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Canada Fluorspar, Colossus Minerals: Proof Positive that U.S. Quantitative Easing is Undermining Can

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Published : April 09th, 2014
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While the media tone of coverage of Canada Fluorspar’s (TSX.V:CFI) buyout by Golden Gate Capital of San Francisco for a measly $38.8 million is decidedly congratulatory, the deal is better considered in the light of the loss of yet another would-be major contributor to future Canadian GDP, thanks in no small part to the oblivious Canadian Government. While America prints what amounts to subsidies for equity investors in U.S. markets, that incentive entices capital from around the world away from non-subsidized economies. Share prices in the resource sector are down on average 60% or more since the last peak in July 2011, and quantitative easing south of the border is a significant contributor to that.

Golden Gate was founded in San Francisco in 2000 by David Dominik, a former partner at Bain Capital, and others, Golden Gate looks for deals in a broad range of industries, including software, semiconductors, restaurants, retail and financial services. It has now raised more than $12.5 billion since its inception.

Golden Gate Capital has “US$12 billion in committed capital”. As a private enterprise, it cannot be qualitatively proven that any of that money derives directly or even by several degrees of separation from the Quantitative Counterfeiting that has been the foundation of ersatz economic growth in the United States since it began in 2008.

However, one cannot refute that in a banking system positively awash in tier one capital fabricated from thin air, the resulting pent-up monetary velocity finds release by exponential self-replication by fractional banking gymnastics. So I don’t know where Golden Gate gets their money, but I know Sprott isn’t seeing any fractional banking largesse on this side of the border.

First, lets look at the deal from the perspective of a long term investor in Canada Fluorspar. As can be seen by the chart below, those who bought the stock within the last 6 months might interpret last week’s announcement as positive news. In fact the board of directors of Canada Flourspar interpreted the offer thus:

Significant Premium to Market: The Consideration represents a 87% premium to the 20 day volume weighted average price and a 67% premium to the last close price of CFI’s common shares on the TSX Venture Exchange as at April 1, 2014;

That isn’t the case, however, for long term shareholders of two years duration or more.

24hGold - Canada Fluorspar, Co...

Buyers of Canada Fluorspar stock in Autumn 2013 are happy campers.

If you’ve been a long term value investor of the long-suffering variety, the announcement that Golden Gate would pay “$0.35 a share” is tantamount to either a cold hard slap in the face, or a welcome end to misery, but under no circumstances could it be called a positive outcome.

24hGold - Canada Fluorspar, Co...

Investors who bought shares in the last five years are not happy campers.

Adding insult to injury is the fact that Canada Fluorspar had $32 million in cash on balance sheet as of December 31, 2013. In 2011, and had completed a strategic partnership with Arkema Inc. (EPA:AKE), an integrated chemical conglomerate based in Colombes, France, whereby Arkema had put up CA$60 million and Canada Fluorspar $14 million to be 50:50 joint venture partners on the $100 million reactivation of the St. Lawrence Fluorspar project in St. Lawrence, Newfoundland.

In a nutshell, Canada Fluorspar is an absolute steal for $38 million, and a tragic loss for the Canadian resource industry. And its a loss that could, and should be prevented in the future. But that would take a monumental shift in how the Canadian federal government regards its southern trading partner, and their program to undermine the value of the Canadian dollar.

U.S. Monetary Fabrication is a Direct Threat to Canada’s Resource Industry

So here’s the thing that the Canadian Federal Government, and indeed, most Canadians fail to grasp: The U.S. fiscal and monetary policy as conducted by the Federal Reserve System constitutes a direct and persistent undermining of Canada’s current and future GDP. The United States is cognizant of the fact that if they keep printing money, they not only attract investment in their markets at the expense of trading partners, but they are in a position to obfuscate natural supply and demand fundamentals through sheer excess of liquidity.

