Earnings Notes (Q4 2023)

Freeport-McMoRan Inc. (FCX)
For Q4 2023, Freeport reported operating cash flow of $1.32 billion and capital expenditures of $1.36 billion, giving a free cash flow for the quarter of negative $42 million. Their quarterly copper production of 1.1 billion pounds was up 2% y/y, at an average realized price of $3.81 per pound. Their guidance for 2024 free cash flow is $1.2 billion (at $3.75 copper), which would be only a 2% yield on the current enterprise value of $57 billion.

FCX’s consolidated operating cash flows are estimated to approximate $5.8 billion (including $0.1 billion of working capital and other sources) for the year 2024, based on current sales volume and cost estimates, and assuming average prices of $3.75 per pound of copper, $2,000 per ounce of gold and $19.00 per pound of molybdenum. The impact of price changes on operating cash flows for the year 2024 would approximate $400 million for each $0.10 per pound change in the average price of copper, $180 million for each $100 per ounce change in the average price of gold and $120 million for each $2 per pound change in the average price of molybdenum.

Capital expenditures are expected to approximate $4.6 billion for the year 2024 (including $2.3 billion for major mining projects and $1.0 billion for the Indonesia smelter projects). Projected capital expenditures for major mining projects include $1.1 billion for planned projects primarily associated with underground mine development in the Grasberg minerals district and potential expansion projects in North America, and $1.2 billion for discretionary growth projects.

FCX’s financial policy is aligned with its strategic objectives of maintaining a strong balance sheet, providing cash returns to shareholders and advancing opportunities for future growth. The policy includes a base dividend and a performance-based payout framework, whereby up to 50% of available cash flows generated after planned capital spending and distributions to noncontrolling interests would be allocated to shareholder returns and the balance to debt reduction and investments in value enhancing growth projects, subject to FCX maintaining its net debt at a level not to exceed the net debt target of $3.0 billion to $4.0 billion (excluding net project debt for the Indonesia smelter projects).

They are quite leveraged to the copper price as you can see: $400 million additional operating cash flow for each ten cent increment in copper price. Yet even $4.75 copper would only give an additional $4 billion of operating cash flow which would be kind of lackluster on the $58 billion EV. They are crazy to be spending money on growth! They should demand contracts in hand for $6/lb before they spend a penny more on capex.

Barrick Gold Corp (GOLD)
For Q4 2023, Barrick reported cash from operations of $1 billion and capital expenditures of $861 million, giving a free cash flow for the quarter of only $136 million on an enterprise value of $25 billion. Gold production was up 1% y/y in Q4. Their cash cost was $982 per oz and their "all-in sustaining cost" was $1,364/oz. 

Like other commodity producers and miners, they are plowing it into capex: They produced 4.05 million ounces of gold in 2023, down from 4.1 million in 2022 and closer to 5 million in 2020. Cash cost has risen from $700/oz in 2020 to $960/oz last year. Operating cash flow for 2020-2023 (four years) totaled $17 billion but they spent $11 billion on capex. So only $6 billion of cumulative free cash flow ($1.5 billion per year) and production is in decline!

Remember that to recover an ounce of gold they have to process 28 tons of ore, and for every ton of ore, they have to also move 6 tons of waste.

Comstock Resources Inc (CRK)
Comstock produces almost 100% natural gas and sells it for the pittance of $2.50/mcf. They reported negative free cash flow for Q4 and FY 2023 yet they grew production 6% y/y. Although they may get some religion about lighting cash on fire now that natural gas is even lower:

"In response to weak natural gas prices, Comstock plans to suspend its quarterly dividend until natural gas prices improve. In addition, the Company plans to reduce the number of operating drilling rigs it is running from seven to five. Two of the five drilling rigs will continue to be deployed in the Company's Western Haynesville play. As a result, Comstock plans to spend approximately $750 million to $850 million in 2024 on its development and exploration projects to drill 46 (35.9 net) operated horizontal wells and to turn 44 (38.2 net) operated wells to sales in 2024. Comstock expects to spend $125 million to $150 million on its Western Haynesville midstream system, which will be funded by its midstream partnership."

