Forced to cover…

A month or two ago we invited the manager of Bronte Capital, an Australian hedgefund, to explain his position on InterOil. He never replied to that offer. The shares, in the meantime, moved sharply against Bronte and they were forced to cover.

Here is the whole Bronte newsletter from November 2 (although it has a October 2 date on it, he’s really talking about the month of October).

2009-11-04-bronte-cap

Here are the relevant parts:

• Moreover we had two positions go sharply wrong.
• The first was a short position on an oil-and-gas company whose claims we are highly skeptical of. We were forced to cover most of our short as the stock went against us. We have said before that we are not wedded to any short position. Moreover as short positions get bigger (and hence more dangerous) as they go against you we simply must react to protect the funds. We did so – but – unfortunately it appears we covered pretty near the top, essentially maximizing our loss.
• That said – we have done considerable research on the said company and remain convinced as to our thesis. We retain a small position which we will be willing to expand at some stage in the future.

We again extent our offer to Bronte to explain why he’s so skeptical…We offer him uncensored discussion here.

The research they claim to have done is very likely to be a geologist (Bartoni) report commissioned by Barry Minkow’s FDI. It is actually funny to see how the latter argues it proves InterOil is a ‘Ponzi scheme’ while the geologist report itself at most adds a few ifs and buts to InterOil claims.

It’s also funny to see how Morgan Stanley deals with these claims (this from p.6 of their thorough report):

• We Discount Recent Negative Media Coverage Recent negative claims about IOC come from a questionable source… Recent negative media coverage of IOC has resulted from claims by the Fraud Discovery Institute (FDI), a for-profit entity founded by Barry Minkow and Sam Antar. FDI’s stated purpose is to detect and prevent fraud; according to the FDI website, Mr. Minkow “almost always holds a position in securities reported on, or profiled by, FDI.”
• Mr. Minkow, the founder of ZZZZ Best, has been convicted in a financial fraud; Mr. Antar, the former CFO of Crazy Eddie, pleaded guilty to fraud. FDI claims IOC is a “Ponzi scheme.”…yet we think it is important to spell out why we discount the claims regardless of the source.
• The thrust of FDI’s claim is twofold:
• (1): stock hyping and potential securities law violations highlighted by a secretly recorded meeting with the head of investor relations and a potential investor (released May 15, 2009) and
• (2) questions regarding IOC’s resource potential based upon a review of public data by a geological firm (Thompson & Knight).
• Regarding the taped meeting, we do not believe the statements disprove IOC’s resource or positioning, and the discussion appears to be factual and to comport with disclosures on the company’s quarterly conference calls.
• On the geological claims, we don’t believe the general conclusions are meaningful. The primary conclusion of the geologist’s report, “It is simply premature to claim that after the Antelope-1 well that results confirm that the reservoirs will have sufficient sustainable flow rates to justify the development of either a LNG plant or a liquid stripping plant.”
• IOC’s has been classified as a P50 resource claim (of 3.5Tcfe and then 6.7Tcfe) by two respectable geological firms.
• All discoveries require further exploration, and IOC is conducting that drilling today.
• Lack of proved resources (under SEC definitions) isn’t dispositive of resource potential as most LNG-related gas reserves cannot, by definition, be booked as reserves until a company FID’s construction of an LNG facility (i.e., can monetize the resource). For instance, XOM has booked only minimal reserves relating to the PNG LNG facility on which it hopes to break ground in early 2010. Finally, after 70 different companies entered IOC’s data room, it appears that other energy companies agree.

Since this report has appeared, a new well (Antelope2) has confirmed the resource and reef 2.2 miles to the south and Morgan Stanley have increased their target price from $65 to $73, increased their bull case to $142 and doubled their bear case to $30 (and they give the latter only a 1:5 chance). The preliminary results at Antelope2 should further reduce those ifs and buts from Bartoni’s report.

We always find it suspect if people do not change their views if the facts change..