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Back from vacation and adding to Aehr Test Systems

I am back from vacation and will be providing a few updates over the weekend of what I have done lately in my portfolio.

I will start with Aehr Test Systems.

I am reluctant to add to any position given the market.  My investment portfolio cash position is up to 65%, and is even higher (83%) in my RRSP account.  Nevertheless I did add to my position in Aehr Test Systems.

I’ve been waiting on a retracement in Aehr for some time.  I think that under $3 is a good opportunity to buy the stock.  On July 19th the company announced earnings.  Their fourth quarter revenue, at $6.7 million, beat their own $6 million guidance.  Their current backlog is $17.8 million (including the $1.3 million WaferPak order announced on August 9th), which is almost equal to full year revenue from the previous year ($19 million).  On their fiscal fourth quarter conference call the company said they expect to “exceed” 50% revenue growth in the next fiscal year.

Listening closely to the conference call, it is clear that the upside bound on revenue could be much higher.  There are a number of high volume applications for their test systems that Aehr is being integrated into and where purchase orders are anticipated.  I think its possible that we see a press release event where a large (maybe $10 million plus?) order is announced.  This would send the stock up significantly.

But of course I’m a little worried about the recent weakness in the stock.  Catching a falling knife is never advised and that is what I have done here.  But there have been so many instances of small caps nosediving only to recover the last couple of months that I suspect this is just another one of those.  I think back to a number of stocks that I have owned, Novabay Pharmaceuticals for instance, which had precipitous drops that were followed by recoveries.  There was some insider selling after the move to $4, so perhaps some investors have taken that as a cue to sell.  The stock is so illiquid that it only takes one large, dedicated seller to send the stock down.

One the negative side they sell semi-conductor equipment, which is a lumpy and cyclical business.  Interestingly, on  the last conference call management said that they are still too small to be caught up in the cycles.

We are not necessarily dealing with macro semiconductor cycles here yet. As we are primarily designed in on key new programs with our customers with new products and new applications in many cases, and so it’s very specific to those customers

I note that the other equipment manufacturer I follow, Ichor Holdings, had a dip back at the beginning of August but has stabilized of late.

After the move down the stock trades at a market capitalization of $55 million.  After the recent capital raise there is $18 million of cash on the balance sheet and no debt.  Assuming 50% revenue growth in fiscal 2018, the stock trades at about 1.3x revenue.

That’s too low in my opinion.

Week 318: Not a Good Quarter

Thoughts and Review

I have been on vacation on and off since the beginning of July, so my posting has been sporadic.  I should get more regular again in my posting by the end of August.  I don’t have good internet access and so I won’t be posting my updated portfolio until I get back.

I wrote a few weeks ago about my thoughts on the Canadian dollar.  At the time, I was frustrated by the move but I did not see a fundamental reason for it to continue.  I therefore concluded that I was comfortable holding onto my US dollar stocks and maintaining my US dollar exposure.

That turned out to be a poor decision.

The Canadian dollar has continued to rise.  Its not the only currency to do so.  I see similar moves from the Australian dollar, the Euro, etc.  What we are seeing is broad based US dollar weakness.

Since that time I have become worried that what is happening has nothing to do with Canada.  I’m worried that the strength of the Canadian dollar is because of a growing recognition of just how bad the US government is.  That there is significant dysfunction that goes much deeper than the circus we see on CNN and Fox News.

There was an article published this week in Vanity Fair by Michael Lewis (the author who wrote Moneyball and The Big Short).  In it he describes the transition from the Obama administration to the Trump Administration at the Department of Energy (DOE).  Basically, the Trump team was uninterested in learning about the department, made no effort to replace key positions, and even 6 months into the administrations tenure many appointed positions have been left unfilled and policy directions unsaid.  The DOE, to put it bluntly, is running on fumes.

If this is representative of how the Trump administration has approached governing as a whole, it suggests a large degree of dysfunction.  Dysfunction that is deeply rooted into the core of the government departments that run the operations of the country.  Who knows what this will lead to.  It certainly does not give confidence in the country as a whole.

I remember that one of the things that Donald Coxe used to talk about was how you can’t have a strong currency with a weak government.  Much of his assessment on the direction of a country’s currency was based on the political climate of the country.

We know that on the surface, the Trump administration has proven to be reality TV.  But maybe behind the scenes things are actually worse.  If it is much worse, then maybe the currency moves over the last few months are just the beginning.  This move in the Canadian dollar is notable for its strength.  It does not want to quit.  I have learned that ignoring a very strong move in an asset class is unwise.  It is often brought about by seismic shifts to the economic landscape that are fully understood only after the fact.  I’m really worried that is what is happening here.

I regretfully reduced my USD exposure yesterday.  I sold down a number of US dollar positions and converted those US dollars into Canadian dollars.  I didn’t sell out of any position because there is nothing wrong with any of the stocks I own.  So I reduced everything across the board so that I could turn those US dollars into Canadian dollars.  The process was depressing.

I’ve always held the rule that if my portfolio falls 10% from its peak I will start to significantly reduce my exposure.  This is my “2008 rule”.  I won’t let 2008 happen again.  In 2008 the first 10% down was followed by another 10% and so on and so on.  Before I realized what was going on it was too late.  To prevent this, I decided that at 10% I draw a line in the sand.

I have held to this rule a few times over the last few years.  In 2014 when I was getting killed on oils.  In January 2016 when I was getting killed on everything.

What is unique about this time is that its almost all currency.  I’m down 9.5%, but a little over 7% of that is the Canadian dollar.  Its depressing to see most of my stocks holding their own at levels similar to where they were 2.5 months ago and yet my portfolio is down significantly from that point.

But 10% is 10% and I have to do something about it.  So I sold it all down.

Air Canada Earnings – out of the park

Air Canada released second quarter results this morning and they were well above anyone’s expectations.   The company blew away second quarter EBITDA estimates, guided gross margins higher, and guided free cash flow for 2017 of $600 million to $900 million.  The free cash flow guidance is up from previous guidance of $200 million to $500 million.  Air Canada has a market capitalization of a little over $5 billion, so the new free cash flow guidance means that the stock is trading at 7x FCF based on the new guidance.

Combimatrix Takeover – finally some positives!

