Pretium’s Predictable Predicament

JANUARY 10, 2019 – Pretium released the Brucejack Mine’s Q4 2018 production update yesterday after-market, and market reaction shows it fell short of expectations. Pretium’s ore grade has predictably fallen since Q2 2018 by >22%, leading to a miss of Pretium’s H2 low-end gold production guidance of 200,000 ounces. At 11.5g/t, Pretium’s head grade is now 30% below feasibility study sampling.

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Per our previous reports, Viceroy believe Pretium’s grades will continue to fall as Pretium appear to be at the tail end of extracting high-grade deposits found along the Cleopatra Vein. As a reminder to our readers, we have appended this section of our thesis to this note.

Pretium have attributed their production and grade shortfall on their grade control system, which they state will be refined. We believe this is an unnerving excuse, and have provided substantial evidence to support our thesis that Pretium is overmining or selectively minng its deposits.

Production capacity increases of Pretium’s mill will not fix this problem.

Viceroy was astonished at the >10% PVG stock decline on massive volume on January 8, 2019, prior to any annoucement by Pretium. This is likely related to earlier bullish sentiment disseminated by The Globe and Mail, who reported Barrick was ‘eyeing’ Pretium.

We find it highly unlikely that Barrick would consider Pretium as an acquisition given it’s performance and grades have fallen well below expectation, and would likely not meet internal IRR criteria.

Pretium has failed to address in any depth the issues raised in our report including:

  • The involvement of SEC-sanctioned fraudster Sima Muroff in the bulk sample program’s milling operations
  • The narrowing of drill core spacings as part of the grade control program, the results of which show no continuity within the VOK deposit
  • Accelerated mine development
  • Resignation of key consultants
  • Blown-out costs

We maintain that Pretium is fundamentally overvalued, and see limited value in its current form.

Ebix’s 2019 ‘Not-So-Good Business Acumen’ nomination

JANUARY 7, 2019 – Ebix has characteristically ramped its press-release flow since the publication of Viceroy’s initial report and continued its acquisition spree. This report concerns management’s disregard for corporate governance, lack of transparency and due diligence.

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Ebix Inc (NASDAQ: EBIX) have come out with multiple acquisitions and service “deals” since our multiple publications on the Company. On further investigation, we find that one of Ebix’s announced contracts has not yet been finalized. Ebix retracted its press release relating to a purported Dubai Forex Services contract, where investors were misled on the status of the contract.

This is a major red flag, and exaggerates what we believe is an already extremely high investment strategy at Ebix.

Investors will note that Ebix have avoided commenting on the audit committee’s recommendation for Ebix to retain the services of Top 4 Auditor for regulatory reasons. We can only assume the Top 4 preferred to give ad hoc accountancy advice rather than full audit responsibilities. So

This report will also dive into Ebix’s near miss attempted acquisition of now-insolvent Patriot National, who Ebix was looking to acquire just before its spectacular collapse.

Ebix have so far decided to have fireside chats with investors while referring to our work as an old short thesis. Ebix have refused to account for Robin Raina’s poison pill bonus, the treatment of goodwill and the accounting irregulates. ebix business acumen award – 08.01.2018

Our research into Ebix is ongoing however we believe the information puts into context Ebix’s recent announcements. We will shortly publish further data pertaining to the Ebix group’s internal cash movements.

Diving into the Robin Raina Foundation

Publicly available financials suggest the Robin Raina Foundation shares similar financial discrepancy issues and poor disclosure practices as Ebix.

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One of the Ebix’s CEO’s biggest self-promotion points is his commitment to charity. Kudos.

As part of our due-diligence process, Viceroy has conducted background checks into Ebix’s directors and their ventures. When diving into the Robin Raina foundation, we have found inconsistencies between Robin Raina’s self-promotion of the Robin Raina Foundation (RRF) and the financial accounts of the foundation and its affiliates, and licensing issues across the US and India.

Ebix – The Taxman Cometh

DECEMBER 13, 2018 – Ebix’s Mumbai office was “searched” by Indian tax authorities in Q3 2018. In other news, Robin Raina claims Ebix has never “been on the wrong side of any regulatory or tax authority”.

The Taxman Cometh – Report Download Link

Viceroy released its preliminary report on Ebix – titled Goodwill Hunting – on 11 December 2017, the contents of which we also discussed at the Kase Learning conference in New York on December 3, 2018.

This report will address the totally inadequate response Ebix issued on December 12, 2018, which was substantially an attempt at authority bias by CEO Robin Raina. Accordingly, we will also shine a light on the statements Raina decided to include in this press release, which we believe to be extremely misleading.

