Why I'm Adding Noble and Seabridge

I’ve been sitting on larger-than-desired cash position of 12.5%, and waiting out what I saw as the potential for a 4-5% pullback in the major indexes. That pullback just doesn’t seem to have gathered its critical mass, with all due nods to the anemic volumes we’re seeing of late. Meanwhile I’ve been poring over sectors that I feel are either undervalued or due for a consolidation wave. Energy fits both criteria with a bow on top.

Valuations are largely in the eye of the beholder, but I am feeling ever more confident in the fact that S&P operating earnings for 2009 will put the market in the range of 15-18x, which is more than fine for this point in the business cycle, and gives us plenty of breathing room for further gains.

Noble Valuation Looking Regal

There’s little to bicker about with regards to Noble Corp (NE) fundamentals. The stock sports a sub-7 P/E, 1.5 book, and my personal favorite, less than 5x the run-rate operating cash flow. Think what you want about the future direction of crude oil prices, this company is booked $10b solid on their rigs, and is a prime M&A candidate. Dayrates rose nearly 20% year-over-year in the latest quarter, and Noble has a high % of rigs that can reset rates mid-quarter, which should boost the company’s next few earnings reports if my hunch of $80 crude plays out.

I was strongly considering Pride International (PDE) instead of Noble, as Pride’s valuation probably has room to run following the Seahawk spinoff. My only real reservation on Pride is the concentration of rigs in the Gulf of Mexico and the lack of clarity as to how Pride’s mgt. team will handle its newfound financial leverage.

Adding 1000 shares Noble Corp. (NE) at $35.49. (Click to enlarge)

Seabridge Gold - Pre-Development Gem

If I had a Rule Sub-1A of investing, it would be to avoid companies with no revenues. Seabridge (SA) violates this unwritten rule, but sometimes you just have to think outside the box a bit.

I’ve been looking to get some exposure to gold, but I have been insisting on seeing an operator that doesn’t hedge; if I’m going to speculate on a miner, I want all the upside. Why gold? I’m certainly no gold bug, and I’m not a believer in just being there to get the prerequisite 5% that so many rote managers say is “smart”. But there is a time and a place, and several positive secular trends are in place right now.

One of them is inflation - that’s right, I’m putting inflation down as a secular trend. It’s going to be that enduring. I’ve been pounding the table on this one for so long that my hands are sore, and started doing it long before the “reflation trade” was common lexicon.

I also think the secular trend of expanding middle classes in India, Brazil, and China will produce higher raw demand for gold, and I’m quite curious to see what any real demand increase will do at the margin, considering how much gold is purchased by the bugs and hedgers of the world. Seabridge has full ownership of 8 mines, and all are in North America, which takes away some of my geopolitical fears of the larger, more diversified miners.

Based on the most recent economic assessment of Seabridge’s main project, the KSM mines in British Columbia, there’s over $11b in gold, silver, copper, and molybdenum to be extracted over a period of 7-10 years. But the company could just as easily get all the field tests in order, then sell the property to one of the alpha dogs next year. Seabridge compiled their assets during a historically low period in gold prices, and they want to leverage spot prices as much as possible.

Adding 1000 shares of Seabridge Gold (SA) at $29.99. (Click to enlarge)

Disclosure: Author does not hold personal stakes in the companies mentioned. The Secular Trends Portfolio is a model that aims to reflect a 100% equities allocation.

Comments

[Roger Knights:]

"avoid companies with no revenues. Seabridge (SA) violates this unwritten rule ...."

But the reason Seabridge is still at a bargain price is that so many investors observe this rule! FWIW, Seabridge has a good balance sheet (much cash and no debt). Also, because it hasn't entered the mining stage, its cost of operations is low. It has only a dozen or so employees. (The drilling and site study work is contracted out.)

The SA site has three noteworthy items:

A 10-minute video tour of construction plans for the KSM site
www.seabridgegold.net/...

24 Powerpoint screen shots describing SA's prospects, philosophy, etc. (click the right-arrow to advance each slide):
www.seabridgegold.net/...

A section of reports from security analysts,
www.seabridgegold.net/...

I've been aboard Seabridge since December. It's outperformed other miners of its size. One thing I've noticed is that it seems to give an early warning signal of moves in the price of gold better than other miners. (Unfortunately, its balkiness in the past few days suggests that gold won't get past $1000 in the upcoming week.)

Sep 06 06:06 AM

[alexmi:]

Well, it was smart to play gold when it was $950. Now it is risky to buy before the brakeout. That could explain why "smart money" is hesitating. I guess there is fear that banks still can further short it. Or they will start covering. I would wait for it to break out of $1000 to buy more. I am covered with options if it goes up too fast.

On Sep 06 06:06 AM Roger Knights wrote:
> I've been aboard Seabridge since December. It's outperformed other
> miners of its size. One thing I've noticed is that it seems to give
> an early warning signal of moves in the price of gold better than
> other miners. (Unfortunately, its balkiness in the past few days
> suggests that gold won't get past $1000 in the upcoming week.)

Sep 06 10:43 AM

[RECESSIONPROOF:]

m i am wrong, but i think you are adding because you want to add, i doubt anybody pressures you to do it, if thats the case, then call the police 911

Sep 06 03:17 PM

[Chancer:]

I have been looking for mutual funds for some of my IRA in oil service companies.

Only one I found is FSESX.

I have read that "oil service energy" is better (less subject to oil price volatility) than pure energy companies.

Anyone know of oil service mutual funds other than FSESX?

Thanks.

Sep 06 03:50 PM

[RECESSIONPROOF:]

Maybe this is what you are looking for:
finance.yahoo.com/q/hl...


On Sep 06 03:50 PM Chancer wrote:

> I have been looking for mutual funds for some of my IRA in oil service
> companies.
>
> Only one I found is FSESX.
>
> I have read that "oil service energy" is better (less subject to
> oil price volatility) than pure energy companies.
>
> Anyone know of oil service mutual funds other than FSESX?
>
> Thanks.

Sep 06 05:47 PM

[Slvrizgold:]

"while I'm certainly not a gold bug"....

This statement should be seen as an indicator that gold has a long way to go, in time and price. For the last 9 years, it has been the only consistently good performer (only other commodities can compare) yet most of these "experts" can't think out of the box enough to realize that gold is STILL the most undervalued investment. The massive secular bear market in precious metals from January 1980 to the early 2000s has now converted into a LONG TERM SECULAR BULL MARKET. Pause to consider that gold has only in the past year and a half has entered new territory and silver still needs to TRIPLE to make a nominal new all time high. Silver is DIRT CHEAP and I can't think of any investment with better fundamentals and spectacular potential upside. The fact is - silver is still money, even though the central banks have demonetized it. And silver is also an extremely important industrial metal with a severe deficit between mine supply and annual consumption!

Sep 06 11:00 PM

[LKofEnglish:]

like the idea of buying a stock in a gold miner that hasn't bought a single piece of equipment yet, let alone ever mined any gold. talk about buy on the rumor, sell on the fact. be interesting to see how well they come through when they actually have to do something. so far since the real inflation has yet to hit i imagine they're in no rush to do anything real at all.

Sep 07 12:32 AM

[bsharvy:]

Gold is a crisis hedge, not an inflation hedge. It's hit its highs this year during a time of deflation.

Sep 08 03:02 AM