The global investor sentiment for commodities remains positive because of a compelling fundamental story and the resumption of strong price trends since the financial crisis. Despite this facade, many smart money investors who were early commodity bulls are now exiting the space. Commodity investors should pay close attention to this trend and reevaluate their own positions. While smart money is not always right, they deserve some attention.
Soros Fund Management Sells Massive Gold Stakes
At the 2010 World Economic Forum in Davos Switzerland, George Soros famously quipped that gold was "the ultimate asset bubble." To add intrigue to an already inflammatory comment, the billionaire's hedge fund was long hundreds of millions of dollars of gold at the time of his comments. But since then, Soros Fund Management has significantly scaled down their exposure to the precious metal. Below is a list of some of Soros's biggest reductions in the most recently reported quarter.
|December 31, 2010||March 31, 2011|
|SPDR Gold Trust (NYSEARCA:GLD)||5,000,000 shares||49,400 shares|
|Kinross Gold Corp (NYSE:KGC)||3,962,100 shares||1,379,400 shares|
|Novagold Resources (NYSEMKT:NG)||12,905,142 shares||3,492,100 shares|
Soros Fund 13F: December 31, 2010 Positions
Soros Fund 13F: March 31, 2010 Positions
James River Coal Doubles in Size
In March 2011, Evanston Illinois based mega asset manager Magnetar Capital sold their stakes in International Resource Partners LP and Logan & Kanawha Coal Company for $475 million in cash to James River Coal Company (JRCC). While we thought viewed the deal as bullish for JRCC, speculating that the coal company's cheap acquisition to double its size could yield 50% stock price upside, considering Magnetar's stellar reputation, it is reasonable to be cautious.
While we continue to believe that JRCC made a good acquisition at a good price, investors, it is important to note that our initial thoughts are based on relative valuation. A richly priced industry's cheapest stock is not necessarily cheap.
In addition to the major coal producers, coal investors should also pay close attention to Market Vectors Coal ETF (NYSEARCA:KOL). The ETF is a good metric for the industry because unlike other popular commodity ETFs, it has less broad market appeal and therefore contains less market sentiment related trading volatility. KOL has $844 million in assets and trades about $35 million of shares per day.
Private Equity Sells Eagle Ford Stake
In June 2011, Hilcorp Energy Company and Kohlberg Kravis Roberts' energy partnership, Hilcorp Resources, sold their Eagle Ford Shale assets to Marathon Oil for $3.5 billion. The assets include 141,000 net acres and 217,000 gross acres primarily in Atacosa, Karnes, Gonzales and Dewitt counties in Texas.
This sale was a big victory for Hilcorp Energy and KKR. Year a year ago, the company sold 40% of their Eagle Ford Shale assets for $400 million, valuing the project at $1 billion. Considering the recently $21,000 per acre price for the rest of the stake, the asset value nearly tripled in the last year. This valuation is higher than recent Eagle Ford deals, including Chesapeake Energy (NYSE:CHK)'s $1.1 billion transaction with CNOOC for a JV related to 200,000 acres.
The actions of smart money investors like Magnetar, KKR and Soros Fund Management demand the attention of investors but they are by no means sufficient reasons to buy to sell an asset. Despite the commodity complex's compelling fundamental investment thesis and strong price performance since the troughs of the financial crisis, the recent activity among smart money managers may be a bearish indicator. Commodity investors would be wise to exercise caution.