The Rational Cloning: Weekly Ideas #4
Greenlight Capital on Teck Resources, YAVB on Uranium/NexGen, Old West Investment On Rafael Holdings, and More
Welcome to the 4th edition of the Rational Cloning Newsletter (Weekly Ideas Series).
Helping you discover the best ideas of others.
Happy cloning.
Weekly Investment Ideas
(1) Greenlight Capital (Teck Resources) (published May 21, 2021) (LINK)
A bull thesis for copper:
“You don’t have to be a real genius like Thomas Edison to know that whether you are are building electric vehicles, chargers, solar, wind, power generation and transmission, to grow the electric grid, we need lots of… copper.”
Goldman Sachs also came out with a research called, “Copper is the new oil.” You can listen to a podcast about it here (transcript link).
(2) YAVB (Uranium, NexGen) (published Sep 4, 2021) (LINK)
YAVB interviewed Brian Laks, partner at Old West Invest Management, about the bull case for uranium.
Key points:
Supply is ~180M/year, production is ~130M/year, breakeven is ~$60/lbs (currently $40/lbs). There is a supply deficit and prices have to go up eventually.
NexGen’s (NXE) predicted operating cost for uranium is $5.69/lb, which is low. Link to corporate presentation here.
The Sprott Uranium Trust (U.UN, U.U, SRUUF) is gobbling up uranium in the spot market and serving as a key catalyst for the price discovery of uranium.
(3) Old West Investment (Uranium/NXE/Sprott)
I also dug through Old West Invest Management’s quarterly letters. The following excerpt is from July 13, 2021 (for Q2 2021):
Our firm recognized an extraordinary opportunity in the nuclear energy/ uranium mining industry several years ago. Old West partner and portfolio manager Brian Laks offers this update on our investments in this area:
In April 2020 we wrote that we believed the inflection point had arrived. Since that time, our positions have multiplied in value and the patience of our investors has been greatly rewarded….
….given the strong performance of the miners relative to the uranium price itself, we have begun to lean preferentially toward pure commodity price exposure for incremental capital.
Uranium Participation Corp [now Sprott Uranium Trust], a Canadian-listed investment vehicle that holds physical uranium, recently approved a change in ownership and structure that would make it easier for them to purchase uranium in the open market. They plan to seek a US listing which would open them up to an expanded pool of capital and potentially significant flows from retail investors. We are very intrigued to see what happens when a large investor base is more easily able to participate in a thinly traded uranium spot market.
(4) Old West Investment (Rafael Holdings- RFL)
Naturally, while going through Old West Invest Management’s letters (Q1 2021, Q2 2021) on Uranium/NXE, I stumbled across their thesis on RFL, which is now a late-stage clinical oncology company (after the merger with Rafael Pharmaceutical).
In 2018, Howard decided to spin-off Rafael Holdings from IDT with approximately half of the parent company cash and all of IDT’s real estate assets to fund future trials.
The company expects multiple major milestones this year, led by its Phase III Metastatic Pancreatic Cancer trial. The Phase III trial was fully enrolled this past August, 18 months ahead of schedule. In October, the FDA granted fast track approval, and the company is expecting the data read-out in Q3 of this year.
If successful, the treatment would become standard of care and CPI-613 would potentially become a $5+ billion per year Revenue indication for Pancreatic Cancer alone. At a 3-6x Revenue multiple, which is a historical range that big Pharma would pay for an oncology asset like this one, Rafael Holdings’ 50% stake in Rafael Pharma would be valued at roughly $7.5-$15 billion, or 12x-23x the current market cap. This ignores all of the other indications for CPI-613 and the other assets owned by Rafael Holdings, which could add substantial value to the company.
The current CEO, Ameet Mallik, started on May 1st, and was previously the U.S. Head of Oncology at Novartis.
We estimate that RFL stock would need to appreciate more than 5x from current levels for Mallik to “breakeven” on the move and to account for the opportunity cost of moving from a $15 billion Revenue business inside of Novartis.
