Bill Herbert

Copper and Resources Lead to Portfolio Outperformance

Hi Albert,

PCU is a stock that has been good to me in the past – but I haven’t followed it closely over the last year. I bought some in the teens and sold in the high thirties a couple of years ago, but held onto FCX and some others at that time. PCU has actually been less volatile than FCX, for whatever good that is in terms of portfolio stability.

The risky things about PCU are its ownership/control by Grupo Mexico, and the geographic risk. All the mines are in Mexico and Peru – both mining-friendly, for sure. But Mexico has been melting down economically for some time, and I believe there is a lot of political/confiscation risk there. I know that Cantarell, the huge oil field in the southern Gulf that has bankrolled the Mexican economy for over twenty years is in serious decline, and lower oil prices are a big hit to their revenues. I believe that Mexico may have to impose new taxes or royalties on mining properties – which are numerous - and since a lot of the PCU stock is American-owned, they can say it’s for the good of Mexico and who really cares about the Americanos, anyway?

Also, I don’t want to be at the whim of a large conglomerate (Grupo Mex) that may capriciously sell assets, do an unfavorable capital raise, or declare a large dividend to itself, as many have done in the past. I don’t have the time to monitor their honesty or capability, so I will pass even though they may generate great returns for investors. Note that in 2005, PCU did a $900 MM secondary, in which both the Pritzker family and Phelps Dodge (run by Adkerson) sold shares. Maybe that doesn’t mean anything, but they opted out of the PCU play, only to expand and develop other copper resources.

There are safer ways to play the copper upside – and FCX also has a huge gold resource, which I like. On the negative, they may have an expensive boondoggle in Tenke, so they are by no means perfect. In general though, FCX has very solid management, and it took a ridiculous plunge to under $17 from its (overvalued) peak of $120. So it had fallen farther, and had more upside, IMO. Also, it has better access to capital, one would think, if it decides to get acquisitive. There are numerous properties out there just begging to be picked off by the majors – and some of them are in FCX’s back yard in AZ so they get economies of scale with existing infrastructure. I know they have mothballed some development lately, but longer term, it may be in their interest to lock up valuable resources at fire sale prices.

Having said all that, I think that perhaps the best resource-based investments right now are selections from the MLP space in U.S. energy infrastructure. I hope to find the time to cover some of those names in a future update.



On Mar 24 09:03 AM Albert Meyer wrote:

> Great article. What's your take on Southern Copper?

Hecla Mining: Caught in a Bad Market

Jim, Ibejack, Marc -

Thanks for taking an interest and replying.

I am definitely interested in avoiding risk in this market, which is one of the cornerstones of the portfolio's strategy. It was unfortunate that HL management erred in handling their balance sheet - but that doesn't override the quality of the reserves or the very low share price. I am surprised that a savvy PE player didn't step in ahead of the bankers and make a nice deal for themselves, but that didn't happen, to Canaccord's benefit, I guess.

I would love to find a name that has great properties, under their control in mining-friendly areas of the USA, with experienced crews that as far as I know are dependable to deliver solid productivity in a rising price environment. You can find a number of companies that have lower labor costs, but do they have all the other attributes that HL has?

I would love to know of one - by all means share if you have come upon one. I'm taking the position that the extreme sell-off was part intense market panic and part fear of a bankruptcy if things turned really ugly. There have been many companies whose shares have been dumped viciously over the past six months - but as far as I can tell, HL should have good rebound potential. I liked the stock at $4, so even with the new configuration of the balance sheet, I can't resist it at $1.77!

Let's see how silver plays out, and how HL reacts to that, over the next few months.