To summarize, here the ways in which excess USD liquidity destroys Canadian market valuations:
1) Subsidized US markets draw investment away from Canada;
2) Because these massive capital pools eschew commodity investment in favour of synthetic derivative instruments, demand for precious metals and commodity assets diminishes along with the companies who are developing them’s share price;
3) When the company’s share price dissuades investors from investing, along with weak commodity prices, the companies are forced to sell off assets incrementally to stay afloat, until they don’t own the asset at all.

While Canada stands dumbly by and does nothing as its resource sector is demolished by an epidemic of capital flight, super cashed-up private equity pools like Golden Gate Capital are able to snap up foreign assets thanks to the low interest rates and corporate welfare distributed freely by the U.S. Federal Reserve to American banks and funds.

The defect in the whole recovery through artificial stimulus in the form of printed ducats strategy is that, where money is not required, and in fact, cannot be coaxed into a motion by the lower 99% of the economy, it begins to create its own demand. Demand for things to buy, regardless of present value. Thus, the entire demand and supply scenario is distorted beyond recognition(at least by Canadian Finance Minister eyeballs), into a force that deflates commodity asset prices because those markets have become too small for multi-billion dollar funds.

The synthetic derivatives market is where that money finds its most fecund womb – where the needles on the dials will continuously go up as long as the monetary magic wand keeps waving each month.

Don’t forget: while the $1.03 trillion last year became a total of $4 trillion plus on the Fed’s balance sheet, if each of those dollars as Tier 1 capital was replicated to its Bank of International Settlements-mandated maximum of (call it) 12 times, then we’ve actually just seen a net increase in USD money supply of $12 trillion. With that kind of a floor on U.S. equity, debt, and especially derivative synthetic investment products, why would an international investor, whose money knows no boundaries, go anywhere else?

So while the really gargantuan funds go out and play proprietary trades in synthetic engineered financial products, they diversify and build real wealth by acquiring assets like Canada Flourspar that are otherwise left languishing unloved, by committing capital to smaller, asset specific funds like Golden Gate.

Colossus Bankruptcy Another Feather in the Cap of Canada’s Policy Paralysis

Colossus Minerals, listed on the TSX until early 2014 when the company filed for bankruptcy, is as pure a case of lost Canadian GDP as is Canada Fluorspar.

Colossus was in development on the Serra Pelada mine in Brazil, where very high grades of Platinum Group and Precious Metals were sufficient to bypass a N.I. 43-101 resource estimate. But then, with the onset of U.S. quantitative counterfeiting and the subsequent collapse in precious metals prices, Colossus suddenly found itself with a plummeting share price and $25 million a month going out the door. Without a 43-101 to put a 3rd party geological endorsement on the project, even alternative funding sources were unable to consider investment. The final nail in the coffin was the failure of mine dewatering equipment to meet capacity requirements, slowing development.

24hGold - Canada Fluorspar, Co...

Colossus’ Serra Pelada mine was nearing full production before dewatering equipment failed to meet capacity requirements.

Colossus filed for bankruptcy in Canadian courts early in 2014 citing $170 million in liabilities including $86 million in a gold-linked facility to Sprott, and $75 million owed to Sandstorm Gold Ltd. (TSX:SSL). The Serra Pelada project was in an advanced stage of development, and it remains unclear as to who will be the ultimate operator. But regardless, the inability to obtain financing is in no small part a direct outcome of U.S. quantitative easing, and the subsequent distortion of precious metals prices.

The mine is now subject to a “Debtor in Possession” arrangement, which puts its future of the mine on hold, for now.

Canada Needs to Get with the Program

Canada needs to figure out how to put a floor on its equity markets too. Standing smugly by, confident and bolstered by our financial conservatism while our assets are carried out the front door is just plain dumb. The Harper government is alarmingly sanguine and incapable of reconciling the damage done by U.S. quantitative easing to our economy.

