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Looking for well-run commodity/precious mineral companies. Any ideas?


Guest ajc
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While recently writing a Twitter thread on market-risk (https://twitter.com/tonyjclayton/status/1142741798554624000), one thing that stuck out was how commodity stocks haven't been this undervalued for close to 100 years (see image below).

I realize we're all supposed to only need Instagram, Amazon, and tech stuff for the rest of eternity and commodities will supposedly never matter again, but I guess I have a contrarian streak.

 

Anyway, knowing very little about the space and after just looking super quickly at some options, I think Impala Platinum might be worth researching some more (see this interview with John Biccard - https://www.investecassetmanagement.com/south-africa/professional-investor/en-za/insight/investment-views/platinums-long-road - who has a good record at the Investec Value Fund).

Sibanye Stillwater also seems initially interesting after their recent Lonmin acquisition, but their debt load might be a concern.

I somehow think silver might be an interesting hedge too, and I stumbled on Fresnillo Plc but I've never heard of them before and know nothing about the company.

 

Other stocks that have come on to my radar (but which I'm still completely ignorant about), are Kavango Resources, TNR Gold, Adriatic Metals, Sandstorm, Silver Wheaton, and Royal Gold.

I'd be thankful if any forum members who are familiar with the space could throw out some stock names worth researching, direct me to some good blogs, mention some commodity FinTweeters worth following, or point out some management teams in the sector that have great performance records and integrity.

 

Any help or suggestions would be appreciated. Even ideas that are kind of wacky, would be great. Thanks in advance.

 

commvalue.thumb.jpg.ee5c7c97cd8b22eed8ec536983734558.jpg

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I think the value tends to be in the smaller cap names especially in the gold space. Often this comes with geopolitical risk and single asset risk so I find a basket is a better approach. You definitely pay a premium for the well run names and it’s easier for those names to run into some bad luck or poor management like Goldcorp or Eldorado did a few years ago.

 

I own ROXG.TO, GCM.TO, KNT.TO, SGI.V and USAS.

 

GCM.TO has thread but no posts in a while. The interesting thing with that one is that the stock has done well for the past three years with production and cost beats and still trades around 1.5x EV/EBITDA like it did 3 years ago. Every 1 multiple point adds about C$3 to the share price versus the current price around C$4.50.

 

SGI.V is a high cost producer but working towards increasing grade. Mid point of guidance is ~100k oz of production with AISC. of US$1125. Costs are supposed to trend lower with each quarter while grade improves. Meanwhile with the price of gold ~$1400 and the EV at US$35m, it just seems too cheap.

 

ROXG.TO is probably the best operator of the bunch from an ROE basis and also has FCF yields over 20% next year. It should also qualify for the GDXJ in September which could increase the valuation.

 

 

 

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I think the value tends to be in the smaller cap names especially in the gold space. Often this comes with geopolitical risk and single asset risk so I find a basket is a better approach. You definitely pay a premium for the well run names and it’s easier for those names to run into some bad luck or poor management like Goldcorp or Eldorado did a few years ago.

 

I own ROXG.TO, GCM.TO, KNT.TO, SGI.V and USAS.

 

GCM.TO has thread but no posts in a while. The interesting thing with that one is that the stock has done well for the past three years with production and cost beats and still trades around 1.5x EV/EBITDA like it did 3 years ago. Every 1 multiple point adds about C$3 to the share price versus the current price around C$4.50.

 

SGI.V is a high cost producer but working towards increasing grade. Mid point of guidance is ~100k oz of production with AISC. of US$1125. Costs are supposed to trend lower with each quarter while grade improves. Meanwhile with the price of gold ~$1400 and the EV at US$35m, it just seems too cheap.

 

ROXG.TO is probably the best operator of the bunch from an ROE basis and also has FCF yields over 20% next year. It should also qualify for the GDXJ in September which could increase the valuation.

 

 

 

Thanks, SafetyinNumbers. Those are just the kind of insights I was looking for, together with some nice color on the space. Much appreciated.

 

 

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https://twitter.com/tonyjclayton/status/1142741798554624000), one thing that stuck out was how commodity stocks haven't been this undervalued for close to 100 years (see image

 

This might be mostly about energy companies.

 

Here’s the source of Chart 4, and a description of the index used for “Commodity Stock”:

 

http://blog.gorozen.com/blog/commodity-and-natural-resource-equities-undervalued-versus-broad-market

 

https://us.spindices.com/indices/equity/sp-north-american-natural-resources-sector-index

GICS® energy and materials sector excluding the chemicals industry; and steel sub-industry.

 

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Not a rec. to buy or sell...check out the Altius thread. It's short and should only take you half a year to wade through. Focus on non-precious metals and bulk materials royalties. Project generator model with a royalty/stream portfolio generating about $80 million a year. Iron ore, copper, potash feature prominently in the royalty/stream portfolio. So does electrical coal for now, but management would like you to know that they are transitioning away from that.

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I think the value tends to be in the smaller cap names especially in the gold space. Often this comes with geopolitical risk and single asset risk so I find a basket is a better approach. You definitely pay a premium for the well run names and it’s easier for those names to run into some bad luck or poor management like Goldcorp or Eldorado did a few years ago.

