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Peter Epstein

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  • Buy Peabody Energy For 230% Upside [View article]
    What's your hurdle rate to make an investment in a stock that you like? Is 230% not enough to warrant a long position by you?
    Jul 17 05:50 PM | 7 Likes Like |Link to Comment
  • Is Patriot Coal Headed For Bankruptcy? [View article]
    Some comments about this post...

    Patriot Coal has ample liquidity, with $239mm of cash on its balance sheet at 9/30/11.

    PCX corporate bonds are trading at $0.96 cents on the dollar, hardly a signal of financial stress.

    The post mentions that PCX has closed 5 mines. That implies a more negative situation than is truly the case. They temporarily closed high cost mines to save money, a prudent thing to do in a slowing coal demand environment.

    No bankruptcy is imminent, certainly not in 2012. PCX stock trading below $7.00 pre-market. If coal fundamentals bottom, which could happen within a few months, than PCX stock would be a compelling buy. I recognize how vague that sounds, but that's the best I can do at this time.
    Jan 18 08:46 AM | 7 Likes Like |Link to Comment
  • Jim Rogers: Commodities Like Oil Win in Every Scenario [View article]
    I like the coal space as I am confident that is coal is a key commodity for emerging market growth for at least the next 10-20 years. M&A will continue.

    ArcelorMittal (MT) and Peabody (BTU) have teamed up to bid A$15.5 per Macarthur Coal (MCC.AX) share to takeout the company. This price is a 40% premium to the prior closing price. M&A is alive and well in Australia as the deal comes on the heels of Rio Tinto's takeout of Riversdale Mining. I strongly believe that both of these deals are good deals for the respective acquirers, despite the possible appearance of paying a high earnings multiple.

    Riversdale Mining's assets are in Mozambique. The mines are not yet in production, but will be any month now. Riversdale got taken out at an 8.5x EBITDA multiple of 6/30/14 consensus estimates. I think Rio got a good deal because Riversdale is one of the two key players in Mozambique and Rio will be able to advance the mining project and necessary infrastructure build out faster and more efficiently than Riversdale could have.

    Macarthur Coal has an attractive niche market in PCI coal, has good organic growth projects and has excess port capacity. The excess port capacity alone is worth a great deal to Peabodty and Mittal. Using consensus #s, MCC is getting taken out at an 8.4x multiple of consensus EBITDA multiple of 6/30/2014 earnings.

    Thus, in the past few months, 2 Australian-listed coal companies have been taken out at more than an 8x multiple of 6/30/14 EBITDA. I believe this M&A activity is just the beginning of a large wave that will engulf the sector over the next 2-3 years. I think there's a greater than 50% chance that this wave of M&A will takeout SouthGobi Resources in the next 6-12 months. Assuming that SGQ were to be taken out at an 8.5x 6/30/2014 multiple, that implies a takeout price of approximately CAD$18 per share, vs. the current price of CAD$ 10.95 per share.

    Is it too aggressive to assume an 8.5x multiple for SGQ? Perhaps. But, I am assuming a conservative $400mm of EBITDA by 2014. The CEO of SGQ continues to believe that the Company can achieve $600mm of EBITDA by 2014, a level that was discussed during the May, 2010 roadshow to promote the HK listing of shares. Recall, SGQ is dual-listed in Canada and Hong Kong. The ticker in HK is 1878.HK. Since May of 2010, coal fundamentals and coal prices have improved. In speaking directly with the company, If coal prices were to stay at today's levels, I could show a path to run-rate EBITDA of $800mm by CY2014,

    So, using a conservative $400mm of 2014 EBITDA equates to a 5x EV/EBITDA multiple. If SGQ were to be taken out at an 8.5x multiple, the stock would be at CAD$ 18 per share. Or, if SGQ can achieve $600mm of run-rate 2014 EBITDA, then an $18 takeout price would represent a 5.7x multiple. The risk/reward opportunity is very compelling if one believes that a takeout is fairly likely.
    Jul 11 11:30 PM | 7 Likes Like |Link to Comment
  • Mongolia: An Economic Boom Investment Guide [View article]
    In response to Jon Springer,

