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Metals Sector


Ulti
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Don't know if there is any interest, but I figured I'd give the Metals topic a try. Energy security and Metals security seem to be intertwined. I've recently been establishing a position in RIO and have been delving into the subject ( see below podcast as samples ).

The Energy and Metals markets have some similarities in being cyclical and having a current  lack of investment as well as the infamous ESG.( and throw in some NIMBY).  Hopefully there are some on the board who can further my education and direct me to other resources. 

 

 

 

 

https://smartermarkets.media/systems-at-risk-episode-6-andy-home/

https://podcasts.apple.com/us/podcast/why-copper-may-be-one-of-the-tightest-markets-the/id1056200096?i=1000564501284

https://podcasts.apple.com/us/podcast/the-metals-money-and-markets-weekly-r-is-for-recession/id1537184725?i=1000570864251

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15 hours ago, Lazarus said:

Are you looking at precious metals or mining in general. Your links make it sound like mining in general, but just checking.

I am sure it’s mining in general, the precious Mets, sector is its own beast.

 

FWIW, I don’t own any mining stocks but some start to look interesting like BHP or RIO. Both of them got religion a while ago before the oil companies did and have decided to run with minimum debt and just distribute their earnings in variable dividend. They should be great holds in cash deferred accounts. It’s better than buybacks which happen when the stock prices are high. You can see how many oil companies bought back stock in 2020 when their prices were much lower than currently. Paying out excess cash mostly in dividends is the way to go in very cyclical sectors, Imo.

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I've been looking at BHP too. It's P/E ratio is 7 or 8 (which is low compared to its average) and its dividend is 13%, with a strong balance sheet. They started raising their dividend dramatically in 2021, but with a yield of 13%, I wouldn't expect it to last. Perhaps if they do cut their dividend, the time to buy would be after a drop due to a dividend cut. Still, it's one of those situations that seems too good to be true, which makes me think I'm missing something obvious. Business expectations have lowered due to China's ongoing Covid shutdowns, but that won't last. 

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24 minutes ago, Lazarus said:

I've been looking at BHP too. It's P/E ratio is 7 or 8 (which is low compared to its average) and its dividend is 13%, with a strong balance sheet. They started raising their dividend dramatically in 2021, but with a yield of 13%, I wouldn't expect it to last. Perhaps if they do cut their dividend, the time to buy would be after a drop due to a dividend cut. Still, it's one of those situations that seems too good to be true, which makes me think I'm missing something obvious. Business expectations have lowered due to China's ongoing Covid shutdowns, but that won't last. 

Th BHP dividend is variable as is RIO’s. I think they are just distributing a share of their net earnings based on a formula. The current 13% yield is based on pretty elevated earnings, but I think if you by this around $45 (my target) then you get ~10% yield throughout the inevitable cycle.

A variable dividend is the right way to distribute cash, imo. Amongst the energy/ oil companies, only PBR does the same thing, but PBR has some political risk.

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”Valuation of  Metals and Mining  Companies” - VALUATION APPROACHES AND METHODS FOR DIFFERENT TYPES OF MINERAL PROPERTIES
https://app.box.com/s/2xaur14cv86tc77r598u6o9yu13enrot

 

 Also check out TPL, BSM, DMLP, MSB, etc.

 

Quote

"Royalty companies typically trade from 30 to 50 times earnings. Generalist investors say, “Why would I pay that?” Take Franco Nevada. It's a $28 billion royalty company run by 30 people. Every new discovery is upside without an extra dollar out the door." -Spencer Cole

 


https://horizonkinetics.com/app/uploads/Q4-2020-Review_Final_Approved.pdf

image.thumb.png.33e071c922ef6c4fea308a561d0988ea.png
image.thumb.png.302f0f406f2242583dc47bd0b89fa351.png

 

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Definitely metals in general.

I've been a Valueline user over the years and RIO was recently added to their 3-5 year  potential growth portfolio . It has some issues such as:

Pricing for key commodities, such as iron ore, aluminum, and copper, have been under pressure recently due to concerns about the slowing global economy, particularly China. At the same time, costs for labor, fuel, and supplies have been on the rise, pressuring margins. But in my tax deferred accounts should do fine over the next few years.

The mining sector today seems more heavily dependent on the Chinese economy. However it seems like due to NIMBY and ESG...also increasing demand from growth in emerging markets....that mines are becoming much more valuable. Also RIO just opened an almost fully automated mine in Aus. ( hopefully lower labor cost down the road.

This seems to be an extremely volatile sector... My reading \exposure to podcasts and this board has help me gain conviction in the energy sector. Hoping to do this with metals.

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I am a bit intrigued by it, because you can make a framework that only 3 companies control the best iron ore assets - Vale (Brazil), Rio and BHP (Western Australia). there is also Fortuesce, but they are a smaller player. The companies have the lowest cost resoruces. Yes China can mine their own, but the cost are much higher and also seems to be increasing. the price floor for iron ore seems to be around ~$75/ ton bd at that point, most other players are really hurting and only the big 3 or 4 make money.

 

Do this seems to be a situation where you can cut through the noise and probably time the bottom, when the resource prices go to his level. that seems to happen every couple of years.

Its better in that sense than energy where you have a cartel and the largest player Aramco  probably can lift oil for $10 per barrel and still break even or make a bit of money. While you can buy Aramco. theoretically, it’s carry a large political risk Fo being the Saudi National oil company so who knows what really their intend is , but enriching minority shareholders is probably fairly low on the totem pole.

 

Now with these iron ore company, you can basically buy the equivalent of Aramco  but with the company and resources located in a political stable county (Australia).

 

Copper is also an interesting metal with the electrification and has substantial LT tailwinds, but the best plays are located on Peru and who knows what’s going on there politically in the future ( current political trends don’t look that great).

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On 7/27/2022 at 8:20 AM, Spekulatius said:

So, here is RIO expected dividend:

https://finance.yahoo.com/news/rio-tinto-delivers-underlying-ebitda-062000666.html

 

Price down a few percent, but nothing major. Looks like an opportunity to me.

 

I think you're right that RIO is the best play on copper right now. The Cuajone mine for SCCO took a turn for the worse this week. Grupo reported 12% drop in production with a further drop expected. Bodes well for other companies though, as demand for copper remains high. I wonder if we will see any political pressure from the US put on down there to get things moving. Biden admin has already been flexing a bit with Brazil and Venezuela when it comes to offshore oil. SCCO or Grupo could still be a solid way to play copper but it's going to take some effort, timing and luck. 

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I think that their CEO is a winner. He got the stalled Mongolia copper mine deal done and it looks like the Guinea iron ore will also get done. Everything that I've read is that mining deals in the future will be much more difficult to implement.

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Ulti, you might want to give a quick summary of any link you post or at least an indication of why you're posting it. If you don't include your thoughts about the link, most people will not bother to follow the link, read it, try to figure out why you posted it, and then add their comment.

 

Just my two cents on posting etiquette.

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