Monday, May 05, 2008

Commodity flotation signal an end to commodity bull run?

Ah, the joys of Spring; hayfever, deads chicks in our garden and the cats leaving dead mice at our door. I suffer badly from hayfever, am allergic to cats and am not particularly found of sweeping away mangled mice and birds from my doorstep, so as you can imagine, spring turns me into a grumpy old man.

The good news however is that someone will be having a good spring and at the same time it gives a signal that the commodities market may be reaching a top.

You may recall our article 'Hedge Funds and Private Equity firms at their peak?' which discussed the flotations of these companies which we believed signalled a top. Well here is another indicator, and another billionaire in the making.

Sprott Asset Management Inc.'s initial public offering this week will make a billionaire of the hedge fund company's founder, spurring speculation Canada's decade-old commodities boom is ending, investors say.

Eric Sprott's bets on gold and oil pushed his Toronto-based flagship fund to an average return of 27 percent a year since 1998, more than three times the gain of Canada's Standard & Poor's/TSX Composite Index. The fund bought mining stock Thompson Creek Metals Co. in 2006 prior to a rally that lifted it tenfold.

Sprott is cashing out eight years after forming the company that made him one of Canada's best-known speculators. The C$230 million ($226 million) IPO is reminiscent of last June's share sale of U.S. private-equity firm Blackstone Group LP, said Stephen Jarislowsky, chief executive officer of Jarislowsky Fraser Ltd. in Montreal. That IPO preceded a 56 percent decline in monthly takeover volume in the U.S.

``When the LBO firms went public, the next day, the game was up,'' said Jarislowsky, whose firm manages about $56 billion. ``Why is he going public? If it's going that well, why would you let anybody in on it? Why doesn't he just sell to his partners?''

Insiders led by Sprott filed last month to sell as much as 15 percent of the company, which manages C$6.9 billion in mutual funds and hedge funds. Sprott Asset plans to sell as many as 23 million shares, according to the sale documents. The founder's 78 percent stake would be worth about C$1.17 billion at C$10 a share, the mid-range of the estimated offering price. The shares are expected to be sold on May 7.

So don't sell your SUV just yet and put on hold the food storage facility you were building in your basement... The commodity rally may just be coming to an end.

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