    Thank you for referring to my commentary as thorough. I have followed SGQ for almost 3 years. There is a history and game plan here that supports my thesis of a takeout of SGQ. I have written about my thesis in other posts. In short, SGQ is clearly in play, the Company is for sale. The CEO said as much on the company's lastest earnings call in mid May. There's a huge difference between someone thinking that company XYZ might get taken out when XYZ is not a willing seller vs. when XYZ is a willing seller.

    I agree with Jon that it's by no means a given that the TT losers will seek an alternative Mongolian coal play, but all we need is 2 (for competitve tension) of the call it 12 losers to care. With regard to a few specific points made by Jon, I quote his commentary and then I respond--

    From Jon-- "The "losers" of the bidding for "Tavan Tolgoi West" are all large highly diversified companies. If they have indeed lost in their bid for the prize coal mine in Mongolia, there is no reason to think they need some other mine in Mongolia to diversify their mining portfolio."

    Not all of the bidders were highly diversified companies. I agree with Jon that they are all big, and that's great because I want a big company to be bidding for SGQ, not a medium-sized one. One of the main reasons why some of the companies wanted into TT in the first place was to diversify. MT is a giant steel company, highly diversified? no. VALE is extremely weighted towards iron ore. What about the Japanese trading companies that showed initial interest? POSCO? And, just because a company is large and diversified doesn't mean that it doesn't want to increase exposure to one of the best positioned commodities in the world, (coking coal).

    Also, SouthGobi is not a small or insignificant prize to be pursued after losing TT, SGQ is a $2b EV company. It will be producing 10mm tonnes of cokin coal (7mm semi-soft, 3mm premium hard) in 2014. I am willing to place a bet that TT won't even be in production of meaningful tonnes by 2014. So, Peabody has been allocated 24% of the TT block. Some math, Peabody's 24% of x = SouthGobi's 10mm tonnes? The answer is about 40mm tonnes. Peabody will control as much tonnage as SGQ does when TT production reaches 40mm tonnes per year. When might that be? I would say between 2020 and never.
    Clearly, 10mm tonnes from SGQ is not merely a consolation prize.

    Jon says that he counts 5 small Mongolian coal companies that could also be takeout candidates. True. And if there were 10 small Mongolian coal companies (private and public) they would all be takeout candidates as well. However, that hardly diminishes the appeal of SGQ. The 4 public ones that come to mind for me are Prophecy, Hunnu, Aspire Mining and Guilford (through a Mongolian subsidiary).

    As a senior analyst at a $3b hedge fund until just 2 weeks ago, I met with (in some cases more than once) the management teams of probably 6-7 public and private Mongolian coal companies including 3 of the 4 public ones listed above. It is entirely possible that a few of the small coal companies have more upside than SGQ. In fact they better have way more upside, call it 200%-300%, otherwise the risk/reward still would favor SGQ. I was not interested in investing in any of those coal companies for my hedge fund.

    As an aside, Aspire has some very high quality coking coal and is very interesting. Some of you reading this may want to take a look at Aspire. I am watching to buy it on a dip to perhaps below $0.50 per share. SGQ owns 19.9% of Aspire, they bought it at 20 cents per share, its currently at 60 cents.

    A final point about SGQ. TT is 1,070 km from the Russian boarder and 240 km from the Chinese boarder. As many of us know, due to political considerations, the Mongolian gov't chose to build a new connecting rail line to an existing rail line that goes north to Russia. They will do this in phase 1. In phase 2, they will build rail south to China. Why do I mention this? Because SGQ is just 45 km to the Chinese boarder crossing of Ceke. A paved road to Ceke is already in place. SGQ is currenlty upgrading the road so that it can handle 20mm tonnes per year of truck traffic. There is a handful of these emerging coal companies that will want/need access to this road.

