|Shares Out. (in M):||172||P/E||0.0x||0.0x|
|Market Cap (in $M):||88||P/FCF||0.0x||0.0x|
|Net Debt (in $M):||-17||EBIT||0||0|
|Entry||01/08/2014 08:47 PM|
Interesting idea, liked the write-up. I'd be buying this if not for one big issue: as you mentioned, it's a high cost copper producer and that worries me. It seems like, if anything, it would need to be a very small position and, even then, I'd need to somehow convince myself that $3.00 is the floor for copper.
Any idea on a good way to hedge this investment to reduce or eliminate commodity price risk? That way I wouldn't have to care about the price of copper at all. The problem is, an equity is basically a perpetuity with no maturity date. So to completely remove commodity price risk you'd need to short copper futures every year out to infinity. How about shorting a basket of other high-cost copper producer stocks, especially overvalued ones? Any idea of which ones to short as a hedge?
|Subject||Questions for rasputin|
|Entry||01/12/2014 11:35 AM|
Do you have any updated thoughts on this name?
It looks like it was your first write-up on VIC, and unfortunately it didn't work out to well for you. So what do you think of it at today's price? What do you think went wrong in your initial analysis?
Also, do you still believe that ARG's profits are insensitive to copper prices? That seems hard to believe and is inconsistent with lpartner's analysis. If your claim (in your first write-up) were really true, the concern I expressed in comment #2 would be completely resolved, since my primary worry about this investment is in fact copper prices falling below $3.00/lb.
|Subject||RE: Questions for rasputin|
|Entry||01/13/2014 12:59 PM|
My recommendation undeniably did not work out. I'll try to be as brief as I can with the post-mortem:
1. I thought this was interesting because you have a company generating nice cash flow from a huge resource in relation to its market cap. It was trading at a very modest multiple to my estimate of EBITDA and FCF. Unlike most mining companies, the cash should have been available to shareholders as it wasn't needed to plow into the ground to find and replace depleting resource. It was more of a "tolling" company than a mining company and the multiple was low and the balance sheet was solid.
2. My point about the copper price sensitivity was more that I didn't see how the global price of copper could decouple materially from the Chilean input costs (primarily energy and labor) for Amerigo's operations. Since gravity did a lot of the work for Amerigo and the royalty scaled down over various price points, I thought some margin could be maintained over time through most fluctuations. This of course is a relatively long-term view.
3. With 30 cents per share of cash and no debt at the time of the recommendation, I thought we had the luxury of ignoring the (in my view unpredictable) short-term movements in the price of copper vs. input costs. Unfortunately, the company binged on capex and junior mining investments during late 07 and early 08 so this balance sheet luxury was not available when copper prices collapsed at the end of 08. The copper price collapse also triggered a drastic price adjustment for already delivered concentrate, resulting in a large unforeseen cash liability for Amerigo. With no cash and a sudden, immediately due liability, they had a liquidity crunch and were forced to issue a lot of shares at exactly the wrong time to a smart investor who had them over a barrel.
Much of what happened I think was preventable, and management bears almost all of the blame. I do think that Klaus Zeitler is by far the better of the original duo, and it's good that Steven Dean's gone. Another writeup on Amerigo was put up prior to mine by Issambres and he asked some relevant questions on my thread about the quality of management and their incentives. It's important to be aware that Klaus Zeitler and Steven Dean receive 1.5 cents for each pound of copper equivalent produced by Amerigo, which is clearly conflicting with the interests of shareholders and explains a lot of the crazy capex decisions they've made. Interesting, the agreement was originally that they only got paid for copper production but was posthumously changed to "copper equivalent" production after they built the moly circuits. My guess is things would have worked out better if that conflict was not in place.
Despite all the capex and expansion in their opportunity set, production of both moly and copper are down from 6 years ago. Offsetting this, power costs are way down, the share price is way lower (albeit mostly because of almost doubling the sharecount at the lows), and they have gotten approval to expand to Cauquenes. If capex finally tapers off, I think this probably works from here. Just keep in mind that a lot of "unforeseen" events seem to occur with this company and they never seem to be positive - earthquakes, landslides, power price spikes, regulatory shutdowns, etc. The ride is probably up from here, but I'd be prepared for it to be bumpy as well.
Hope this helps.
|Subject||RE: RE: Questions for rasputin|
|Entry||01/13/2014 01:14 PM|
Thanks Rasputin, very interesting comments. I was completely unaware of that special deal Klaus Zeitler gets, and that may indeed explain poor capital allocation decisions.
So am I correct that your primary concerns are things other than the price of copper? I.e., things like management, capital allocation, landslides, earthquakes, regulatory shutdowns, etc. ? You're not worried about new mines such as Oyu Tolgoi in Mongolia coming on line and what that may do to the price of copper?
|Subject||RE: RE: RE: Questions for rasputin|
|Entry||01/13/2014 01:44 PM|
If you have a strong view that a non-Chilean source is coming online that is large enough and disruptive enough from a cost standpoint to materially lower the price of copper in the intermediate term, you would definitely want to hedge the price risk out.
I am personally skeptical of the ability to predict global commodity prices much beyond what futures curves already display (the copper curve is pretty flat - declining 10 cents between today and 2018). For me, that piece is a portfolio management decision. We have currently have very low exposure to base metals prices in our fund, so I would just accept the exposure. By contrast, we have fairly large energy price exposure, so we actively hedge oil price risk. There are plenty of copper producers available to short, but I think others on this board can be more helpful with that than I.
|Entry||01/13/2014 05:32 PM|
There are certainly many ways to hedge copper price exposure from shorting various etf's to buying long dated puts on copper futures based on your view. With Cauquenes, Amerigo's all-in sustaining cash costs are expected to be below $2.1/lbs which would be lower than Codelco's cash costs. So this deal dramatically changes the cost profile of the Company. At the same time the Company is trading at half the replacement value of its assets with an unlevered balance sheet to enable it to weather any short term hiccups, and the two largest shareholders are on the board to prevent past missteps. With a five year investment horizon, I can easily see with not very aggressive assumptions, a 5X invrease in the stock price. Chinese economy implosion, global deep recession or acts of God are the main risks to the thesis. This is a large, high conviction position for us.
|Subject||RE: RE: Hedge|
|Entry||01/13/2014 06:01 PM|
Your point about the shareholders, esp Ross Beaty, on the board is an important one. I think you're right on this one, but again it'll probably be bumpy.