The Rational Cloning: Weekly Ideas #27
Mispriced Markets on Ero Copper; Caveat Emptor on Kin Yat Holdings; Doomberg on the Onset of a Global Famine
Welcome to the 27th edition of the Rational Cloning Newsletter (Weekly Ideas Series).
Helping you discover the best ideas of others.
Happy cloning.
Weekly Investment Ideas
(1) Mispriced Markets on Ero Copper
Ero Copper (ERO, trading under the same symbol on both the TSX and NYSE) is a copper mining company. They have a mine in Brazil that is currently producing about 45 000 tonnes of copper a year. This mine has been in production for 5 years now and in that time, they have grown production, grown their reserves and lengthened the mine life (from 8 years to 12). The mine enjoys exceptionally low production costs, among the lowest in the world and this has helped them churn out consistent profits even before the recent run-up in the price of copper.
They also have a gold mine in Brazil that is part of the mix and have plans to expand production there, but it is a relatively small part of the picture. Copper is their main bag.
Neither of these mines is particularly long-lasting, which is probably the main reason that the company appears to be cheap. Or cheaper than its peers at any rate. However, with these mining companies, you never really know how much gold or copper is there until you hit the bottom of the barrel. You can poke a bunch of holes in the ground to try to make a guesstimate as to how much is down there but poking holes in the ground is expensive, so you try to do as little of that as possible.
With the holes they’ve poked, they’re estimating that their current copper mine will last at least another 12 years, but they say it’s open at depth meaning there is the possibility they’ll find more copper as they dig deeper.
If I do a pro/con evaluation this is what I come up with: On the upside, the company has a great set of low-cost mining assets that have generated solid profits over the past 5 years in both low and high commodity price environments. The trailing p:e is low. If production doubles in the next 4 years as the new mine comes on stream, if the price of copper doubles into the bargain and if the p:e ratio also doubles or even triples as a response to all of this, then a 10 bagger is not out of the question.
On the downside, a drop in the price of copper back to 2019 levels would knock earnings back down a peg or two and make the whole enterprise worth a lot less. But cash costs at all their mines are low and if the new copper mine comes on stream as planned then this would help to offset the drag on profits caused by a lower commodity price. Add in the fairly low starting p:e ratio and I think you might reasonably get away with a 50% haircut if things go sideways.
On the whole, those look like good odds to me. I’m hoping that the hyper-optimistic scenario is the one that plays out and I sold off some dribs and drabs of my other stocks to make room for this new kid on the block. I ended up paying a little over $18 a share on the Canadian market for my stake.
(2) Caveat Emptor Stocks: Kin Yat Holdings (0638.HK) - Cheap and Positioned for a Rise
Bottom line up front: Kin Yat Holdings (0638.HK) is a stock selling at multi-year lows with a large discount to tangible book value, growing tangible book value per share, and high insider ownership.
I like to keep it simple when it comes to buying stocks. I want stocks that can be easily identified as being well-positioned for a large rise. That includes the following characteristics:
Cheap on a net tangible asset basis (earnings is too noisy)
An established business and stock price history (at least 10 years)
Has a "good" chart (basically, past pricing history shows that it can have a large rise if given the chance)
Low share turnover
No major share dilution
Small market cap (less than 50M USD)
Low public float
High insider ownership
0638.HK checks all of the marks for what I'm looking for.
Market cap: 285.3M HKD (36.5M USD)
Share price: 0.65 HKD (0.083 USD)
Shares outstanding: 438.96M
Shares in public float: 137.77M
1-month share turnover %: 0.70%
Tangible Book Value per share: 3.57 HKD
(3) Doomberg: Farmers on the Brink
We believe we are at the onset of a global famine of historic proportions. In a staggering defiance of logic, many US politicians are still attacking the lifeblood of our own energy production infrastructure, looking to score political points against “the other team,” blaming price-taking producers of global commodities for gouging, threatening producers of energy with windfall profits taxes, resisting calls to remove bureaucratic hurdles to new production, and refusing to open an introductory physics textbook to help guide them through the suite of policy choices that require true leadership to get right. They remain stuck in an endless loop of platitudes, blamestorming, corruption, and ignorance.
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