    Unsurprisingly, SGQ plans to charge a toll for the use of this road. SGQ has cash costs per tonne of about $20. If SGQ were to charge $2 per tonne for access to the road, then their mining costs per tonne would go down by 10%. SGQ could have costs per tonne declining when we are routinely seeing 10%-20% year-over-year increases in mining costs all over the world.
    Jul 11 02:11 PM | 7 Likes Like |Link to Comment
  • Exclusive Interview With Pershing Gold's Stephen Alfers [View article]
    Please click on link for risk factors in conjunction with investing in highly speculative stocks such as Pershing Gold.

    If you find the article useful, please comment. Thank you.
    Feb 25 08:46 AM | 6 Likes Like |Link to Comment
  • This Gold Mining Company Is The Best Bet In Nevada [View article]
    I just got an email asking me my thesis on gold....

    While I don't pretend to know more than anyone else, I have noticed a very pronounced uptick in, "resource nationalism" in key gold mining countries. While equity analysts pick up this news on a company by company basis, I see it across the globe and across multiple natural resources, coal, gold, copper, etc.

    I would argue that up to 40% of the global production of gold comes from supply challenged countries such as South Africa, Indonesia, and Russia and smaller producing countries like Mali, Zimbabwe, Venezuela. The only cure to the scurge of resource nationalism is significantly higher costs in the impacted countries.

    The U.S. as a safe haven will benefit from what I believe will be a floor in gold prices going forward of perhaps $1,500 per ounce, with upside to $2,000-$2,500 next year. Pershing gold mints money starting in 2014 with $2,000 gold, it would be off the charts. To be fair, many gold companies are printing money at $2,000 per ounce, but the biggest upside should go to the most under-valued stocks.
    Oct 24 09:58 AM | 6 Likes Like |Link to Comment
  • Mongolia: Will Peabody Get More, Less, Or The Same Of Tavan Tolgoi? [View article]
    SouthGobi Resources, (SGQ.TO, 1878.HK, SGQRF.PK), the Canadian-listed Mongolian coal producer, announced that it is producing coal at an annual rate of 5.3mm metric tonnes and that production continues to ramp up. In CY 2012, SGQ will mine and sell approximately 7mm tonnes of coal, most of it coking coal. This level of production makes SGQ one of the 2 dominant coal producers in Mongolia.

    While much has been written about Mongolia's massive Tavan Tolgoi coking coal deposit, market participants appear largely unaware that SGQ's production profile will dwarf that of the recently announced winning mining groups. For example, Tavan Tolgoi is expected to be operating at 15mm metirc tonnes of coal, about 2/3 of it coking coal, by 2016. Of that amount, Peabody Energy will control 3.6mm tonnes with its respective 24% stake in the project.

    By 2016, SouthGobi will be producing 12-13mm tonnes of coking coal, including 3mm tonnes of premium hard coking coal. As such, SGQ will remain 1 of the top 2 producers in Mongolia for many years to come. As a dominant producer in a frontier country that many global miners and steel companies want to get access to, SGQ is a prime takeout candidate.

    I believe that within 6-12 months, SGQ will be taken out by a strategic player at a price at least 50% higher than today's closing price, (Sept 6, 2011). The reason for my conviction is twofold. First, like Mongolia, Mozambique is an emerging coking coal exporting country with 2 dominant coking coal companies. There, Rio Tinto just acquired 1 of the 2 dominant players, Riversdale Mining, for an 8.5x 2014 EV/EBITDA multiple. The other major player in Mozambique is global mining giant Vale. Second, the company is known to be for sale. Interested parties are already talking to 57% majority owner Ivanhoe Mines.