Its been such a frustrating couple of months.   The Canadian dollar has been on an unstoppable march upward.  My moves into oil and gold to hedge the exposure have had mixed results at best.  Radisys laid an egg.  But things took a big step in the right direction tonight as Combimatrix has been taken over by Invitae Corporation.  From the news release:

Based on the Company’s current forecasts and estimates of Net Cash, and based on a fixed price per share of Invitae’s common stock of $9.49, the Company presently estimates that the CombiMatrix price per share received by CombiMatrix common stockholders would be between approximately $8.00 and $8.65.

This was a much needed win.  Combimatrix was one of only a few US stocks that I didn’t reduce over the last few weeks.  I’ve yet to sell my shares here.  I may start to reduce them as they get to $8.

Radisys lays an egg

Radisys reported and it was not good.  My thoughts are: A. I’m glad I sold down my position as much as I did, B. I’m less glad that I bought a little back a few days ago, and C. I’m wistful that I just would have sold the whole block back when they lowed guidance at the beginning of July.

Radisys reported second quarter earnings last night and the guidance for the third quarter was worse than the second quarter.  Verizon has stepped back from DCEngine purchases for 2018 because of changes they have made to their subscriber structure that has pushed off requirements for more capacity.

Listening to the call, apart from the revenue headwind that occurs when your largest customers steps back for 6 months, the company moved forward in all other respects.  They are seeing a material increase in engagements around CORD (central office as a data center), shipped for lab trials to a US Tier 1 which presumably is AT&T, closed on the “master purchase agreement” with the Tier 1 (again I assume AT&T) that they had alluded to in May, they were named systems integrator for a Tier 2 service provider in Europe, and they launched the new FlowEngine TDE and already have had a win with it in Europe.  Overall they are up to 15 proof of concepts which is 5 more than they were engaged with in the first quarter.

But none of this is revenue generating in the immediate future.

I held onto Radisys too long.  I’m generally good about selling a stock that isn’t working but in this case I was enticed time and again by the promise of a better future.  I don’t think that Radisys management was being deceitful, I just think that being telecom equipment manufacturer is hard.  I listened to a podcast of a seasoned telecom analyst who said as much.  You get one time orders, nothing is recurring, and you are dealing with big, lumbering beasts of telecom companies that can move at a glacial pace and do not care how their erratic decisions impact you.  Radisys is a casualty of this dynamic.  I sold.

Selling Radcom

I also used the bump back over $21 in Radcom to sell it down further.  I had been selling down Radcom over the last couple weeks.  I have completely sold out of the stock in one of my portfolios and own a mere shadow of the position that it used to be in the other.

My thoughts on Radcom are related to valuation and timing.  I’m worried about the market, and stocks that trade at extremely high price to sales ratios are particularly susceptible in corrections.  Radcom reports earnings on August 7th, and I don’t expect that they will have any new contracts in place at that time.  I wonder what happens to the stock if their next NFV win is delayed into the fourth quarter and in the mean time the market slides.  I’ve decided I prefer to be on the sidelines to watch if that event plays out.

Empire Industries

I will write something more extensive on Empire’s quarter when I am back but the bottom line is that I am happy with it.

On the surface the lower sequential revenue, lower sequential EBITDA, is probably the cause of recent selling but I see a number of positives in the quarter that bode very well for the future.

First, the company generated over $6 million in operating cash flow, including cashing in $4 million from working capital.

From what I see, they paid down about $6 million of debt in quarter!  I added up the numbers twice because it seemed like so much but if you add up bank debt and long-term debt it decreased substantially quarter over quarter.

Deferred revenue increased substantially from $10 million to $23 million sequentially.  This is related to the big working capital influx.  Revenue should follow shortly imo.

I don’t see how you can view the growing backlog as a negative.  This is a construction business, size of backlog is directly related to future work.  The doubling of the backlog is a huge positive imo.

Keep in mind this is a ~$40 million market cap company that just generated $6 million of operating cash flow for the quarter, roughly $5 million of free cash flow, and has doubled their backlog.

Hudson Technologies

Hudson was a mixed bag.  They had a blow out quarter.  But they forecast weaker volumes and prices for the third quarter.  They also made a huge acquisition, of Airgas-Refrigerants.  I honestly had trouble wrapping my head around all the data points, especially with limited internet and time, so I sold.


Hortonworks had a blow out quarter and gave solid guidance.  The stock rose significantly, which was nice.  I sold out after the jump, which had more to do with my market outlook than any insights with the company.


Vicor had a wait and see quarter.  Revenue, bookings and backlog were all up, but less than I would have liked them to be.  But the company forecast a much better third quarter and reiterated their guidance for a $75 million run rate by year end.  I still really like the stock and it is on the of the few I hold in size.

What’s Left

The only positions that I have right now that are greater than 2% position in the portfolio are the following:  Vicor, Combimatrix, Air Canada, Empire Industries and Americas Silver.  Every other position I own is less than 1%.  That kind of sums up where I stand right now.


Buying Gran Colombia Gold, A Levered, Free Cash Flow generating Gold Producer

I like the looks of gold right now.  Short positions in the metal have been climbing for a number of weeks.  Fred Hickey (of the High Tech Strategist) tweeted on Friday that “gold large spec future shorts at 157.4K contracts are second highest on record”.  Anecdotally, the charts of many of the gold mining stocks have been depressed for some time.  Often July is a seasonal turning point for the miners, as they perform well into the second half.

I took positions in Argonaut Gold and Klondex Gold a few weeks ago.   Argonaut worked out, and I actually sold some of my position last week, but Klondex has not.   To be honest, the more I look at both of these names, the less excited I am about them.  They haven’t generated free cash in the past, so their projections about the future leave me skeptical.  I have been searching for other ways to play gold (in addition to Gran Colombia I have bought Rox Gold and Americas Silver).

I found out about Gran Colombia from this tweet from Brown Marubozu.  They are a tiny gold producer with two mines in Colombia. They operate the Segovia mine and the Marmato mine.  They also have an exploration project called Zancudo.

The Segovia mine is by far the bigger of the two mines.  It produced 126,000 ounces in 2016. Marmato produced 23,500 ounces.

Costs at Segovia are much lower than Marmato.  In 2016 cash costs at Segovia were $655 per ounce while Marmato cash costs were $981 per ounce.  The company doesn’t break down all-in sustaining costs (AISC) on a per mine basis but over in 2016 they had AISC of $850 per ounce

For 2017 Gran Colombia is expecting production of 150,000-160,000 ounces of gold and AISC are expected to be under $900 per ounce.  The rise in costs is because of more exploration at Segovia and a higher Colombian peso.  AISC of $900 per ounce and under makes them a relatively low cost producer.

Debt and Cash flow

Gran Colombia is heavily indebted compared to most gold miners.  The company has $145 million of debt outstanding, denominated in US dollars.  They have 20 million shares outstanding.

However, looking at nominal debt and shares outstanding is a bit misleading.  The outstanding debt is comprised of 3 convertible debentures.  There is a $46 million 2018 debenture, a $52.4 million 2020 debenture and a $47 million 2024 debenture.  All of the debentures are convertible at $1.95 per share.

The 2018 debentures have a unique feature that I have not seen before.  If the share price of Gran Colombia at the debenture maturity is less than $1.95, the company has the option to repay up to 81% of the debentures with shares at $1.95.  It’s a very odd clause, and it factors into debt and outstanding share calculations. .  Nevertheless it is clearly stated in note 8 from the debentures FAQ:

The 2018 debenture pays only 1% interest.

The reason that the 2018 debentures have such a strange structure is because they are the result of a restructuring of debt in early 2016.  The company exchanged two sets of existing notes (called the silver and gold notes) for debentures and shares.  The silver notes, which presumably were subordinate (I admit I haven’t looked into all the details of the old securities) were given poorer terms than the gold notes, including this odd repayment clause.  The 2020 and 2024 debentures, which are the successors of the gold notes, are payable in cash at maturity and carry an interest rate of 6.5% and 8.5% respectively.

Assuming the conversion of 80% of the 2018 debentures into stock at $1.95 per share, the true amount of shares outstanding is 39 million, so a market capitalization of $58 million.  Likewise, true debt is $108 million USD, which is still a lot of debt, but not quite as much as it appears at first glance.

How about Cash Flow

Gran Colombia has a lot of debt but they also generate a lot of cash flow.  Looking at cash flow from operations before working capital changes and capital expenditures, I calculate that the company generated $17 million in free cash flow (I am calculating this before working capital changes, just to be clear) over the last four quarters. In 2017 the company has given rough guidance (slide 19 of this presentation) that “excess cash flow” will be “at least” $15 million.

I actually think that may understate free cash flow.  The company includes debt repayments as part of their calculation of excess cash flow.  Below is a reconciliation of excess cash flow to EBITDA for the first quarter of 2017.  Note that excess cash flow is calculated after subtracting $390,000 of debt repayments.  This repayment is likely to a small term loan they have with a Colombian bank that is paid down on a quarterly basis. There is $700,000 remaining on this loan that will be repaid this year.  True free cash flow would be $1 million higher after accounting for this.

Guidance suggests that excess cash flow may exceed the $15 million minimum that the company has guided to.  The midpoint of the company’s production guidance is 155,000 ounces for 2017.  AISC is expected to be $900 per ounce.  At an average price of $1,200 per ounce gold, the company generates an AISC margin of $300 per ounce, or $46.5 million.  If I assume the same level of cash interest and cash taxes as 2016 I deduct another $26.5 million.  This would leave $20 million of excess cash flow.

The company is likely to have a very strong second quarter.  On the 12th of July the company announced second quarter production of 46,000 ounces.  This is significantly above the 39,000 ounces that they produced in the first quarter and is more than 10% higher than any quarter in 2016.

Summing it up

I find it very hard to resist a gold miner trading at less than 4x free cash flow (I’m using a market capitalization of $60 million Canadian which includes conversion of the 2018 debentures and free cash flow of $15 million USD for 2017, which I believe to be conservative).  To say it is unusual to find a miner with this sort of free cash yield is an understatement.  Unheard of is more like it.

Gran Colombia compares well to the peers I have looked at.  Below is a table of 4 other gold stocks that I liked because I didn’t think they were exorbitantly expensive.  Gran Colombia is the cheapest of the bunch.

However I know there have been issues with management.  They clearly got themselves into way too much debt and had to restructure once already.   The shares had to be consolidated due to the fall in the stock price.  Management may be the Achilles heel of the idea.  But the last few quarters they have produced solid, if not stellar results.  So maybe the past is the past.

I also understand that the debt level remains quite high.  It makes them a leveraged bet, no question. And that leverage can go both ways if they fail to perform.  However because it is convertible debt, it can easily play into the company’s favor if the stock price moves up.

Let’s say the stock goes to $2 USD.   I have a nice return from my recent buys (60%).  The convertible is now in the money and is exchanged into stock at $1.95 USD.  The result is dilution of 55 million shares.  Total shares outstanding are 94.4 million, so the market capitalization is $190 million.  Free cash flow increases by $10.5 million because cash interest goes to zero.  So free cash flow is somewhere between $25 million and $30 million.

At this point, do you think a gold miner with $25 million plus in free cash flow and no debt is going to trade at a multiple of 7.6x FCF?  I highly doubt that.  The reality, whether you agree with it or not, is that historically gold miners trade at above market multiples.  Most miners (at least those not currently at depressed levels caused by in discriminant GDXJ selling), trade at 10x operating cash flow, not free cash flow.

My point is that the share price could be its own best friend.  Confidence that the company can generate the free cash needed to deleverage could quickly cause that deleveraging to occur and in turn cause a revaluation to a level consistent with other miners.  I think the path is there.  If the company executes, and the gold price stays at this level (or even better, moves higher), I think we will see this process occur over the next 12-18 months.

Week 314: Trying to Digest the Dollar


Portfolio Performance

Top 10 Holdings

See the end of the post for my full portfolio breakdown and the last four weeks of trades

Thoughts and Review

The Canadian dollar has been a massive headwind for my portfolio over the last 2 months.  I created a simple little spreadsheet to quantify just how much of a headwind it has been.  Below I have recreated that spreadsheet but normalized to a starting amount of $1 million so we are looking at round numbers.  Since mid-May the majority of my losses have come from the Canadian dollar.

The performance of my portfolio has been poor since mid-May.  Stocking picking hasn’t been great, and I am down 3.7% over that time.  This isn’t totally surprising to me.  I had a big run in the months after the US election and had wondered when the inevitable pull back would occur.  What I didn’t expect was that the pullback would coincide with a huge currency headwind.

The rise in the Canadian dollar has taken place as oil prices have fallen.  This has made the move particularly painful.  In the past I have been able to offset Canadian dollar gains by trading oil stocks that have tended to rise along with the dollar.  Not so this time.  Oil stocks have mostly fallen along with oil as the dollar has risen.  On Friday the Canadian dollar was up almost a full percent even has oil traded down over $1/bbl.

Scott Barlow, who is a writer at the Globe and Mail, had an interesting piece on the Canadian dollar a couple of years ago.  In it he pointed out that there was a strong correlation between the Canadian dollar and oil, which is not surprising, but also an even stronger correlation between the Canadian dollar and the yield spread of the US 2-year Treasury and the Canadian Government 2-year note.  He presented the chart below.

While the Canadian dollar/oil relationship has went out the window over the last two months, the yield spread relationship has not. Below is a table taken from the Financial Post website that shows Canadian and US Government bond yields. I tried to find a chart to update the one above but could not.  Nevertheless, looking at even just the last 4-week data in the table, its clear that Canadian yields have risen substantially while US yields have only risen modestly.  The spread has risen from -0.592 to -0.236.

Comparing that to the historical spread chart from the Globe, we can see that a spread of -0.236 is pretty much in line with a Canadian dollar in the 77-78c range.  In this context the move in the Canadian dollar is no surprise.  The dollar is just moving along with yields.

The other factor at play right now are the short positions.  I read back in May that Canadian dollar short positions were at an all-time high.  It worried me, but I didn’t react to the news, incorrectly assuming that the short covering might send the dollar up a couple cents and I could handle the blow if it occurred.

The shorts have begun to unwind.  Below is a chart posted by Frances Horodelski.

We aren’t quite at a level where the Canadian dollar is overbought.  The net position remains short.  It is still larger than it has been over the past year.  But much of the froth has been worked off.

The last consideration is what the Bank of Canada is going to do.  The rise in the dollar has coincided with hawkish comments from the Bank of Canada.  The market is now 95% convinced there will be a rate hike this week.

So it seems like much of the coming rate hikes has been (painfully) priced in.  The rise in the Canadian 2-year yield has been 43 basis points.  This pretty much prices out the 50 basis points of rate cuts expected this week and in October.

I would think that for spreads to rise further there would have to be evidence that the Canadian economy is actually stronger than the US economy.  While the Canadian economy is showing strength at the moment, so is the US.  The jobs numbers in Canada were strong (though a lot of it was part time work) but so was the jobs number in the US. Historically, the only times that the Canadian economy has outperformed the US economy were during times of commodity price strength.  This isn’t one of those times.

Meanwhile so much of the Canadian economy is being driven by housing right now.  I know many will disagree with this, and I know I have been wrong about this for some time, but I still do not think this is healthy and I do not think this is going to end well.  I read over the weekend that transaction costs on housing make up 2% of Canadian GDP.  That seems incredible to me.  It is but one example of how important housing, and buoyant housing prices, have become to the Canadian economy.

There was an interesting BNN interview last week with John Pasalis, president at Realosophy Realty.  Pasalis said that over the last couple of months the “Toronto housing market turned on a dime”.  June home sales were down 37% year over year and prices declined 14% from the April peak.

I am sure that the response of the housing bulls is that this is just another buying opportunity, and they will point to Vancouver, which quickly recovered from its dip last year.  Maybe so.  But what is going on in housing has every earmark of a bubble.  When I read about the foreign ownership, about the domestic speculation, and about prices exceeding traditional metrics of income as debt piles up, it sounds so familiar to other speculative bubbles I’ve read about.  I’ve read Extraordinary Popular Delusions and The Madness of Crowds multiple times, as have I read Manias, Panics and Crashes multiple times.  All of the lessons I tried to learn in those book rhyme with what I read about Canadian housing.

I have no idea when Canadian housing plays out in the way I expect it to.  But being short the currency of such a bubble does not make me lose sleep at night.

Could I lose more because of the Canadian dollar?  Most definitely.  I can see a path to 80 cents.  There are more shorts that need to be unwound.  If the Bank of Canada raises rates and strikes a hawkish tone this week, the market will likely push the dollar up.

But I am not going to try to trade this for a couple of cents.  My belief is that the only thing that is going to move the Canadian dollar sustainably higher is higher commodity prices.  If we get those, then the stocks I own should more than compensate me for any rise.  Unless that happens I will take the lumps that I am getting from this move, try to focus on maximizing the performance of the stocks I own, and not focus on what the short-term movements of the dollar are doing to my portfolio.

Portfolio Changes

I’m going to be brief with my transactions this last month and a half.

Radisys has been a disaster and I have reduced my position some in my actual portfolio but I have not in the portfolio tracked here.  As usual I was a bit slow to the trigger with the online portfolio and by the time I got around to it the stock had sunk to a level that I believe is too low, even given the reduced guidance and lowered debt covenants.

What led me to reduce my position were the changes to the credit agreement amendment that they filed.  There was a change to EBITDA, which was consistent with the change in guidance and therefore not unexpected.  But there was also a change to the expected restructuring charges in the second and third quarter.  Total TTM restructuring costs are expected to be $9.5 million by the end of the third quarter.  This compares to $1 million in the previous amendment.  I’m a little worried what precipitated this and until the earnings call, its impossible to know.  If this is restructuring of the legacy business, then no problem.  If its something to do Software Systems or DCEngine, that would be bad.  And until we get to earnings, we won’t know.

With that said, the credit agreement also implies decent revenue in the third or fourth quarter.  Below I have recreated what their minimum EBITDA covenants, which were just amended in the new agreement and therefore presumably at levels that management is comfortable with, imply about the third and fourth quarter.

They are still predicting a revenue ramp, albeit not as significant as they had been suggesting previously.

At $2.75 the stock is kind of in no man’s land.  It seems too low to me to sell (its essentially back to the level it was at before they even had Verizon as a customer).  However I find it impossible to be a buyer until there is some clarity around the restructuring and what constitutes the delays.

The other portfolio change that I will mentions is that I added a few gold stocks, Klondex Mines, Argonaut Gold and US Gold (which I already wrote about here).  I like how beaten up the junior miners are, and I will write something up shortly describing how changes to the GDXJ have impacted these stocks.  Apart from that early in the month I sold out of a number of names which in retrospect, for the most part at least, turned out to be a mistake (GIMO, ATTU, SUPN, SIEN, BVX and OCLR) as many of these names are higher now.  I would have been better off selling Radisys!

Portfolio Composition

Click here for the last four weeks of trades.

US Gold (formerly Dataram): Hopefully another Gold Standard Ventures in the Making

In my first few years of investing many of my biggest winners were gold explorers.  This was before 2008 and the financial crisis.   I spent a good portion of my time analyzing drill holes, reviewing land packages, and reading preliminary economic assessments and resource reports.

