Tails you lose: the IMA Exploration coin flip ends up badly
About two months ago I wrote about MA Exploration (IMR). I called the stock a “coin flip” silver play because a Canadian court was considering whether to turn over the company’s principal asset, mining claims to a huge silver find in Argentina, to a competitor, Aquiline. Although I thought the odds were around 50-50 that IMA would prevail, I invested in the stock because the upside if it won was materially larger than the downside if it lost, giving it a positive expected return. If IMA won, I surmised, the stock could eventually go to ten dollars as the mining world began to focus on the huge prospects for the La Navidad property. If it lost, it would lose most of its value, but that amount would still be a fraction of the potential upside.
The problem with coin flips is that 50% of the time you will lose — which happened here. The Canadian court handed IMA a devastating decision (see IMA’s explanation of the decision here, and Aquiline’s explanation here). The court ruled that IMA had misappropriated confidential information to find and stake La Navidad, and ordered IMA and its subsidiary Inversiones to turn over all interests in the property to Aquiline within 60 days.
The decision was announced last weekend, and IMA opened down over $2 Monday morning. I sold my entire position that day.
Yesterday SilverSpec emailed to ask: “Would you play IMA now? After all they have a decent chance in the appeal and at any rate will receive compensation from Aquiline for the expenses they have put into La Navidad to date.”
My answer to SilverSpec is no. This was a calculated bet that I made, and lost. Rather than double down, I took whatever shred the market gave me (a paltry $0.68 average) and walked away. I don’t know a whole lot about Canadian appellate standards, but I think the odds of IMA winning an appeal are fairly low. In the United States, about 15% of civil judgments are appealed and significantly less than half of those are successful. There are three factors specific to this case that, in my opinion, make a reversal on appeal unlikely. First, the case hinged upon findings of fact by the trial court that will likely be given deference by the appellate court. Second, the judge supported her opinion by a well-reasoned 119 page opinion. Third, as I noted in the original article, Aquiline’s attorneys were simply more skillful than IMA’s. As a result, I think Madame Justice Koenigsberg’s opinion will stand.
SilverSpec’s other point, that Aquiline will have to reimburse IMA for its staking and development costs to date, doesn’t excite me either. IMA’s current enterprise value of 18.9 million anticipates that reimbursement. Also, I expect a lot of cash to be eaten up during the appeal. Lawyers are not cheap.
Bottom line: I outlined a risky coin flip bet in IMA that lost. Due to the binomial nature of the bet, the losses were more painful than most. However, I’m not going to compound my error by sticking with a loser. The stock is already down over 25% from where I sold Monday morning and I see no reason why it will not continue to trade lower as the appellate process drags on. As SilverSpec hinted, there may be some point at which it becomes a buy as an option on the outcome of an appeal — but that’s all it is right now. Now if anyone has an opinion on Aquiline, please email me….
DISCLOSURE: I have no position in IMR or Aquiline. Not a recommendation to buy or sell any security. For informational and educational purposes only.
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