Food For Thought

It is very easy to use our investor emotion to rationalize why NOT's SP is not where we think it should be. I regularly read the top ranked messages daily and respect many posters here.

The problem with investor emotion is the high probability of it being irrational and certainly subjective. There have been many theories posted including poor management, poor retail investor information, not getting listed on the TSX, the failed takeover attempt of FWR, being an exploration vs. a transition to production company, relations with first nations, relations with institutional investment firms, and even stock price manipulation and other conspiracy theories. Maybe, and here is my subjective input, there is a much simpler explanation which takes into account how institutional investment cash flow has become very important to understand and their subsequent rules of risk management.

I don't remember where I copied the following from but it is worth sharing.
"Speaking of stock brokers, most of us serve as our own brokers which brings to mind the aphorism "a lawyer who represents himself has a fool for a client". This aphorism implies the lack of required objectivity necessary to make the right decision with clarity at critical moments in such a situation. I would extend this to those trading for themselves. Others who have documented how student traders have fared in the open market have not found high success rates as most, in spite of good training, were never able to conquer what most simply overlook....themselves....the key link to success in the market. Like it or not, we are most often our weakest links in our own lives. The sooner we come to terms with what it is in ourselves that keeps us from success the sooner we move ahead."

Professional investors use well defined trading rules to manage large amounts of capital. These rules vary from firm to firm, but the principles are quite similar. One very important rule is simply this: tying up capital which doesn't produce any source of revenue for any period of time is wasting resources. Taking small but regular interest payments from bonds, for example, is a logical decision vs. holding money in a stock with a flat, or worse, declining stock price. This is why in our current economic environment the bond market has grown to such inflated proportions.

It is my belief that the fund managers rules of risk management have changed significantly since 2008. Many of the firms balance sheets suffered hard losses both from exposure to high levels of risk themselves and from investors withdrawing their funds. Professional money has been forced to engage in less risk and with less total funds, to produce regular short term cash flow in a market which doesn't produce as much. This changes how money flows into and out of their investment decisions.

For example, a fund manager may be very excited about the progress of Noront's explorations and significant finds. Prior to 2008 he would be very comfortable to leave funds in this exploration development using a Black-Scholes and/or other pricing models . Post 2008, a heavier weighted decision takes place. What short term price change should I expect and what cash flow can I produce from it? Longer term price models are still important but more for evaluating risk. As the timelines increase from exploring to when production may take place for whatever reasons, the risk obviously increases. The stock price goes down. If the economy moves toward slowing down then the timeline for raising capital to build a mine becomes more difficult. The stock price goes down as fund managers slowly drain cash out to make other short term investments . Retail investors meanwhile would suggest the stock price should match pricing models prior to 2008 by quoting known in-ground resource values. When this doesn't work the conspiracy theorists start gaining momentum.

If I'm on track a couple of points should be noted. First, price control, as it should be, is out of the BOD's hands. The best thing NOT can do is to continue expanding the known resources as well as continue to find new ones. The investment world must be made aware this will be a mine in the future. Second, the fact that so much retail is holding this stock suggests they believe there is less risk then the stock price suggests. Third, if anything should help shorten the timeline to production in the ROF (government, First Nations, partnerships, etc), you will see another fast price swing way up. It would then level off to a point a more traditional pricing model would suggest. Forth, if the economy slides into a double dip, the timeline to production increases greatly and the stock price will take a beating. Don't quote value in the ground at this point cause this won't mean dirt! Fifth, a buyout would be ok by institutional investors because this would give them their short term cash flow. This is why we have already seen some low priced takeovers already. Sixth, long term investors should fare well as it seems either you will get a low priced buyout and possibly eventual dividends from the producing company, or NOT will produce this themselves. There seems to be too much value for this not to eventually get to production. The question is will you see it, or will your grand kids?

NOT is my favorite venture company. I see the possibility of huge returns but I also see the possibility of further price decay if macro economics wither. I don't think conspiracy is driving the price and if you are looking for fair value for what resources are in the ground then you will need to be patient. Pay day is coming but you may want to sleep on it a while longer... unless of course those deep drills hit something silly!

Good trading to all,

Doug
(if I was a lawyer I would have a fool for a client!)