In 2005 and 2006 the gold explorers hit on a bull market.  The stocks ran up on drill hole hits and speculative sentiment.  Miranda Gold, Endeavor Silver, Atna Resources (before they had a mine), Full Metal Minerals, Mirabel Resources, and others that I can’t remember saw doubles and triples.  I remember gains of 10-20% a day in some of the names.  I’m pretty sure that my first ever “quick triple” was in Miranda Gold, which went from 60c to $2 in the matter of two or three months (going off the top of my head here so don’t hold me to the numbers).  It was a fun time.

However junior explorers can try one’s patience.  There are long periods where very little will happen and the stocks will drift lower.  They are also illiquid and constantly in need of cash.  But they can be extremely fun when the sector is in favor or if one hits on a big drill intercept.

I haven’t invested in the sector in a while.  Gold has been lackluster and the valuation of explorers has tended to price in multi-million ounces even when the companies had little more than a package of land and an idea.  But I’m warming up to the idea.  I have a hunch that January 2016 was the bottom for many gold names, and that we are in the early stages (the part where no one believes it yet) of another move higher in gold.  If this turns out to be right, the juniors will have their day.

My Gold Standard Memoir

One company that I did particularly well on a few years back was Gold Standard Ventures.  In 2010 Gold Standard was formed to explore a package of land claims in Nevada.  The claims were very close to and on trend with large existing mines owned by Barrick, Newmont and the like.  Gold Standard was pursuing a large, low-grade, sediment hosted, open pit-able deposits like many of the Nevada mines host.  What made the company particularly interesting to me was that its VP of Exploration was Dave Mathewson.  Mathewson had been head of Exploration for Newmont Mining for a number of years and was responsible for discovering a number of the Nevada deposits that Newmont owned.  He had done this before, was well known and extremely well respected, and for some reason he had decided to shack up with a tiny little exploreco to try to find the next elephant.

As it turned out I didn’t own Gold Standard Ventures for very long.  The company’s flag ship project was called Railroad.  Shortly after listing they began to drill out targets at Railroad, and within the first couple of rounds of drilling the company hit on a number of very exciting intercepts.  Numbers like  56.4 metres grading 4.26 grams gold and 164 metres of 3.38 grams gold.  This, along with the proximity to the existing monster deposits owned by Barrick and Newmont, and the pedigree of Mathewson, created a bit of a frenzy in the stock.  I can’t remember exactly what I bought and sold the stock for, but I believe when I originally bought it the market capitalization was around $50 million (which was not cheap for a gold explorer with little more than a property at the time) and close to $200 million when I sold it.  At $200 million I figured the stock was pricing in more than a million ounces already, and so it was best to take the money and run.

Gold Standard 2.0

Flash forward to last month and I was listening to a weekly podcast that I tune into.  Its hosted by a newsletter writer who periodically invests in gold exploration stocks.  He is describing a new pick that he is very excited about, a gold explorer with massive upside potential.  Of course before you get the name you are going to have to subscribe.

But throughout the podcast he gives a few clues.  He says he recently traveled to Nevada for an exciting new idea, and while he didn’t link that directly to the gold explorer it wasn’t difficult to deduce the two might be one in the same.  He said that the explorer had a very experienced management team who had done this sort of thing before.  And he said that the company was flying under the radar because they had recently took over a shell of another company, had yet to change their name, and so very few knew they existed.

It took me about 15 minutes of googling to figure out who he was talking about.

Mathewsen’s latest vehicle for discovering a large, sediment hosted, Carlin style deposit in Nevada is a company that, at the time, was called Dataram.  Dataram, somewhat surprisingly, actually seems to have operated a real business pre-Mathewson.  They manufacture memory modules.  While they are a small company, they did have $30 million of revenue in the last twelve months.

While it seems a little odd that this memory module manufacturer would be used to host Mathewson’s new gold explorer, I don’t know if delving into the details is really relevant to the story.   At the time of the reverse merger a clause was included regarding the distribution of net proceeds of the legacy memory business such that only holders of the stock prior to the acquisition date will participate in any proceeds from the sale of the memory business.  So when you are buying Dataram today you are only buying the gold assets.  And you aren’t actually buying Dataram any more.  They changed their name to US Gold, the company they merged with,  a couple of weeks ago, ticker symbol USAU.

Project #1: Keystone

US Gold has two assets.  The first, what you would call the flagship asset, is called Keystone.  Keystone is very similar to what Mathewson started with at Railroad.  Its located in Nevada along one of the major fault trends (called the Cortez Gold trend) about 10 miles south of the Barrick Cortez Hills mine.  It is in the middle of a number of elephant deposits, along a major fault and close to other faults.   This map of Nevada, from the company’s presentation, shows where Keystone is in relation to other discoveries and mines.

As depicted on the areal view below, you can actually see Keystone from high above the Cortez Hills mine.

US Gold provides background in this 8-K filing.  The history of the Keystone is pretty much what you would want to have in a gold exploration target.   There has been “no comprehensive, modern-era, model-driven exploration has ever been conducted on the Keystone Project.”  What drilling that was done occurred before other Carlin style deposits were discovered and generally targeted formations that aren’t consistent with the large, low-grade, sediment hosted deposits that characterize the elephants in the region.  US Gold described it as such in a June press release:

“most of the historical drilling going back to the 1960s appear to have been largely focused on exploring for massive sulfide within skarn and hornfels adjacent to the Walti Springs pluton.

The more recent history of ownership is marred with fits and starts that prevented any serious exploration.   In 2004, after the area potential of the Carlin trend was well recognized, the Keystone land package was bought by Nevada Pacific Gold.  Given that this was at the height of the last gold exploration boom, one might have expected a big drill program to ensue.  But fate and a takeover intervened as Nevada Pacific’s joint venture partner, Placer Dome, was bought out by Barrick.  Barrick subsequently did house keeping by dropping all of Placer Dome’s exploration and joint venture projects.  Eventually in 2006 the package was bought by McEwan Mining, and 35 holes were drilled before the financial crisis put another hold on exploration.

The consequence is that very little drilling has been done on the project, and what drilling has been done has mostly targeted the wrong formations.  After acquiring Keystone in May of 2016, US Gold undertook a review of the historic drill holes, geology, surface geochemistry, and geophysics.  In the same June press release I referred to earlier the company said:

Large target areas prospective for potential Carlin-type deposits are beginning to emerge as a result of synthesis from the historical data and the newly obtained detailed gravity survey data and geology.

They concluded that:

A thorough review of all the available data, in addition to some historical holes that included economically significant gold, strongly suggested that Keystone comprised a very large gold-bearing mineral system. US Gold Corp.’s assessment further indicated that this opportunity had potential for high-quality Carlin-type gold deposits. The rock units appeared, now confirmed, to be very much like the same package of stratigraphy and lithologic rock types as is present as host rocks in the Pipeline, Cortez Hills, Goldrush, etc., of the Cortez district within the apparently same northwest-trending Cortez-Keystone structural corridor.

Its expected that they will begin to drill Keystone early in 2018.

Project 2: Copper King

While Keystone has to be considered the focus for US Gold, the company also has a second project that is interesting.  The Copper King project – located  32km west of Cheyenne Wyoming, with 5 square kilometers of land claims, is intriguing in that it has had significant drilling in the past and already boasts a measured and indicated resource estimate (from this 8-K filing).

In total there are 1.5 million gold equivalent ounces in the resource.  80% of that resource is sulphide rock, which means that it won’t be amenable to heap leaching and therefore will not be as cheap to process.  One thing I have learned in my years of gold exploration speculation is that low-grade sulphide projects are not ideal.  Nevertheless in 2012 a preliminary economic assessment was completed on the resource.  At $1,100/oz gold and $3/lb copper the project had a net present value of $159.5 million.  And it was bought by Mathewson, which counts for something.

I haven’t delved into Copper King but I can tell you already that its true economics is going to greatly depend on those details.  Things like: how easily is the ore processed, how much overburden is there, is the shape of the deposit well-fitted to an open pit design, and is there a higher grade oxide zone that can boost the economics by being mined first (20% of the deposit is oxide ore) to name a few.  Given Mathewson’s pedigree, I suspect that the answers to many of these questions will be favorable.

Its expected that in the coming months US Gold will review and update the PEA on Copper King, initiate the permitting strategy and further delineate the resource.

Summing it up

US Gold has 8.1 million shares outstanding, but there are also preferred shares outstanding that are convertible into another 4 million shares.  At 12 million shares and a $3 stock price the company has a market capitalization of $36 million.  They have $7 million in the bank.

The cash should be enough to get them started on Copper King and Keystone, but they will undoubtedly have to raise capital in the next 12 months (all gold juniors are serial capital raisers, it just comes with the territory).  I’m not too worried about that though.  Given the pedigree of management and the location of the Keystone project, I think they can raise cash without crashing the stock price.

Quite honestly, the $36 million market cap does not seem unreasonable to me.  While it was years ago and exact details evade me, I am pretty sure that when I bought into Gold Standard it was with a $50 million market capitalization.  And Gold Standard did not have a second property with an M&I resource and PEA assessment valued at more than 3x its market capitalization.

On the other hand, $36 million is not incredibly cheap in an absolute sense of what you want to pay for an early stage exploration company.  I am positive you can find scores of gold juniors trading for a few million bucks.  But none of those companies boasts the team or location that US Gold has and none of them are going to be able to raise capital with the ease that I am sure this team will.  I am inclined to agree with my podcast host that the stock has thus far been overlooked by investors.

Nevertheless the fact is that this is a pure speculation.  Keystone may not work out.  The probability of failure for the initial drill program even if there is a deposit somewhere under the ground is likely greater than the probability of success.  Consider that they are going to punch 20 or 30 4” holes into a 15 square mile land package.  Its easy to miss.

In the face of such odds you just have to look for situations where there are as many factors in your favor as possible.  US Gold has a lot going for it.  It has a management team that is very familiar with the area, Mathewson has already discovered a number of deposits with the exact geology they are prospecting for here in the same area and on the same trend, and they have a land package bearing favorably geology to these other discoveries.  You can’t line up your target much better than this.  It still might miss, but those would just be the breaks.  And if it hits, there is no question it will be a multi-bagger.

Eiger Pharmaceuticals: Good Data but the stock hasn’t followed

I bought Eiger Pharmaceuticals back in February at $11.  As the chart below shows, its been a painful slide since then.

It is one ugly looking chart.  However Eiger is not alone.  Among the biotech stocks I follow there were a number that fell into a similar malaise in March or April.   While the IBB (the biotech index) has held up and recently rallied hard, the smaller biotechs that are not part of the index have not done as well.  However I’m seeing signs of this sentiment changing, which hopefully bodes better for the future.

Eiger’s Post-Bariatric Hypoglycemia Data

While the stock has declined, I remain of the opinion that the data Eiger has presented has been pretty good.  I already discussed their Phase 2 result on lonafarnib in this April blog post.  Last week they released more Phase 2 results for another drug called Exendin 9-39.  Again I thought the results were positive.

Exendin 9-39 is targeting patients with post-bariatric hypoglycemia.  This is a condition that occurs in some people that have undergone bariatric surgery, which is a surgery performed for weight loss.  Some post-op patients become hypoglycemic after eating.  That means their glucose level drops too low.  Depending how severe this is it can cause all sorts of terrible outcomes, with the worst being unconsciousness and seizures.

Exendin 9-39 decreases insulin secretion.  It is expected therefore that introducing Exendin 9-39 will dampen the instances of hypoglycemia in patients at risk.  In December Eiger presented initial Phase 2 results, which looked at a single-dose subcutaneous (SC) injection.  Those results showed that Exendin 9-39 produced the desired effect.

The results released in June were an extension of the December results (I also have a copy of the poster and will send it to anyone who emails me for it).  The new data looked at two variations of the first set of results: a multiple ascending dose of the SC injection, and a multiple ascending dose of a liquid formulation of Exendin 9-39.   The charts below show 3 hour glucose levels following a meal of the SC injection (left) and liquid formulation (right). These levels are compared to a baseline patient group that received nothing.

In the 60, 90 and 120 minute intervals, the patients on Exendin 9-39 had significantly better glucose levels, which is what you want to see.

After the stock reacted poorly to the data it was postulated by Daniel Ward on twitter that maybe the market didn’t like the 150-180 minute data.  You can see how during this time period the baseline and Exendin arms converged to similar glucose levels.  But I point out that in an earlier key opinion leaders (KOL) presentation by Eiger, the following chart (slide 28 from this presentation) shows the glucose responses of 3 patient groups: symptomatic post-bariatric hypoglycemia patients (so those that get hypoglycemic), asymptomatic post-bariatric hypoglycemia patients (those that don’t get hypoglycemic), and control persons (I believe these are just regular people that have not had a surgery).  You can see that in the 150-180 minute data of the two post-bariatric patient cohorts, neither of which are on Exendin 9-39 or any other drug, the glucose levels converge in a similar fashion to what was seen in the Exendin 9-39 results.

I believe there is one other important inference that can be drawn from the above chart.  Again, focusing on the red and white groups of patients who have undergone  post-bariatric surgery, I can’t help but notice that the difference between a symptomatic and asymptomatic patient is really not that big.

I have to wonder how much of the market response was due to this.  Folks looked at the delta in the response between the Exendin 9-39 and control group and were unimpressed with the visual difference between the two groups. What the above chart is telling you is that the expectation should not be so high.  The difference between a symptomatic and asymptomatic post-bariatric patient is simply not that big.  That Exendin 9-39 is producing results that appear close (maybe better?) to that of a healthy post-bariatric patient is quite positive in my opinion.

Summing it up

The stock is cheap but it’s admittedly its not the perfect set-up.  At $7 the market capitalization is about $60 million.  Eiger had $48 million of cash on their balance sheet at the end of the first quarter and $15 million of credit line debt.  They have another $10 million more they can borrow under the credit line.  Eiger burned through $11 million in the first quarter and $12 million in the fourth quarter.  Before that their cash burn was in the mid-single digit millions.  So bottom line they are going to have to raise cash here at some point, probably before year end.

I originally reduced my position in Eiger as it seemed to be in free fall.  However after thinking about the results and drawing the conclusions above, I decided to add that stock back.  This isn’t the sort of position that I am going to double down on or anything, but I think the price is succumbing to a weak market for micro-cap biotechs and lack of liquidity in the shares (it only takes a couple thousand shares to send the stock up or down 5%), not poor data, and I hate to get shaken out for that reason.  The company has a bunch more data coming out before year end, though most of it will likely be in the fourth quarter.  I will wait until those readouts and then reassess.



TeraGo Networks: Inexpensive with Potential Upside from a Hidden Asset

The Straightpath Analog

A few years ago I owned a company named Straightpath Communications.  I didn’t buy the stock directly; Straightpath was a spin-off of another company I owned called IDT.  To be honest I did not even know IDT had these assets when I bought the stock.

The two assets being spun-off into Straightpath were obscure and hard to value.  Neither generated any revenue.  One of the assets was IP for various telecom patents.  The second was license spectrum for very high frequency telecom bands.

It was not clear whether either of these assets would ever be worth anything.  I don’t think investors understood them.  I likely would have sold my shares immediately if it were not pointed out to me by a friend that Howard Jonas, IDT’s CEO, had put his son in charge of the business.   Why would you put your son in charge of a junk business?  So I thought maybe there was something there.

Straightpath did pretty well in the coming months, mostly on speculation that something might come out of one of these assets and not really because of any particular news or development that I could see.  Because I did not really understand what I owned, I decided to sell the stock when it doubled.   I believe I sold my shares for $15 or $20.

Flash forward 3 years and Straightpath was taken over by Verizon after a bidding war with AT&T.  The price tag was $190 per share!  Talk about leaving money on the table.

So why recount this depressing little tale of money not had?  Because the Straightpath conclusion is relevant to a little Canadian company that owns similar high frequency spectrum licenses major metro areas through-out Canada.  TeraGo Networks.

Terago’s Business

Terago Networks operates two lines of business.  They provide data center services (see Cloud and Colocation services below) and they provide data and voice communications (Connectivity services below).

The business that owns the spectrum assets is the data and voice communications segment.  The company offers internet access, unified communications redundancy to small and medium businesses across Canada.  It does so by operating a wireless and fiber network within a number of large metropolitan areas. This is the weaker of the two businesses, as it revenues have been declining for the last couple of years.

The wireless access service they provide is in part via high frequency spectrum, for which they own the license to.  TeraGo owns spectrum in the 24GHz and 38GHz range.  I will give a more detailed breakdown of their spectrum assets a little later on.

A new Use Case High Frequency Spectrum

TeraGo kind of backed into ownership of this potentially valuable asset.  Because the spectrum is high frequency, it has traditionally only been used for short distance communications, like fixed wireless, which is what TeraGo uses it for.  TeraGo bought the spectrum to fill out their WIFI network in commercial and industrial parks so that its small business customers could have an alternative to purchasing connectivity services from a large communication services provider (CSP) like Shaw or Telus.

However because of the continuing growth in data traffic, CSPs are looking for ways of increasing their capacity for data transfer.  Rather than deploying more fiber and network equipment into densely populated areas, an alternative is to leverage technology advances that have allowed for high frequency spectrums to be used for short distance mobile wireless capacity.

Take any downtown core.  More office occupants are using their cell phones to watch videos and use apps.  As more internet-of-things functionality takes off this will be compounded by additional data streaming from smart devices.  Service providers have to add capacity to deal with the increase in traffic.  One of the ways they can do this is by adding small cells, which are low powered radio access nodes that provide coverage over short distances.  These small cells use the high frequency spectrum (like what Straightpath and TeraGo have licenses for) to transmit both “last mile” services to devices, and to “chain” together and relay data to base stations without the CSP’s having to lay costly fiber.

Before the Straightpath acquisition there was a lot of uncertainty about the value of high frequency spectrum.  In fact there was a very high profile short-seller called Kerrisdale that wrote multiple articles (this one for example) on why Straightpath’s spectrum assets were worthless.  Reading these articles in retrospect is informing.  Its clear that there was a case to be made that technology limitations would make high frequency spectrum uneconomic.  Nevertheless it was also clear that large telecom players were spending significant research dollars to determine whether this was the case.  When Verizon bought Straightpath for such a large premium, and when both AT&T and Verizon were involved in a bidding war for the assets, it gave a very positive answer to those questions.

What this suggests to me is that in this respect TeraGo’s assets are significantly derisked from where they were a few months ago (I italicize “in this respect” because other concerns remain, as I will get to shortly).  It’s the same technology up here in Canada, the same spectrum, and populated Canadian areas are going to run into the same bottlenecks that their US counterparts are.

Approval of Spectrum for Mobile

So the Straightpath acquisition derisks the technology, but there is still a hurdle remaining.  The two spectrum ranges that TeraGo owns aren’t approved for mobile services in Canada.  The United States is ahead of Canada, having already made approvals in July of 2016.