Comstock has $3.4 billion of net liabilities and a $2 billion market cap. It is conceivable that the equity here goes to zero.

PrairieSky Royalty Ltd. (PREKF)
PSK reported revenue for 2023 of $380 million, generated $283 million of funds from operations (74% margin). They spend 13% of revenue on income tax, 9% on G&A expense, 3.4% on finance expense (interest), and about 1% each on production taxes and on exploration and evaluation. The $283 million of funds from operations is a 7% shareholder yield on the $4 billion market capitalization. (Based on Q4 would be an 8% yield.)

Horizon Kinetics wrote about PSK in the annual letter for their Inflation Beneficiaries (INFL) ETF:

"With today’s temporarily depressed energy prices, PrairieSky should be able to generate C$1.50 in FFO/share, which equates to a 7.5% yield. This could be viewed as a “base case” minimum return—assuming no improvement in energy prices, production volumes, or Canadian price differentials. Assuming modest improvement here, namely with pricing and volumes, it is reasonable to expect more than C$2.00/share of FFO, or a 10% yield. If prices rebound more fully, and volume grows even moderately, FFO could exceed C$2.50 share, nearly a 12% yield."

One big hope for PSK would be more export of natural gas from Canada. Their share of natural gas production for the quarter was 5.4 million Mcf of gas which was sold for only $2.19 per Mcf.

Intercontinental Exchange Inc. (ICE)
For the full-year 2023, ICE earned $3.05 billion of free cash flow on $8 billion of total revenue (less transaction-based expenses) for a royalty-like 38% free cash flow margin. The current market capitalization is $78 billion the enterprise value is around $100 billion, so at a 3% free cash flow yield, it is not cheap. Something else to note was FCF was flat from 2022 to 2023. Their M&A goals: "deepen moats, gain intellectual property, increase customer wallet-share".

Peabody Energy Corp (BTU)
The market capitalization of Peabody is now $3.35 billion versus $3.3 billion when we wrote about them last quarter. (It was $4 billion when we wrote about them in August 2022.) Total liabilities less current assets are now $335 million, so we would put the enterprise value at $3.7 billion now. For the fourth quarter of 2023, Peabody's adjusted EBITDA was $345 million, up from $270 million in the third quarter. Adjusted EBITDA for the full year 2023 was $1.4 billion which is about equal to the Q4 annualized figure. That puts the EV/EBITDA at 2.7x. Operating cash flow for the quarter was $282 million and $1,036 million for the year. Capital expenditures were $158 million for the quarter and $348 million for the year. So the free cash flow yield on enterprise value is 13% based on the most recent quarter or 19% for the full year.

Thoughts from Coal Trader: "If executed successfully, the Centurion and Shoal Creek organic investments should deliver extremely high IRR's and return significant free cash flow to Peabody in the coming years. Peabody’s team also found a way to further enhance the Centurion investment by acquiring the adjacent Wards Well deposit. These investments will pivot the company more towards the met market where the long term fundamentals are far more favorable compared to thermal. The long term prospects of the company have significantly improved with Centurion being the flagship of their portfolio in the years ahead. The average realizations of the met segment will improve significantly with the addition of Shoal Creek and eventually Centurion. This is probably something that will be overlooked by many analysts, but I believe the 'relativities' in the metallurgical coal market are something the sector if going to have to contend with for far longer than most believe. That is to say, the price spreads between high-quality coking coals relative to lower-quality coking coals may be here to stay..."

Seems cheap and everything, but would rather own coal royalties at current valuations.

Natural Resource Partners, L.P. (NRP)
No year-end results yet, but NRP put out an 8-K in January about a warrant settlement:

On January 29, 2024 (the "exercise date"), holders of Natural Resource Partners L.P.'s (the "Partnership's") warrants to purchase common units ("warrants") exercised 462,165 warrants with a strike price of $34.00. On January 31, 2024, the Partnership settled the warrants on a net basis with $10 million in cash and 198,767 common units. The 15-day VWAP ending on the business day prior to the exercise date was $97.62. Of the originally issued 4.0 million warrants, 1.08 million warrants with an exercise price of $34.00 remain outstanding.