(5) @lakemeadput_VWTR (Vidler Water Resources- VWTR) (published 07/07/21) (LINK)
Came across @lakemeadput_VWTR’s 100+ research page on VWTR: The Cheapest Parametric Drought Insurance Money Can Buy.
VWTR is significantly mispriced along with the price of water, from an investor standpoint, we believe the fundamental valuation in the next 3-6 months warrants a $25+ share price and from a Parametric Drought Insurance it should already be at $25+ with upside to $50.
Some other key points:
Over the past 3 years following the changes to Board of Directors and Management, Vidler has repurchased over 20% of shares
Water prices are undergoing “price discovery” as the NQH2O (Veles Water Contract) started trading last year. There is a trust prospectus (WWTR) that could potentially lead to speculation in water contract prices.
Carries $150m+ of tax assets that at 80%+ gross margins (as evidenced by recent sale of Doge Flat assets) will be used to repurchase shares or dividend.
Management and Board own over 11% of shares and interests are aligned.
VWTRs stock was recently deleted out of the Russell 2000 (partly due to repurchasing 20%+ shares over the last three years) and is not a holding in the PHO (water ETF). In short, it is orphaned.
VWTR has no analyst coverage.
(6) Clark Street Value: Atlas Financial: Senior Bonds Should Reject RSA, Reopening Play (published September 9, 2021) (LINK)
Atlas is in the early innings of a business transition, previously they were an insurance company to the niche light commercial auto market (think taxis, limos, shuttle buses, etc.), that wasn’t a great segment prior to covid and then really got crushed during the pandemic with rides down 90+%.
If they can return to writing the same volume as they did in 2018 (~$285MM, approximately 15% market share) under the MGA model (management put this goal out there in their recent investor call), this could be a multiple bagger (they take a 20% commission and guided to 20-30% pre-tax margins), but the path between here and there is highly uncertain and probably not realistic. To put that goal in context, they currently have only 5% of that in-force, writing a bit more than on a run rate basis as new business is inflecting with the reopening.
To make it even hairier, the company has a quickly approaching $25MM debt maturity in April 2022, that security is a baby bond ($25 par, exchange traded) under the symbol AFHBL.
The company missed the July payment on these bonds (although you would have no way of knowing unless you owned the bonds) and then last week the company announced it had come to a proposed restructuring support agreement (“RSA”) with 48% of the noteholders to exchange the current bonds for a new security with similar terms (same headline 6.625% coupon, but the company has the option to PIK at 7.25% for the first two years) but pushing the maturity out 5 years in an amend and extend.
The bonds (AFHBL) did trade up on this news to $11-$11.50ish (par value is $25) creating a yield-to-maturity in the mid-to-high 20% range if the proposal is approved. But I think there is an opportunity for a better, fairer deal for AFHBL noteholders, if you own the bonds feel free to reach out to my email and I can put you in touch with a group that is pushing for a better deal. I plan on rejecting the RSA. Either way, seems like an interesting quirky way to play a reopening or normalization of the post-pandemic economy.
Activists/ 13Ds / 13Gs
(1) Park West Asset Management takes 8.9% of Rafael Holdings (RFL)
Share Repurchases
Previous Issues👇
Along with writing The Rational Cloner newsletter, I’m trying my hand at the self-publishing game. Just released The Little Book of Investing Ideas: A Curated Collection of Investing Wisdom. Drawn from over 25 books, the Little Book of Investing Ideas distills fundamental wisdom about investing into concise ideas that you can immediately apply to your life and investments. In total, there are over 200+ curated ideas.
Some topics include:
Ideas on value, growth, and trend following
How biases are affecting your decision-making
What alternative investments are and which ones may be best for you
What you should look for in dividend investing
Valuation methods and how to value companies in different life cycles
And more.
Life is short. Collect good ideas and move on. No need for fluff.