 

I own ROXG.TO, GCM.TO, KNT.TO, SGI.V and USAS.

 

GCM.TO has thread but no posts in a while. The interesting thing with that one is that the stock has done well for the past three years with production and cost beats and still trades around 1.5x EV/EBITDA like it did 3 years ago. Every 1 multiple point adds about C$3 to the share price versus the current price around C$4.50.

 

SGI.V is a high cost producer but working towards increasing grade. Mid point of guidance is ~100k oz of production with AISC. of US$1125. Costs are supposed to trend lower with each quarter while grade improves. Meanwhile with the price of gold ~$1400 and the EV at US$35m, it just seems too cheap.

 

ROXG.TO is probably the best operator of the bunch from an ROE basis and also has FCF yields over 20% next year. It should also qualify for the GDXJ in September which could increase the valuation.

 

 

 

Thanks, SafetyinNumbers. Those are just the kind of insights I was looking for, together with some nice color on the space. Much appreciated.

 

No problem!

 

I would say on GCM.TO, they have some warrants, GCM.WT.B, that are offered at $2.60 with a strike of $2.21, while the stock is at $4.55. They expire on April 30, 2024 and trade at almost no vol.

 

An interesting trade is to pair the warrants with GCM.NT.U which is a complicated senior secured note that has a fixed amortization schedule that pays a premium if the gold price is above $1250. With gold at $1410, for example, on July 31, 6.21% of the face value of the bonds will be redeemed at a premium price of 112.80 vs the last trade at 101. These bonds also have an 8.25% coupon.

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Not a rec. to buy or sell...check out the Altius thread. It's short and should only take you half a year to wade through. Focus on non-precious metals and bulk materials royalties. Project generator model with a royalty/stream portfolio generating about $80 million a year. Iron ore, copper, potash feature prominently in the royalty/stream portfolio. So does electrical coal for now, but management would like you to know that they are transitioning away from that.

 

Can't tell if you're being sarcastic given the "it's short and should only take half a year to Wade through" comment

 

To OP:

 

But generally, I like their business model and these guys seem to have integrity. They haven't hit their stride in the stock yet - some would say because the business model can't overcome terrible industry dynamics and that royalties are essentially fixed income like return investments. Others would say it's because we haven't seen a prolonged bull market in base commodities since the last one popped in 2011.

 

It's up to you to determine which you believe. As a long suffering shareholder, my modest profits on the name have been 100% due to active management (adding/trimming at the right times) and not because the stock was easy money or because the company has delivered exceptional results.

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Top line royalty trusts offer participation in oil & nat gas production with no debt, no responsibility for expenses, & no self dealing management to contend with.

I currently own Crosstimbers Royalty Trust (CRT) about 80% top line/20% bottom and have owned Sabine Royalty Trust (SBR) 100% top line & Dorchester Minerals (DMLP) about 70% top line in the past.

 

Also bought some Birchcliff (BIREF) today. Canadian gas & oil producer, over 3% dividend, significant undeveloped assets, seems cheap .....

latest quarterly here https://seekingalpha.com/pr/17514047-birchcliff-energy-ltd-announces-q1-2019-results-provides-operational-update

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Also, something I believe should be pointed out, typically these commodity indices are geared very heavily towards oil. It's not to say that all commodities aren't cheap (most are), but if the thesis is based on the relative value of financial investments versus the components of a commodities index, you probably need oil exposure.

 

It doesn't need to be the only thing you own, but if you don't own it, it's very possible the commodities index DOES revert and you still miss the rally.

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Thanks all, for the various potential trades, ideas, and commentary, so far. Lots of food for thought. One thing it brings home is how Wild West-like commodities are, and how superficial my knowledge of them is.

Just from doing some initial digging around, I think it's going to take me months (or more likely years) to get some kind of handle on the dynamics and where the real risks lie. I mean I think that's to be expected, but the last few days have made it even clearer.

 

I remember reading The Frackers by Gregory Zuckerman a few years back, which was an enjoyable book.

Trying to understand the space so far though, makes his narrative seem orderly and organized in comparison. It gives me a new respect for folks who consistently make money in this sector, and through each cycle.

Anyway, my appreciation to those who took the time to share their experience and insights.

 

 

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Thanks all, for the various potential trades, ideas, and commentary, so far. Lots of food for thought. One thing it brings home is how Wild West-like commodities are, and how superficial my knowledge of them is.

Just from doing some initial digging around, I think it's going to take me months (or more likely years) to get some kind of handle on the dynamics and where the real risks lie. I mean I think that's to be expected, but the last few days have made it even clearer.

 

I remember reading The Frackers by Gregory Zuckerman a few years back, which was an enjoyable book.

Trying to understand the space so far though, makes his narrative seem orderly and organized in comparison. It gives me a new respect for folks who consistently make money in this sector, and through each cycle.

Anyway, my appreciation to those who took the time to share their experience and insights.

 

An indirect (and possibly safer) way to play the fracking trend is Intrepid Potash (IPI).  It's a small low-cost producer of potash (an oligopoly industry) but has been making a lot of money selling water to frackers.  They have water rights in some desert areas where a lot of fracking is going on, and each well that is fracked needs thousands of gallons of water.  I used to own it but sold out.  It's come down since then but still not cheap enough for me to buy back in yet. 

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