As of the September 30, 2023 quarterly results, NRP had 2,190,000 warrants outstanding. An October purchase (8-K) brought them down to 1.54 million warrants. We had been wondering what they did with their Q4 cash - we won't know for sure for another few weeks until they report earnings, although they did aggressively tackle the warrants. Wonder if they were redeeming the preferred (12% liability) during the fourth quarter?

Exxon Mobil Corp (XOM)
XOM reported cash from operations of $13.7 billion and free cash flow of $8 billion (58% of CFO) for the fourth quarter of 2023. The market capitalization is $400 billion and the enterprise value is $420 billion so the free cash flow yield is 7.6% at current oil (and LNG) price. For the full year of 2023, shareholder distributions were $32.4 billion ($14.9 billion of dividends, and $17.4 billion of share repurchases) which is a 8% shareholder yield.

Imperial Oil Ltd (IMO)
We mentioned IMO last week. Production in the fourth quarter was up 8.5% versus the prior year, while capex for the quarter was down 34% versus the prior year. (See results. Full year capex was down 2% from 2022.) Free cash flow for the quarter was $667 million, which is about an 8.6% yield on the enterprise value. Imperial is a share cannibal. During 2023, they shrank the share count by 8.3%. 

Enbridge Inc (ENB)
Enbridge shares have been really weak, under-performing Enterprise Products, for example. (Also compare with EPD, NTG, and FEI over the past three years.) It's a $70 billion market capitalization company yielding 7.9% (dividend) which is quite high compared to what it has yielded historically. And it is a C-corp so you don't even get the annoying Schedule K-1 that you do from other midstream companies. From the Q4 call:

2023 showcased the predictability of our business amid continued geopolitical instability, persistent inflation and rising interest rates. This is as a result of the 98% of Enbridge's earnings being generated from either cost of service or take-or-pay contract assets. Our debt portfolio is less than 10% exposed to floating rate volatility. Our customer base is over 95% investment grade, and 80% of our EBITDA is earned from assets with protection against inflation. We are rated BBB+ by all rating agencies and remain committed to our long-held leverage target of 4.5x to 5x.

Half of the EBITDA is from their liquids pipelines. They've got the Mainline pipeline from the western Canada oil sands and then the Line 5 that takes it to eastern Canada refiners. The Flanagan South and Seaway can also take that Mainline oil from Canada down to Gulf Coast refiners. ("We transport about 30% of the crude oil produced in North America. We transport about 65% of U.S.-bound Canadian exports.")

A quarter of their EBITDA is gas transmission. They carry from western Canada to export, also to eastern U.S. Connects PA gas to eastern U.S. as well as Gulf Coast. ("Enbridge moves about 20% of the natural gas consumed in the United States. We are the largest natural gas supplier to New England, the Southeast and virtually all of Florida. Our transmission network is also webbed throughout the Gulf Coast. We are also one of the largest offshore natural gas transporters in the Gulf of Mexico.") They are working on LNG export from western Canada, called the Woodfibre LNG project.

Other quarter is gas distribution (utility). ("Enbridge’s gas utility business, Enbridge Gas Inc., becomes the largest by volume in North America—with about 7,000 employees delivering 9.3 billion cubic feet of natural gas per day (Bcf/d) to about 7 million customers.")

Allison Transmission Holdings Inc (ALSN)
We keep noticing ALSN on the daily all-time highs list. Per their website, Allison is the world’s largest manufacturer of fully automatic transmissions and hybrid propulsion systems for commercial-duty vehicles. 

On fourth quarter sales of $775 million, they did $170 million of net income and $186 million of adjusted free cash flow (24% free cash flow margin). On full year sales of $3 billion, they did $659 million of adjusted free cash flow (22% FCF margin). Revenue for the year was up 10% for 2022 and adjusted free cash flow was up 37%. They repurchasing $260 million of shares during 2023 (6 percent of outstanding). The market capitalization is $6.25 billion and the enterprise value is $8 billion, so the FCF yield is 8%.

Penske Automotive Group, Inc. (PAG)
Highlight from fourth quarter results:

For the three months ended December 31, 2023, total new and used units delivered increased 8% to nearly 117,400, and total retail automotive revenue increased 5% to $6.2 billion. