When Gold Didn’t Glitter...And Pegasus Couldn’t Fly

As the big New York outpost of a Swiss firm, we got a lot of orders from wealthy European individual investors. We’d had one customer looking to buy $250,000 face amount of a convertible issued by the Canadian mining firm Pegasus Gold. The bonds were quoted around 75 cents on the dollar. Depending on a bond’s maturity, such a price could indicate some level of financial distress, simply a move up in interest rates, or some combination. You should be able to convince yourself that a bond due in one year trading at 75 stands a meaningful chance of not being repaid. This is because even ignoring coupon income, such a bond is promising a 33% one-year return, a 25-point gain on an investment of 75, and you don’t get that kind of yield for nothing. In Pegasus’ case, the bonds had been issued several years earlier, with gold trading just below $400. Now gold was heading to $300 or lower, and Pegasus was a high-cost producer. Basically, the company was starting to lose money on every ounce it mined, and no, they weren’t going to make it up in volume. Environmental issues involving the use of cyanide at a Montana mine did not help.