Real Assets Investment Research

Gold & precious metals, base metals, oil & gas
Real Assets Investment Research
Gold & precious metals, base metals, oil & gas
Contributor since: 2012
Around the time that Conrad and Eliot were deducing the existential horrors of the modern age, Jay Gould described Wall Street as an uncontrollable ocean that required careful navigation. While the methods of deceit and misdirection have evolved, the conditions you describe were similar to those that inspired the investment theses of Benjamin Graham and Warren Buffett.
I think EGY has some properties in the North Dakota/Montana region although your point still stands.
In addition, you may be thinking of their New Mexico assets. I haven't looked into those too much, as their focus is on the Wyoming CBM properties for now and I think rightly so.
Thanks for your comment, Zvi. I tend to think new management is an improvement, especially CFO Stewart Skelly, who almost immediately trimmed expenses and debt as detailed above.
WRES does have some very attractive assets, so it's certainly possible that someone would try to acquire them. However, I am going off the assumption that higher natural gas prices and better than expected earnings numbers are driving share growth. The fundamentals seem to back up what's going on right now, but if the stock keeps shooting up so quickly we might have to reevaluate.
CHK is in a similar bind as many of the major gold miners, who are still slogging through debt they accumulated at the height of the gold boom. Companies like Barrick have similarly struggled to reduce debt levels while trying to unload underperforming assets.
Essentially, by buying CHK you're betting that the firm has learned its lesson and will reduce debt as soon as higher gas prices generate better cash flows.
Good, overlooked company and great analysis. Also bullish on BNK Petroleum, which was spun off from Bankers, though focused more on natural gas.
Excellent point. There can also be significant shifts in project economics after the mineral property is aquired.
Focusing on the majors in this analysis makes sense, but the article fails to account for the fact that many of these big producers got in trouble even before the gold price tanked, because they couldn't keep their capex down and diluted shareholder value in the process of going after boondoggle projects. A rally in gold will obviously help matters, but many of these equities will continue to trade at a discount until their management teams inspire confidence in their commitment to creating shareholder value.
I don't think you're wrong in your conclusion, but disillusionment among gold bandwagoners is only part of the story.
This was a one-off test with gold and copper (with the explanation given above). We are not trying to cherry-pick variables to "prove" under or overvaluation of the markets or metal prices, but rather trying to explain the disconnect as in our last piece, which was primarily copper-focused.
FCX's energy plan is difficult to fathom, but its inability to find mining acquisitions is much more explainable. Copper head grades are plummeting globally and the gold mining M&A space is competitive to a detriment, even with majors like Barrick pledging restraint. Molybdenum and other light rare earths are subject to extreme volatility as long as the Chinese are holding all the cards, so better to let some junior take the risk before stepping in. That could take some time.
I haven't looked at that one so closely. My uninformed guess would be some combination of fears that the commodities supercycle is over and the bullishness on equities coming from QE rather than industrial growth. That would explain the copper divergence as well.
Of course there are other variables in shipping that make the BDI highly sensitive to volatility, so maybe the uncertainty is more of an explanatory variable than general pessimism on price levels. But I'd have to look at that more in-depth before making a more definitive case for either one.
Nothing against technical or momentum trading, but I write from a fundamental valuation perspective. To each his own.
Copper has long been considered a proxy for global growth. This is both intuitive and backed up by historical data that I didn't consider material to what I was doing here. Within that framework I was looking at a significant breakdown of a relationship within the last few years for the purposes of examining short-term spreads. This is why I looked at daily prices rather than monthly. Long-term price forecasting would require a longer sample period.
From a qualitative standpoint, the relationship has broken down because of concerns over China's economic slowdown. I believe, for reasons stated in the article, that the market overreacted to a certain degree to these concerns.
Good question, Mike. I have used these variables in the past (though generally shorter-term treasuries than 20+) , but this was specifically focused on the correlation of the equity market and copper prices, especially considering my general feeling that the market over-reacted to China's slowdown last year.
I am working on a project involving copper/gold spreads that will include some of these more macro variables, and hopefully I will be able to post about it here early next week.
Emerging market demand ex-China in addition to supply deficits (BMO analyst Jessica Fung just predicted 36,000 ton shortfall this year) should push prices even higher. I think that's what we're seeing in a lot of commodities, except in cases of supply gluts (like shale gas).
First Quantum has some very promising property in Zambia after getting their mining license revoked in the DRC back in 2010. Zambia has great average ore grades of 2-3% in copper and is a much more favorable business environment than the DRC, in spite of recent royalty increases.
You are right, Quest saw a significant jump in their resource at the end of October and I hadn't realized that it vaulted their Quebec project over Bokan Mountain's overall numbers. The market didn't seem to, either, or maybe the investing public has just had enough of rare earths for the time being.
I do not have a specific inventory of Bokan Mountain project's infrastructure, but I know there has been a lot of previous mining activity at the site (going back to the 50's), which generally presents a capex advantage. The power situation you describe is duly noted and I thank you for the contribution to fellow readers.
I've mentioned that UCore is subject to the same risks as any junior pre-production miners. If you find them to be too speculative, then this is not an appropriate asset class for your portfolio.
ANR lost more of its relative value during the coal decline of the past year. My guess is that value investors think that the relative performance of the companies will move in parallel over time so the bigger short-term loser is the better long-term value. From most indications, BTU is a stronger company.
The small cap weighting that you mentioned is curious, given the dominance of the lithium market by 4 major producers who account for about 80% of global market share.
Some good background on the lithium market are mentioned in this August 8th article, in addition to analysis of an intriguing American lithium junior which is up 30% since then:
In addition to Peabody's strong international business, the company's low-sulfur coal in the Powder River Basin give it a significant advantage in price and regulatory compliance should current statues persist.
Good article. As you cannily pointed out, Mongolia's natural resource wealth is not quite the trump card some of their politicians seem to think it is. As with many developing countries, they've counted growing resource revenue into their ambitious infrastructure development programs but are wary of foreign influence both economically and culturally. It is a difficult balancing act, but they will figure it out eventually.
Thank you, glad you enjoyed it. Miners rarely get much coverage before their maiden resource statement, but it's also rare that they establish themselves so quickly. The buzz about Newstrike has mostly been among analysts and investors rather than the press, but the company was mentioned in a WSJ article about Mexican Gold Mining back in July, for which there is a link in the first paragraph.
BTU is in a superior position in the industry with its unmatched total reserves and abundance of low-sulfur grade in Montana. Now we'll see if the coal rally has legs.
Argentina is a highly risky country, even in the resource sector on which its economy depends. In fact, a study by MIT professor Alberto Cavallo showed that the country's public finances were far more dire than the official numbers indicated. However, many of the mining majors have big projects in countries with far greater risk factors in terms of economics, security and policy. You have to look at the overall risk profile of a company's projects, and Argentina aside, Mexico, Brazil and Chile are all very solid mining jurisdictions.
Good article. Yamana's acquisition of Extorre is a good example of bigger miners turning away from boondoggle M&A deals and trying to find efficient, low capex projects.