But Canada is moving towards approval.  Innovations, Science and Economic Development Canada (ISED) released a consultation paper, “Releasing Millimetre Wave Spectrum to Support 5G”, in the last couple of weeks (the paper is dated June and I just found it a couple weeks ago so I think this is quite recent).

The paper is a first step toward getting spectrum approved for mobile services in Canada.  It specifically requests for comment on the 38GHz band that TeraGo owns licenses to.

The 24Ghz spectrum, which is the other spectrum range that TeraGo owns licenses for, is not mentioned directly.   This is because Canada is following the lead of the US, and there the two ranges approved  so far for mobile usage are the 28GHz and 38GHz ranges:

But all is not lost for the 24GHz spectrum.   The 24GHz band is one of a number of bands with an open for comment period by the FCC.  Given the need for bandwidth, I wouldn’t be surprised if its approval just lags a little behind these other bands.

What will the ISED do with legacy spectrum?

So the ISED is open to restructuring the usage for 38Ghz spectrum and, as it follows the lead of the US, would presumably do the same with 24Ghz if the United States decides to open up that spectrum.  But what happens to TeraGo’s legacy licenses in such a scenario?

Right now Terago is licensed for its spectrum assets until 2025.  That license is currently limited to fixed use wireless (as it was, until recently, the only use case for the spectrum).  In the request for comment paper the ISED addresses what they are considering.  They propose two alternatives.

The first option is by far the preferable one for TeraGo.  They will lose a percentage of their spectrum on any rule change but still be able to keep the majority of it, which will be suddenly much more valuable.

The second option would see little benefit to TeraGo, but also is unlikely to be implemented in my opinion.  It would be complicated.  Protection means that Terago gets to keep the areas that it currently uses those bandwidths for WIFI, and other carriers could purchase licenses around those fixed sites.  Having a network with gaps would be messy, and the ISED admitted in a later comment that they believe it could hold back 5G development.  If there is no protection, TeraGo would basically have to compete with wireless signals in their areas which would likely not be good for performance for either them or the wireless providers.  I simply don’t think this second option is going to be favorably received by anyone and I think its far more likely that the first is accepted.  Also, the United States has set precedent by choosing a solution along the lines of option 1 though from what I can tell they made no clawback of existing spectrum in their decision.

TeraGo’s Spectrum

TeraGo owns spectrum in both the 24Ghz and 38Ghz range.  Unfortunately it appears that the most valuable spectrum lies in the 24GHz range.  Below is their entire spectrum holdings.  Note that MHz-POP column is simply the previous two columns multiplied together.  When Straightpath was acquired, many analysts valued their assets on a MHz-POP basis.

With its $3.1 billion bid for Straightpath, Verizon paid $0.017/MHz/POP for StraightPaths spectrum assets.  A similar valuation for TeraGo’s assets would value the 24GHz spectrum at $100 million and the 38GHz spectrum at $29 million.  The consolidate spectrum assets, if valued at the same level as StraightPath, would be worth over $9 per share.  The 38Ghz assets alone would be worth a little over $2 per share.  Then you need to start discounting that based on what spectrum you think will get approved and how much TeraGo will have clawed back.

Putting it all together

Terago has 14.3 million shares outstanding.  Their market capitalization is $65 million at the current stock price of $4.75.  They have $9 million of cash and $39 million of debt.

The $9 per share number is exciting.  Of course there is a lot of uncertainty around that number.  There is uncertainty about what ruling the ISED will make, uncertainty about when and if the 24GHz spectrum will be opened up for mobile use, and uncertainty about the attractiveness of spectrum in less dense populations like Windsor and Red Deer.

While obviously the uncertainty dictates that a significant discount be made to the $9/share number, I think the optionality of this playing out in TeraGo’s favor has to be worth something, particularly given the positive momentum already seen in the US and by the ISED.

Also worth noting is that the spectrum is really only marginally related to the existing business.  The data center business has no dependency on the spectrum assets.  The connectivity business has some dependency, however there are ways for TeraGo to provide alternative connection services if their spectrum assets are coveted by a CSP.

Meanwhile TeraGo’s valuation is not out of line when only its existing operating businesses are considered.  The company trades at 7x trailing EBITDA and 12x trailing free cash flow.  One third of their revenue comes from data centers that they operate and offer all the standard compute, storage and disaster recovery services from that other data centers around the world offer.  Their data center revenue is derived from 7 owned centers throughout Canada. Revenue grew at 13% in the fourth quarter of 2016 and  8.5% in the first quarter of 2017.  TeraGo’s larger peers in the data center and cloud services business (most of them in the United States), trade at between 16-20x EBITDA.  Shaw just sold data center assets a couple weeks ago for 16.2x EBITDA.

The connectivity business has had some setbacks, but it still generates significant cash flow and has a reasonably stable customer base.  Revenue has been declining in the 8-10% range over the last year.  The company has been intentionally churning its low value customers and has also had headwinds in Western Canada because of commodity prices.  On the first quarter conference call management suggested that recent marketing initiatives were beginning to take hold and revenue should be expected to stabilize.

While TeraGo doesn’t break out the business costs by segments, based on the color I have gathered margins for the businesses are reasonably similar.  Therefore I’m assuming in the following that I can break out costs for each segment proportionally to revenue.  If I do, I get about $4 million of EBITDA from the Cloud business and $8 million of EBITDA for the connectivity business.  Even assuming a low end multiple for the Cloud business (15x EBITDA) and a fairly low multiple for the Connectivity business (6x) I come up with an  enterprise value of $108 million, which would value the shares at around $5.50.

Its worth noting that these multiples work favorably over time as the cloud business grows and becomes a larger part of overall revenue and EBITDA.  Also, given the recurring nature of the Connectivity revenue, if the business can be stabilized I think its reasonable to assume it deserves a much higher multiple than 6x EBITDA.

The point here is that the current price arguably doesn’t cover the value of the existing businesses, let alone any spectrum value that might be hidden in the assets.

So that’s why I own the stock.  There’s probably no rush on this one, so I have added when the stock has been weak.  Because the ISED is in comment period, a change of the rules is still some time off.    The comment period lasts until September. I would expect another 3-6 months before we hear anything back from them on the matter.  The next quarter is as likely to be weak as it is strong.  So its probably not a big rush to get into the stock.  Nevertheless I would add more on a pullback into the mid-$4s.  I am hopeful that in the next 18 months, as we see more clarity from the ISED and hopefully some movement on the 24Ghz spectrum, the market will begin to price in some of the upside from these assets.