18 Comments

Great !!! You always surprise me. Congratulations.

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Interesting (hi)story! Thanks for the article!

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FASCINANTE. Gracias Alberto, gracias Yeimy. De corazón.

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Gracias a ti Jorge!

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otro Magnifico articulo.

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Amazing article Alberto. Have you considered investing in the gold theme through picks and shovels instead of producers?

Gold/Copper theme with the largest mining contractor (PRN.AX 63% gold, 13% copper) and drilling company (MDI.TO 31% gold, 31% copper) in the world. Cheap valuations and about to break out:

-NTM EV/EBITDA of 2.2 (PRN.AX) and 5 (MDI.TO) both are exceeding the revenues and earnings from the previous cycle, yet their market cap is lagging.

-Picks and shovels, just like with the offshore sector. With mining capex being half of the last maximum in the previous cycle. There's room for multiple and earnings to increase. Probably they're both a 4x from here.

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Thanks for the stock picks, I didn’t know them.

I have given a lot of thought to that way of getting leverage to metals and I think there may be a lot of logic to it. I have also considered Aurizon Holdings, they own a massive railway in Australia in which a lot of minerals get transported. The only negative I see in that thesis is in terms of value creation: are service firms in the mining industry price takers? I wonder if there is a “race to 0” when it comes to pricing their services. What do you think? Thank you for the comment and the compliment

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The pleasure is mine, Alberto. I've been enjoying your recent posts. The pricing power issue you mentioned earlier is a good point. There used to be the PureFunds ISE Mining Service ETF, and if you look at the holdings at the time of closure, many of them went bust or were acquired. You can check the holdings when they last reported on 2014-02-27 here: https://www.sec.gov/Archives/edgar/data/1467831/000089418914000971/factorshares_nq.htm

I just checked Aurizon Holdings, but it seems that 44% of the revenue comes from coal, 30% from bulk, and 26% from network, which doesn’t make it a pure play for gold or copper but rather for the general commodity cycle, which is good. To play the gold or copper theme, I’d like to find companies that are more exposed to those particular commodities.

There’s another company called MLG Oz that provides hauling services in Australia, similar to Aurizon, and 81% of its revenue comes from gold. The more the gold goes up, the more the mining companies will try to increase production, and so they will need their services. However, they have had problems with competition, and if you check their earnings, they’ve come down even when their revenue went up, precisely due to the lack of pricing power. They have been forced to sell part of their equipment to keep servicing their debt. Now it seems that as their competition has gone bust or is withdrawing from the mining business, they have managed to renegotiate their rates with the mining companies, which is why their revenue and earnings has been going up recently. However, I’m not sure if they’ll be able to adjust quickly if there’s another increase in the price of fuel, since that’s a big part of their expenses. Maybe as they have less competition and managed to negotiate with the mining companies they will, but I don’t have a solid opinion, so I just put it in the too hard basket.

The drilling sector is where there’s more competition. Here you can find the latest ranking sorted by drilled meters: https://coringmagazine.com/article/top-exploration-drilling-contractors-2022/ . Looking at the top 4 of the list, which provide 66% of the drilled meters, Boart Longyear has already been acquired by a private company, DDH1 has been acquired by Perenti, and Orbit Garant has so much debt that they will probably dilute their shareholders very soon or will be acquired too.

With less competition, there’s more pricing power, but it also helps if they provide unique services, like Major Drilling as a drilling company, where only 8% of their revenue comes from conventional services, as they are focused on specialized services for tougher environments, especially now that the easier reserves have already been mined. In the case of Perenti as a mining contractor, 70% of their revenue came from underground mining, which is where the growth is, with a 30% compound annual growth rate in underground mining. It’s also a tough environment.

It says quite a lot about pricing power that while the mining capex is only half in nominal terms of the last cycle peak, their revenues and profits are already at or exceeding their previous maximum cycle top. This leaves a lot of room for when the mining and exploring capex reaches its maximum in the next few years.