Tapering to nothing in the U.S. over the course of 2014 is not going to be any sort of remedy. How will the Fed lighten up its balance sheet without causing a market swoon? (They can’t). How can they deflate the $12 trillion in monetary inventory they have created? (The can’t). How can Canada expect to grow economically when its biggest trading partner is paying in dollars that are being debased at the rate of $12 trillion per Year? (It can’t).

Here is the Bank of Canada’s attitude toward printing money:
“If the Bank were to print money to repay the national debt or to finance government programs, it would be adding greatly to the amount of money in circulation. This would encourage people to spend and borrow more, and the economy would receive a temporary boost. But overall demand for goods and services would grow faster than the economy’s ability to produce, and this would inevitably lead to higher inflation.”

That’s great if your biggest customer isn’t paying you in money that is suffering this kind of inflation/value destruction. The only way to offset that is to print money at exactly the same rate. All else being equal in terms of future economic prospects, to NOT print money at this point is to sell the country into voluntary bondage.

The EU is now contemplating its own stimulus program, having observed that Japan’s stimulus program and the U.S. stimulus program have both effectively boosted the markets from which all other economic activity flows. This is the third world war and it is a currency war. Canada, at this point, is set to lose and become utterly subservient to the United States. Some might say we’re already there.

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James West is an independent writer who has been active in the management, finance and public relations of public companies in both the resource and technology sectors for over twenty years.
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"The only way to offset that is to print money at exactly the same rate. All else being equal in terms of future economic prospects, to NOT print money at this point is to sell the country into voluntary bondage."

Is it any wonder, then that that's exactly what most of the world is doing? Printing money to keep up? But we've lived with mandated inflation targets every single year for generations - worldwide. The world has been debasing slowly but surely for decades.... and intends to continue.

Do holders of debt worldwide rejoice at this news? Obviously those holding money / savings have lost purchasing power but it seems to me the flip side would be that those in debt now have less "real value" to pay off. So Johny FatWallet loses x% real value on his savings while Suzie Mortgagee gets an x% cut on her debts.

In theory it sounds like a decent enough mechanism to stop too much wealth condensing towards the upper classes. In Theory the "haves" are forced to "invest" in order to keep up with inflation, providing a pool of wealth that serves to enhance progress for the borrowing "have-nots", whose debts decrease in real terms over time.

Obviously things are far more complex than that, but it does make me wonder which side to cheer for here. Hard money or soft? Only holders of money *now* care if it loses value. Anybody in debt may well welcome it. Those that have neither probably don't really care.

There must be more to it than this. Perhaps somebody could enlighten me? Old money would not have allowed such a system to arise in the first place if it disadvantaged them so... I would have thought.

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Waffle much? When you come to a decision maybe post again. In the mean time my PM's slowly but surely go up in value. Who da thunktit? Well not you I'm sure.
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Not one rebuttal? you're usually full of arguments and opinion V. I'm asking a question... so that's a fairly good opportunity to pose an intelligent counter argument. Your lack of any real response speaks volumes. Perhaps somebody else can offer something of actual value?

Right now I'm loving the debasement from where I sit. All I have is mortgage debt, and that debt is being reduced in real terms with every passing year. What's more, cheap money is driving house values up at the same time. Losing a bit on PM's was a small price to pay in comparison.

In case you hadn't noticed our PM's lost between a third and half their dollar "value" and still going down. But, just a second. I thought PM's were supposed to be a "store of value", right? Fluctuation in the paper price of PM's merely reflect confidence in paper, right? The actual value of PMs never changes because it is the absolute yard-stick of value, right? To say that PMs "go up in value" tells me you're not getting with the program, V.

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Not one rebuttal? you're usually full of arguments and opinion V. I'm asking a question... so that's a fairly good opportunity to pose an intelligent counter argument. Your lack of any real response speaks volumes. Perhaps somebody else can offer somethi  Read more
dom1971 - 4/11/2014 at 1:00 AM GMT
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