Institutional Reports and Hidden Agendas
Bill Ridley, January 13, 2009
I have read a lot of analyst reports in my 30 years investing in the stock market, and I always take them with a small grain of salt. But when I read the RBC Dominion Securities fairness report on the Gold Reserve-Rusoro takeover battle, even I did a double take.
In case you're not following this story, Rusoro Mining (RML-TSX) is attempting to takeover Gold Reserve Inc.(GRZ-TSX) by having GRZ shareholders tender their shares 1:3 for Rusoro shares by January 21st. Rusoro has their eyes on the Brisas gold/copper project that contains a resource of 11.8 million ounces of gold and 1.6 billion pounds of copper. Gold Reserve had been working in Venezuela for 16 years and has spent US $230 million on developing Brisas but the project has been stalled because the GRZ cannot get the mining permits in place. Long story short, Rusoro has close connections to the Venezuelan government which they feel will expedite the approval of the necessary permits.
With light at the end of the tunnel for the long-suffering GRZ shareholders, enthusiastic buying has driven GRZ stock up over 400% over the last few weeks. The market seems to be saying "let's do this deal" however one of GRZ's financial advisors is saying "no way." They are telling Gold Reserve shareholders the Rusoro bid is inadequate, despite it being above their own target price for Gold Reserve.
You see, research departments have this hush-hush relationship with their corporate finance departments – you may have heard of an old, now politically incorrect term called the Chinese Wall. What it means is that when a brokerage firm makes money raising funds or doing merger
and acquisition work for a public company, that firm will then issue a research report on the company.
This creates a huge conflict of interest in the system, and every few years the shrill nature of public outcry makes the press. Remember in the dot com days how Merrill Lynch analyst Henry Blodget was caught writing scathing personal emails about the Internet companies he was
covering, while at the same time writing glowing research reports for institutional and retail investors?
To preserve and increase revenue with client companies, these firms – and their analysts – sometimes need to jump through verbal hoops that would challenge even the most flexible Cirque du Soleil contortionist.
- And dear reader, I don't fault them for this. We all have to make a buck and it's caveat emptor always – Buyer Beware.
RBC follows Gold Reserve, and helped them raise $180 million in 2007. (See what I mean – raise money, issue research).
I see that one RBC research brief, dated May 1 2008, they downgraded Gold Reserve to $2 per share, down from an $11 target, when the Venezuelan government rescinded one of their permits to develop the Brisas deposit. On Nov. 27 – only 3 weeks before Rusoro launched its bid – Gold Reserve was trading at 32 cents and RBC put out a small note with a target of $1.25 per share. Valued today, January 13 2009, Rusoro's bid for Gold Reserve values GRZ at $1.80 (RML is giving 3 shares of itself to GRZ shareholders – and Rusoro is trading at 60 cents).
The second reason I found the report intriguing – it was a five page document with four-and-a-half pages of legalese, and 3 lines of conclusion, saying the bid was inadequate. No reasons given. That's a confidence booster.
We read 30 documents, and if they're all true, and nobody lied, then the bid is inadequate. No rationale. Thank you and good night.
I can't speak to conviction level of that report. What I can say is that it's clear from the number of press releases and media stories, the Rusoro-Gold Reserve battle is far from over.
Please pass the salt.
Happy Investing,
Bill Ridley, Publisher
http://www.jameswinston.com/
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