There’s another way to play it through the royalty companies that leverage cheap financing. The one I like the most is EMX, with 39% of their current revenue coming from gold and 45% from copper, and it is precisely the cheapest of all their peers, trading at 0.5x NAV. Elemental Altus is also okay but it's trading at 1x NAV compared to EMX, I'd rather pay up 1.7x NAV and own FNV than ELE.v.

The funniest part is when you go through their junior royalty competitors, they don’t even include EMX when they compare themselves with their competitors (someone had to add the EMX valuation manually because it was not included https://static.seekingalpha.com/uploads/2024/3/1/45984866-17093093207284377_origin.png). I’m sure they do that because once you check their low valuation, management team, shareholder base, with Franco Nevada as one of the top holders as well as Newmont, Sprott and Paul Stephens, and their partnership with Franco Nevada, which basically leverages Franco’s balance sheet for growth of EMX, inflection from negative to positive earnings, and organic growth, it’s a no-brainer. They will also benefit from the reopening of the Viscaria copper mine in Sweden (https://emxroyalty.com/asset-portfolio/sweden/viscaria/). Info about the reopening of the mine in Sweden can be found here: https://www.svt.se/nyheter/lokalt/norrbotten/nu-far-den-slumrande-koppargruvan-i-kiruna-liv-igen .

Finally, another way I found to play the gold thesis, while at the same time having exposure to PGM, is through SBSW, which is within the top 20 producers of gold in the world, and you have their uranium as a call option. They are currently producing 627 - 659 koz of gold. According to this ranking of November 2023, they are the number 10 producer. Source: https://finance.yahoo.com/news/top-20-gold-mining-companies-191942161.html .

Its valuation is so cheap that even if Africa goes bust, their US operations are worth more than their current market cap. More info about this valuation can be found here: https://youtu.be/FMN8TSZ1hEg?si=dDDGxE6YnrEhuIiX&t=429

The last way I'm playing the gold thesis is through AMRK, which by now the explanation is very well known haha.

Hope this long answer helps! What other ways are you playing the gold or copper theme so far apart from ERO?

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Congrats Alberto. Once again, a super interesting report, both from an intellectual and investment perpective. Love the long-write up format.

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Enhorabuena Alberto!. Muy buena tesis.

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Excellent article! Looking forward to the follow-up!

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Thanks a lot .

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I think the only really relevant points here are the decrease in gold discovery and the high demand from central banks (though this second point rests on that demand remaining high). I want to address some of the other points made and explain why I don't think they make sense

1) We won't see a lot of recycling because that only happened in 2009 when the consumer was distressed - isn't the whole point of gold that it does fine when the economy goes down the shitter?

2) Gold is easy to transfer - this is clearly untrue. While yes, if you want to move a few million dollars it's alright, it does not represent a reasonable method of payment when a single cubic centimeter of the stuff is worth a couple thousand dollars.

3) "Nowadays a gold user can drop a coin in a glass of water; if it sinks it is a precious metal, as imitations tend to use lighter metals." - are you suggesting that fake gold floats...?

4) Gold has been used as money for a long time, therefore it will be used as money in the future - this seems to be taken almost as self-evident in this post, but I don't think it's a strong argument at all. Why should the future look like the past? We have electronics now, the internet. Nothing will ever be the same again.

5) Gold has had a stable price throughout time because the line on this graph is flat form 1792-1972. - the line is flat because it's at ~0. Use a logarithmic graph to see if the value was actually stable, as a certain vertical distance on a log graph corresponds to a certain percentage change.

6) Any justification of gold's value by its industrial applications - the price of gold is not what it is because of its industrial utility, that is a fact.

7) The whole thing about elasticity of supply - in a hypothetical world where the whole world uses one currency, what does "demand" for that currency even mean? And you assert that people would never spend the bitcoin because its value would go up over time - obviously, people would spend it. Stocks go up over time too, people still sell stocks to buy groceries. And aren't you literally betting on the price of gold going up over time here? There are a million reasons why using bitcoin as our currency would be terrible, but most of them apply to gold too.