    Just as many miners are interested in getting into Mozambique, many are also interested in getting a foothold in Mongolia. In fact, Mongolia's coal exports are already running at greater than 20mm tonnes per year, while Mozambique is beginning to export coal in 2h 2011. Mozambique is thousands of kms from China, while SGQ is just 45km from the Chinese boarder. Coal from SouthGobi's mines arrives at Chinese steel mills faster and more reliably than coal from Canada, Australia or Africa.

    SGQ is in the early stages of substantial organic earnings and production volume growth. Within 3 years, the company will be exporting at a run-rate of 10mm tonnes of coking coal and generating a run-rate of up to $600mm in EBITDA. Compared to the 8.5x multiple that Rio Tinto just paid for Riversdale Mining, SGQ is trading at less than half that multiple. Sooner or later, perhaps when the world sees how painfully slow the ramp up will be at Tavan Tolgoi, global miners and steel companies will recognize not only how cheap SGQ is, but also its importance as a major strategic coking coal producer serving China's every growing needs.

    SGQ is the perfect hedge for the global seaborne coking coal markets. If (when) Australia's coking coal mines get inundated by massive flooding, as they have twice in the past 4 years, SouthGobi's proximity to China becomes even more valuable. Strikes in Canada and Australia are another wildcard for global coking coal supply that is mitigated by SGQ's production on China's doorstep.

    As a frontier market, Mongolia has country risk, but this risk is diversified if any of the major players were to acquire the company. The major coal producers have coal mines in countries like Indonesia, Mozambique, Botswana and Colombia. Mongolia is not materially different from these other countries. More important, the process that lead to the choosing of 3 mining groups to mine Tavan Tolgoi involved an initial list of 15-20 parties. Each of the 12-17 mining groups that did not win a place at the table are possible suitors of SGQ as each has accepted Mongolia country risk.

    Finally, SGQ's enterprise value of about $1.6 billion makes it digestible for dozens of strategic and financial buyers. Given the proven ability of the global miners to issue debt with fixed coupons of 4%-5% these days, SGQ is a very cheap option on the continued tightness of the coking coal markets. I think that any of the following companies could be interested in acquiring SGQ; BHP, VALE, Anglo American, Xstrata, Glencore, Noble Group, ArcelorMittal, New World Resources, Exxaro, Fortescue Metals, Teck Resources, BTU, Arch Coal or Consol Energy. I bet there are more....
    Sep 6 06:50 PM | 6 Likes Like |Link to Comment
  • Mongolia: An Economic Boom Investment Guide [View article]
    Now that the big news is behind us, (the 3 winners of the Tavan Tolgoi mandate have been chosen), investors should focus on the end game. Peabody (BTU) is a winner, they will control 24% of the proposed project. To recap, 15 companies / groups, applied for the opportunity to mine a portion of this massive un-tapped coal reserve. That list was cut to 6 a month or so ago. Now we have learned the 3 winners. What about the 12 losers? Among the top 6, the three that walk away empty handed after having done the most work to win a coveted spot are Vale, MT and Xstrata.

    Since these 3 have accepted Mongolian country / political risk, their next step should be to explore alternative ways to get exposure to coal in Mongolia. One way would be to invest in a one or two of a handful of emerging private coal producers. This alternative suffers from the necessity of working with the existing management and Boards of these small companies. In most cases, the assets that these private companies control are 2nd-3rd tier. They also lack official govt support, and in every case they require substantial infrastructure additions. An investment in one of these green field projects is an entirely different risk profile.

    Instead, Vale, MT or Xstrata could look to acquire nearby SouthGobi Resources (SGQ). SGQ is a publicly traded Canadian company with an EV of $1.9 billion. China's main sovereign wealth fund, CIC, owns 17% of SouthGobi. Unlike the private coal companies mentioned above, SGQ is in production of 4.5mm tonnes of coal in 2011 and 6mm tonnes in 2012. By the time that Tavan Tolgoi is in meaningful production in 2014, SGQ will be producing 10mm clean tonnes of coal, 7mm tonnes of semi-soft coking coal and 3mm tonnes of premium hard coking coal like that of what is expected from Tavan Tolgoi.

    Importantly, SGQ is for sale. Ivanhoe Mines (IVN) owns 57% of SGQ and is a willing seller of its equity stake. The reason for IVN wanting to sell is that IVN is in turn owned 46% by Rio Tinto. Rio is not interested in SGQ because of its strong focus on the seaborne coal markets. To facilitate the sale of IVN to RIO, IVN management is already speaking with potential buyers for its SGQ stake. We know this because on SGQ's latest earnings call in mid May, the CEO said so. You can listen to the replay at the SGQ website- minute 28 is where M&A is discussed.

    In summary then, 15 parties wanted into Mongolia for coal, 3 were picked, 12 were not. Of the 12 losers, MT, VALE and Xstrata came the closet to winning a spot, but learned in the past few days that they lost. In addition to these 3, Anglo American (AAL), ENRC and BHP are each thought by some to be looking at SGQ as a takeout target. To the extent that Arch Coal wants to follow in the footsteps of Peabody, I would argue that Arch should take a look at acquiring SGQ. Other potential suitors might include iron ore major FMG, Chinese steel producer Wuhan and global commodity traders Glencore and Noble. WIth a list of 8-10 potential suitors for a takeout of SGQ,it will only take 2 to create the competitive tension to get the stock price materially higher.
    Jul 5 05:44 PM | 6 Likes Like |Link to Comment
  • Mongolia: An Economic Boom Investment Guide [View article]
    The guy downandabout suggests that BTU is going to get picked to mine Tavan Tolgoi-- well, there are six companies / groups on the short list. The latest news from the Mongolian gov't is that 3-4 parties will be chosen. If BTU is one of the chosen, that's great news for them. However, let's say a Chinese group, a Russian group and Peabody are the 3 picked. Team those 3 with the Mongolian gov't and what do you get? Not a smoothly running, efficient, on time, on budget operation. I think the timing and scale of coal coming from Tavan Tolgoi is aggressive.

    Why not just buy shares of SouthGobi Resources (SGQ)? SGQ is already in production at a run-rate of 4.5mm tonnes. It is 45 kms from the Chinese boarder crossing at Ceke. The stock (despite being up 4% today) has traded very poorly because 2011-12 earnings do not support the current $1.8b enterprise value. However, looking at 2011-12 earnings is missing the bigger picture. By late 2013 or early 2014, SGQ will be producing and selling 10mm clean tonnes, 7mm semi-soft and 3mm premium hard coking coal from a new mine called Soumber, that's opening in 2013.

    By 2014, SGQ could be generating $600mm of EBITDA, even though in 2012 the number will probably be under $200mm. How will they do it? Four things, a big uptick in mix (3mm tonnes of hard coking coal from Soumber in 2013), a more valuable washed semi-soft coal from 2012 on, margin capture from coal traders, logistics firms like Winsway and on transportation and a greater total number of tonnes sold, 10mm in 2014 vs. about 6mm in 2012.

    Importantly, the jump from sub $200mm of EBITDA to $600mm or more in 2014 does not require an increase in currently strong coal prices. In fact, SGQ has substantial support on its margin per tonne due to its cost structure. Cash costs per tonne are less than $25. With the addition of Soumber in 2013, and more comprehensive washing of the the Company's coal, cash costs will increase to $35 per tonne, but that compares to $80-$90 per tonne in Australia and similar costs from the marginal coking coal producer in China.

    THE BEST part-- while many natural resource companies can point to heroic earnings leaps in 2-4 years, we won't have to wait nearly that long to see SGQ get there. Why? Ivanhoe Mines (IVN) owns 57% of SGQ. Rio Tinto owns 46% of IVN. Rio is not interested in SGQ because Rio's coal segment is almost 100% tied to the seaborne coal markets. Therefore, since Rio is going to control greater than 50% of IVN within a year (a standstill agreement expires in 1q 2012), it is well known that IVN is looking to sell its stake in SouthGobi. Thus, SGQ could be sold in the next 6-12 months.

    On SouthGobi's most recent earnings call, the CEO stated that IVN is already talking to a handful of potential suitors. Frequently mentioned potential acquirers are Peabody, (especially if they are not picked to mine Tavan Tolgoi) and Anglo American, but several more will be (and probably are already) taking a look. As the article above on Mongolia rightly shows, global miners want access to frontier markets like Mongolia and Mozambique. Acquiring SouthGobi for a coal producer is the perfect hedge to potential weakness in the seaborne coal markets. BHP should buy SouthGobi so that they can ship coal to China even when their Australian coal fields are under water. Global diversified miners should buy SouthGobi to get a foothold in a country that also has uranium, copper, gold, phosphates, etc.

    Rio Tinto just acquired Riversdale, with operations in Mozambique, for 8.5x 2014 expected EBITDA. SouthGobi is trading at 3.6x expected EBITDA, assuming the Company reaches the $600mm figure I mentioned earlier. Compare the risks of each company. Riversdale is 500km from a port on the coast and I'm told that rail capacity is not a sure thing beyond 3mm-4mm tonnes per year without costly and time consuming upgrades. Riversdale has spent the last 3 years planning ways to barge coal down a nearby river, but doubts remain about that. As an aside, I just heard that Riversdale has placed a large order for rail cars, but has yet to order any barges. By comparison, SouthGobi is just 45km by paved road to the Chinese boarder. Riversdale is not yet in production, while SouthGobi is ramping up to 10mm high value tonnes by 2014.

    I could go on and on comparing Riversdale (or many other coal companies in Africa, Australia, Canada or the U.S.) to SouthGobi, but to reiterate-- SGQ has China in the palm of its hand and will never lose its ability to ship every single tonne it can produce. Mongolia is risky as a frontier country, but some risks that SGQ does not face include; severe weather events that shut months worth of production, strike activity or rail / port / demurrage problems. I would argue that Mongolia is actually a risk diversifier for larger coal or natural resource players.

    Buying SouthGobi (SGQ) in Canada or ( in Hong Kong at current levels offers the opportunity for a takeout at a price could be 60%-75% above today's price. Sell-side research analysts are lost in the weeds dealing with quarterly #s, when there will likely be a competitive bidding process for SouthGobi within 6-12 months. And in fact, the CEO said exactly as much on the Company's last earnings call!! Read the end of the transcript!! The process has already begun....

    Please email me at if you would like to learn more about SGQ. SGQ is my largest personal investment, but hopefully not for long.
    Jun 29 10:05 PM | 6 Likes Like |Link to Comment
  • Pershing Gold, Nearing Production And Huge Exploration Upside [View article]
    Interesting side note, yesterday Coeur d'Alene raised $300 million of debt with an 8 year bond deal. Use of proceeds is for, "internal and external growth iniatives."
    Jan 25 10:42 AM | 5 Likes Like |Link to Comment
  • This Gold Mining Company Is The Best Bet In Nevada [View article]
    I reiterate my call for all prospective and existing investors to read BOTH the S-1 Filing, which is quite recent and has an amazing amount of detail and history, AND the Sept 17th press release, which is very well done and gives a balanced update on where the company stands.

    Like Healthpicker says, as it stands PGLC is not exciting, but with less risk, (I would say considerably less risk) than most peers, Pershing Gold has the same or even better blue-sky potential.

    One has to look at both the upside and the downside. Otherwise, everyone should simply buy ALL junior gold stocks with the idea that a few will be home runs. Problem is, there will be A LOT more strike outs than home runs.
    Oct 25 02:36 PM | 5 Likes Like |Link to Comment
  • Powder River Basin Coal Prices Have Bottomed, All Clear For Arch Coal? [View article]
    dwillis, that's simply not true.

    Arch overpaid for Intl Coal just like WLT overpaid for Western and Alpha overpaid for Massey. Now all three are paying the piper.

    Arch has a lot of debt and a lot of interest expense, and is heavily exposed to the PRB, a basin which has shown tentative signs of recovery. A recovery by the way which may already be out the window given what's happened to nat gas prices today. Arch has a decent coking coal pipeline, but it's going to cost a lot to get there. No meaningful FCF for Arch anytime soon, little to no debt paydown.

    I like ANR because it's NOT JRCC or PCX. It has far less debt leverage than ACI and more coking coal exposure in the event of a turn in coal fundamentals. ANR mgmt says that they will have coking coal capacity of 26-30 million tons from organic projects within 3-4 years and they have 25-30mm tons of export capacity.

    I like WLT because it produces premium low-mid-vol coking coal and very little thermal coal. It exports through the Gulf at half the transportation cost of east coast peers. Organic coking coal growth could take the Company to 20 million tons by 2020. That's there goal, not my prediction. I've been waiting 2 years for the company to be taken out....Still waiting.

    Consol Energy is a conglomerate discount story. The sum-of-the-parts is undervalued. I think CNX has proven to be quite good at managing their nat gas and shale assets AS WELL as having an very strong coal franchise, AND some valuable infrastructure assets like the port of Baltimore.

    ARLP is just awesome. I won't even explain my ownership of ARLP.

    NRP units are yielding 11.5% right now, a yield that's SAFE. I think it's safe for at least 2 years, by which time the coal markets should be in recovery or recovered. A truly safe 11.5% yielding MLP should yield 8%-9% in a year or 2, once coal markets stabilize.

    I've been playing the coal stocks largely by buying Jan-2013 call options on days when the coal stocks are especially weak. I'm not trading daily, not even close. My performance has been mixed at best. I also own ARLP and NRP units outright for the yield.

    That's it, my whole story. I don't write articles to justify anything to anyone. Why bother? I don't assume that my articles are moving the market
    Aug 2 03:45 PM | 5 Likes Like |Link to Comment
  • What Does Friday's Surge For Arch Coal And Alpha Natural Resources Tell Us? [View article]
    I just finished reading all of pullgoodman's excellent articles on SA. I highly recommend them.
    Jul 30 10:59 AM | 5 Likes Like |Link to Comment
  • A New Way To Play A Possible Takeout Of Walter Energy [View article]
    Please follow me for a lot more articles on coal companies to come in March!
    Mar 9 09:58 AM | 5 Likes Like |Link to Comment
  • SouthGobi Makes A Logical Target For Teck Resources [View article]
    Cracker 1:

    I address your points 1 at a time. Cracker said,

    "I don't invest in companies that have a history of raising equity (again and again) to finance future growth. (Float history is 16mil shares in 2006, 51mil shares in 2007, 128mil shares in 2008, 133mil in 2009, 176mil in 2010, and 182mil in 2011). That is too much dilution for me. It is a pattern that I do not like."

    You said "float history," this is misleading. The company did not float the # of shares you listed each year. What you listed was the total # of shares at the end of each year, which is totally different. In terms of prior equity raises, they are irrelevant IF the company in question is not going to issue shares again. Why irrelevant? Because all that matters is the valuation of the company today and looking forward, not looking back. One compares the valuation of the coal assets and future cash flow to the current enterprise value of the company and makes an investment decision. SGQ does not need to issue shares again, (they have $312mm of cash and liquid securities at 6/30/11), UNLESS in conjunction with an acquisition. In fact, SGQ has been buying back shares almost everyday for a few months now.

    Cracker said,
    "SouthGobi is a promise for the future. They do not have much history of executing. They appear to be on their way of breaking $100mil of revs in 2011, but the future already awards them a $1.3bil market cap based simply on mining a natural resource. They are selling cheaper, dirtier coal at lower prices, yielding lower margins. Why not invest in a more stable coal name that plays in higher margin product? There are many coal stocks on sale right now. Why roll the dice on one in Mongolia where 3 guys get to decide on a take-out happening?"

    Ok, where do I start-- Yes, I agree with you. SouthGobi is a promise on the future. A promise that if all goes roughly according to plan, then they will remain a dominant exporter of coal from Mongolia to China. The company is a dominant player because it is producing and exporting at a run-rate of 5mm metric tonnes. Mongolian Mining, (975.HK) is the only other Mongolian coal producer selling that much coal.

    Cracker said, SGQ is awarded a $1.3b market cap simply for, "mining a natural resource." Gold companies mine natural resources, so do oil companies and potash companies and coal companies. If one doesn't think that mining a natural resource is a potentially valuable business model, then one should not invest in a coal company.

    Cracker says that SGQ is selling cheaper dirtier coal at lower prices, yielding lower margins. TRUE. We agree on that. If SGQ's plan was to continue mining 5mm or more tonnes of cheap, dirty, low-margin coal, then I wouldn't recommend the stock. However, the plan is to wash the dirty, cheap coal to make it less dirty and less cheap. Washing the coal reduces the ash and sulfur, making the coal more valuable. Washed coal commands a higher selling price, which means higher margins. The game plan is very straight forward. Execution and the timing of getting things done is of course key. While the CEO readily admits that there have been setbacks from time to time, the company is slowly but surely moving in the right direction.

    Cracker said, why roll the dice on SGQ, there are many stocks on sale now. TRUE. We agree. When I started posting on SA about SGQ, the huge sell-off that we have seen in natural resource stocks had barely begun. Now, there are dozens of coal stocks to choose from that are on sale. Some will definitely end up being better investments that SGQ is right now. Some will get acquired sooner than SGQ. I'm an expert on SGQ, not every coal stock, and I think it's very compelling at $7 bucks per share.

    I also thought it was compelling at $11.0-$11.5 per share So my advice to buy the stock has been dead wrong from a technical or trading perspective. To anyone who bought the stock at $11 or so, it may take a long time for that investment to pay off, and the ultimate return on that specific investment may not be that exciting compared to investments that can be made today. But, the same can be said for almost every other natural resource stock that was bought 2-3 months ago.

    Cracker asks, why not invest in a more stable coal company with higher margin product? My answer, coal companies sell coal, that is their product. SGQ will have a strong margin when they reach a run-rate of 10mm tonnes of coking coal exports within 3 years. Again, that's the plan, if SGQ mgmt doesn't execute, than an investment in this company will be a bad one.

    The rest of Cracker's post focuses on two things. First, the company must be desperate to list on multiple exchanges. This is nonsense. According to Bloomberg, Rio Tinto has 66 stock tickers, it's listed on dozens of exchanges. I thought we addressed this topic before. The final point of Cracker's is about the institutions not owning SGQ. TRUE.

    However, there is one simple reason why they don't own SGQ. The float of this stock is low. 70% of the outstanding shares are owned by just 2 entities. 57% by Ivanhoe Mines and 13% by CIC, the giant Chinese sovereign wealth fund. Ivanhoe Mines spun out SGQ years ago. The effective float has been poor for years. A big reason for issuing shares in Hong Kong in May, 2010 was to improve the public float, to get the trading volume of the shares up.

    That effort has not been entirely successful. So, of all Cracker's points, this is the most relevant and important-- not only that institutions don't own the stock, but that in many cases they will never own the stock because of the float. Importantly though, retail investors like you and me and SA readers CAN buy the stock and benefit from a take out. I am fairly confident that NOT TOO MANY readers of my SGQ posts actually bought SGQ shares. Good for them!

    I like the stock more at $7 per share than I did at $8, $9, $10 and $11. The stock has sold off massively, but the fundamentals specific to SGQ have not changed.
    Sep 27 08:12 PM | 5 Likes Like |Link to Comment