  • Ebix acknowledged our report via a press release on December 12, 2018, however CEO Raina would rather issue a hollow press release than address the issues Viceroy have raised in our preceding report.
  • Robin Raina claims Ebix has “never been on the wrong side of any regulatory or tax authority”. This is inconsistent with:
    • Ebix’s Mumbai office being subject to an undisclosed “search” by Indian Tax Authorities for suspicion of tax evasion in late August 2018;
    • Ebix currently subject to a tax audit by the Australian Taxation office since at least 2016;
    • Ebix historically settling an IRS dispute for >$20m;
    • Ebix being subjected to a prolonged SEC investigation;
    • Ebix being subject to a possible ongoing DOJ investigation;
  • Contrary to Raina’s claims, it appears his conduct was subject to regulatory scrutiny even prior to his rise to CEO. Ebix’s former auditor, Arthur Anderson, was charged by the SEC for improper conduct and fraud relating to the audit of Ebix’s revenue recognition practices at a time where Raina was VP of Sales and Marketing and COO.
  • Robin Raina claims Ebix has had “no difference with any statutory of consolidated auditors across the world in the last two decades”. This is objectively, and verifiably false, as we have already reported.
  • Ebix detracts attention to concerns raised through reinforcement Ebix – The Taxman Cometh 2018.12.13of its commitment to stock buybacks, of which it has announced US$330m since 2015 and only fulfilled US$187.169m.
  • Viceroy is writing to the Debt Providers shortly with these and other material concerns.

Viceroy’s original report can be found here:

https://viceroyresearch.org/2018/12/11/ebix-goodwill-hunting-2/

Ebix’s press release on December 12, 2018 can be found here: https://www.ebix.com/press-release/ebix-ceo-decides-to-take-salary-in-ebix-stock-instead-of-cash-the-company-commencing-purchase-of-ebix-stock-under-100-million-usd-repurchase-commitment-over-the-next-6-to-12-months-period

Ebix – Goodwill Hunting

Accounting irregularities, undisclosed tax investigations, auditor shuffling, poison pill to protect short sellers: welcome to Ebix.

DECEMBER 11, 2018 – Following on from our presentation of the same title, Viceroy are releasing our preliminary report on Ebix (NASDAQ:EBIX). Our investigation has uncovered accounting discrepancies dating as far back as 2008 to present day as well as several other red flags.

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Filings.zip – Download Link

  • Numerous accounting discrepancies in years 2013 to 2018 regarding the recognition of goodwill and acquisitions within the Ebix group. These discrepancies have largely gone unnoticed due to the delay in local filings being signed off and the multi-jurisdictional nature of these transactions.
  • Over the course of our investigation we uncovered evidence of what we believe is a scheme to incorrectly book revenue and earnings. We believe this is done through the shuffling of assets from one subsidiary to another while improperly booking internal revenues, and contingent consideration “cookie jar” accounting.
  • We are limited by the recency of the available subsidiary filings. We believe this behaviour continues to take place. Ebix’s acquisition spree in India further muddies the waters.
  • Ebix announced a change in auditor to T.R. Chadha from Cherry Bekaert (of MiMedx fame) after reporting material weaknesses regarding purchase and income tax accounting, pursuant to appointing a big four accounting firm in Q1 2019.
  • T.R. Chadha has never audited a US-listed entity and was auditor of several Indian Ebix subsidiaries in which there appear to be several accounting discrepancies.
  • Cherry Bekaert was subject to a scathing PCAOB inspection just weeks before its replacement.
  • Ebix’s subsidiary structure is excessively convoluted and opaque. The subsidiary structure includes holding companies in geographies where obtaining financials is near impossible. Many subsidiaries are held under a UK entity, Ebix International Holdings, which has only ever filed locally as a dormant company and recently received a warning of compulsory dissolution for failing to file accounts.
  • Ebix’s joint venture with Vayam Technologies, Ebix Vayam, accounts for 25% of Ebix’s receivables and only customers are Vayam Technologies themselves. Vayam appears never to have settled its receivables and the entire JV is funded by Ebix at an 8% interest rate, payable in receivables. This appears to be a scheme through which cash is injected in to make paper gains of margin plus 8%.
  • Ebix CEO Robin Raina is entitled to a massive payout in the event of an acquisition at the expense of shareholders. This poison pill protects short-sellers from takeovers by attaching an unreasonable premium to the company. This arrangement and its predecessor are currently subject of ongoing shareholder litigation.
  • The company’s debt-fuelled acquisition binge in India was originally intended to create and list an Indian payments entity. This appears to have turned into an unfocused rollup, with more and more scattered businesses being added to the Ebix stable. Despite these additions, Ebix does not break out its revenues from these disparate income streams.
  • Ebix’s has been subject to an undisclosed tax audit by the Australian Taxation Office since 2016, we believe due to the transfer of Telstra eBusiness Exchange assets to Ebix Singapore, and non-arm’s length transactions.

Due to the delay in availability of subsidiary accounts, and the rapidly expanding nature of the company’s operations we are unable to quantify a base downside. We believe it is highly likely given the progress of the shareholder litigation that regulatory authorities including the SEC open or reopen their investigations into the company. Accordingly, we believe that Ebix carries a high investment risk.

NEPI Rockcastle – Mucking Out the Stable

On November 28th, 2018 Viceroy Research released a report regarding NEPI Rockcastle (JSE: NRP) detailing what we believed to be overinflated profits in the company’s Romanian operations. NEPI issued a response to our research and hosted a call for concerned investors.

NEPI Response 2018.12.06 – Download Link

NEPI Dutch Filings – Download Link

Unusually NEPI provided some clarity in terms of their accounting treatments. We maintain our belief that NEPI is fundamentally overvalued with reservations regarding the sustainability of distributable income, the tax treatment in foreign jurisdictions and the status of the overall company. This we will update on.

  • NEPI Rockcastle have not sought to deliver any scope of investigation in response to a request by investors in August 2018, and claim it is the prerogative of investors to identify the exact issues they want investigated. It seems clear what issues 10 of South Africa’s largest financial firms sought clarity on: potential trading of associated companies, suspicious capital raising activity and property transactions.
  • Per our original report, we were of the opinion that transfer pricing is not an adequate explanation as to why statutory losses are incurred in Romania. This is due to transfer pricing legislation in Romania and the EU. On further investigation, these hard currency, unsecured, intra-group loans are disclosed in NEPI’s Dutch subsidiary at rate of 8%-12%, compared to the Romanian mortgage rate of 4.5-5% and safe harbor limit of 4%. This is a stark contrast to the CFO’s description, in which she did not provide the figures, but guided the rate was between 4% to 8%.
  • Having obtained the filings of Dutch subsidiary, NE Property Cooperatief UA, we find it untenable how a local CFO or Financial Controller locally can advocate a “fair” and arm’s length transfer pricing interest rate on unsecured loans of 8%, formerly 12%. Essentially, the equity holders at the local level are being punished for an excessive and non-arm’s length priced loan. We make this assumption based on local Euro borrowing costs within Romania with an LTV of circa 28% as disclosed by NEPI.
  • NEPI uses the entirety of its funds earmarked for deferred tax payments to inflate its distributable earnings figure. In effect, the company is likely improving their dividend figures at the expense of future disbursements.
  • New anti-abuse legislation will materially hamper NEPI’s transfer pricing model going forward in Romania, Netherlands, and across the EU. Given the extent of transfer pricing, this will impact NEPI’s distributable earnings.
  • Taking a step back, it is delayed outgoings, not earnings, that substantiate ~20% of distributable earnings. The Romania tax channeling is in fact one of many adjustments that allow this unsustainable dividend practice. Other items that deserve scrutiny include the dividend contribution of stocks, the antecedent dividend add back and the sale of financial investments.
  • At a property yield of 6.77%; after accounting for cash costs, interest costs, taxes, and the stock trading at a premium to NAV, we fail to see how NEPI can justify a 7.5% dividend unless holders choose to take their dividend as scrip, which is dilutive and makes future dividends even harder to justify. Accordingly, we maintain our view that the stock is fundamentally overvalued.
  • Of concern is that large money managers, including retirement money managers PIC, have continuously chosen to take dividends as scrip.
  • SENS trading data shows entities associated with the Resilient stable associate Roque Hafner traded large amounts of NEPI shares at least for the period between May 2016 and May 2018. Hafner was implicated in the media as being involved in the Resilient insider trading scandal and several Hafner entities used to trade Resilient shares also traded NEPI shares.

We reiterate our belief that NEPI Rockcastle’s shares carry a high investment risk and are fundamentally overvalued, which will become increasingly unattractive over time given what we believe are unsustainable distribution practices.

Ebix – Goodwill Hunting

The Alchemy of Creating Profits

Ebix Presentation – Download Link

Viceroy’s presented Ebix at the Kase Learning Conference on December 3, 2018. We will shortly release a full report into our findings.

Summary red flags:

  • Change in business model (IT providers to insurance v. finance sector) without visible synergies or management experience.
  • Accounting discrepancies suggests EBIX is booking external revenues on transactions between its subsidiaries: this occurred in 2014, 2015, 2016, 2017 across multiple geographies (UK, Singapore, India, Dubai, Mauritius).
  • The company has a growing unbilled receivables balance:
  • 50% from by EBIX’s India JV (Ebix Vayam Technologies) whose only customer is the JV partner (Vayam): it appears to have no other customers, and 446 days of receivables.
  • Rapid change of company auditors, most recently the replacement of Cherry Bekaert with T.R. Chadha, an Indian auditor with no history of auditing a major US-listed entity.
  • Unnecessarily intricate and opaque subsidiary structure, with very little insight provided to investors. Many assets are being held in opaque geographies and have been transferred with no disclosure or justification.
  • The CEO has financially engineered an >US$825m “poison pill” to prevent any takeover by mandating a large payout to himself in the case of such a takeover.