8) A Carrington event could wipe bitcoin out - this is just not true. The effect of a Carrington event nowadays would not be enormous - certainly it wouldn't destroy all the electronics on earth, lmao

9) Theft - anecdotally, a friend of a friend's mother got scammed out of hundreds of thousands of pounds worth of gold. They physically came to her house and picked it up, as she thanked them.

10) Gold can be hidden - and bitcoin can't?

11) The claim that the monetary base and gold price were closely related before QE - that just isn't true. Once again, you need to use a log graph. The two lines look close together at the start because their values are both small. But during that little peak in gold price around 1980, it's actually about 5x higher than the green line, from what I can see.

But besides all these, I think there is a bigger underlying issue. Value investing is not about answering difficult questions, like who will win in AI, will China's economy collapse, are we headed for recession; it's about very selectively choosing situations where you can make a lot of money answering a very easy question. I think whether gold becomes "money" in the future is a VERY hard question. Whether it even sustains its value, I have no framework to begin to answer that. Its industrial utility only justifies a few hundred $/oz of value - beyond that it has value because we prescribe it value, and we prescribe it value largely because it's always had value. But it's very clear that the future will look very different to the past (the present already looks different enough) and hence I don't think just pointing to the past and taking it as gospel that it will continue on that way makes a load of sense. I think finding high quality, well-run businesses for reasonable valuations is just so much more rational.

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Thanks for the comment Matt!

1) I said there is no recycling now, because we are not seeing economic troubles. If we were to see them, then recycling would likely go up. Now, remember that gold demand balances out often because Asia consumes gold when the economy does well, but the West buys gold when the economy does badly.

2) In this video you can see how gold is used in Venezuela instead of the fiat currency. Therefore, it can certainly be used for payments, in fact it is being used as we speak

https://youtu.be/WmHxz6G3SRw?si=4QfEB-JuJTDCUhxs

3) A lot of fake gold does, yes.

4) Because gold is the result of thousands of years of evolution in money.

5) In the Coinage Act of 1792 gold was priced at $19.39 per ounce. In 1971 it was around $40/oz. If you do not see the price stability there I do not know what to tell you. In almost 200 years it only doubled in price.

6) If demand for industrial applications rises, the price of gold will rise, ceteris paribus. That is a fact.

7) In monetary economics, the demand for money is the desired holding of financial assets in the form of money (gold in this case).

Yes, the price of gold will rise. As I said in the report, buying gold would be my first step.

8) Yes, it would. Have you got any counter argument to offer or is "lmao" the best you can do?

9) "anecdotally". Enough said.

10) Yes, it can be hidden.

11) In the 1970s there was a fear of hyperinflation. Therefore gold outrun monetary supply.

"“Majors’ [miners] reserves peaked at 967M ounces in 2012. But by 2019, just 7 years later, reserves had plummeted 30% to 670M ounces”- Scott Reardon from Dakota Funds. This decrease in reserves is not sustainable as miners will run out of ore sooner or later. Therefore, miners must increase exploration spending or takeover undeveloped deposits to increase reserves."

It is not about looking at the past and predicting the future, its about supply and demand, and the lack of the first.

Let me know if you have more questions.

Hope it helps!

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2) This system is clearly incredibly inconvenient for Venezuelans - it is being used out of desperation, and I don't think we should be modelling our payment system after Venezuela... There's just no way we ever go back from electronic payments. (That's not to say gold can't have a use there - for example if I pay you some money electronically, my bank could transfer a small amount of gold, or an IOU thereof, to your bank, rather than reserves as they currently do. Then again, economists pretty much universally agree the gold standard is a terrible idea).

3) I suppose it can due to surface tension. But that depends on the shape of the metal - for example gold foil would probably float.

4) You're just repeating yourself - as I said, there is not good reason to believe the future will look like the past.

5) I was taking issue with your use of the graph to prove your point - I didn't think that was valid. Moreover, the price was incredibly stable in dollars because the US government pegged dollars to gold. As soon as this peg was removed, there was no price stability.

6) Ceteris paribus is a big claim though, over a decades-long timeframe. The ceteris never actually paribuses, if you haven't noticed. As the price gets higher - which, let's be clear here, is what you're expecting to happen - it will become economical to supplant it.

8) I want to clarify I am not a bitcoin guy. But factually, a Carrington event would not wipe it out. Bitcoin relies on a ledger stores on hundreds of thousands of different devices - the only way for it to be destroyed is for substantially all (not 50%, or 90%, rather 99.999% or something) of those devices to be destroyed. Google what a Carrington event would do today - sure it wouldn't be pretty, but we're talking about a few weeks of spotty electricity and communications, not the destruction of every device in the world. If that were what would happen, don't you think everyone would be a little more concerned?

10) My point was not that gold can't be hidden, it was that bitcoin can, therefore it's not a fair reason that gold is better than bitcoin.

11) The point is that the two lines are not well correlated - why they aren't is sort of besides the point.

Buffett made a large play in 1997 on silver based on the supply demand dynamics. He sold in 2006 at a significant loss (while the stock portfolio tripled). Might be worth understanding his trade and why it didn't play out, to know whether yours will.

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2) If it were so inconvenient, why are they using it? If it were merely due to desperation, why not use the dollar?

I guess we don’t read the same economists. Albeit there is a case to be made that we never left the gold standard considering every central bank accumulates gold.

3) Gold foil would suspend in the water.

4) If you want to deny the evolution of money, so be it

5) So you admit that your argument that there was no price stability prior to 1971 was plainly false? The price of gold was stable worldwide, not just in the US.

6) Industrial demand is not necessary for the investment thesis, so Im fine with substitutes.

8) Google answers is not the best source of information. I think people should be concerned. Historians are certainly concerned

10) Gold can certainly be better hidden than Bitcoin. And more untraceable.

11) The reason is simple. For some time the demand for money ($) has outpaced the supply of money.

In 1997, silver was at $5/oz and by 2006 it was over 10$. Perhaps you ought to examine why buffet did so badly in a bull market. Holding the actual metal would’ve doubled his money in less than a decade.

I actually think that some crypto will do well. Im just not competent enough in that field to predict which one.

Let me know if you have more comments or feedback Matt. This is a great conversation, although expressions you use like “lmao” might lessen your credibility if I may add.

Hope it helps.

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| expressions you use like “lmao” might lessen your credibility

cry about it

sorry

This is getting somewhat arduous so I'll just address the points where I think we can have a meaningful discussion.

You're right on the silver price - I was mistaken that he made a loss. Of note though, it took a long time after he identified the supply demand imbalance for the price to actually respond, and he was certainly not satisfied with the return. I still suspect this trade is still worth looking at - e.g. if you examine the situation in 1997 and decide the imbalance was more severe than the imbalance is for gold today, then that would be a sign that it might not be a good play.

Regarding the Carrington event, I'm not sure why you think historians are the relevant people to listen to - if we want to know how much damage it would do to our infrastructure today, we should ask an electrical engineer. But I want to emphasise again, don't you think if an event like that could wipe out all the electronics on earth, governments wouldn't be a bit more worried about it?

Regarding the gold standard, the mainstream view of economists is that going back would be a very bad idea. I'm sure there are economists out there that disagree with that, but I'd just caution you to try to get a balanced view and not just listen to the people that reinforce your view that gold prices will go up. After all, there are climate scientists who don't believe in man-made global warming.

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“cry about it”

No point discussing with you. You are either a child or you are an adult that is yet to have a reality check. You have no place in this blog. Get your toxicity elsewhere. You are not welcome here.

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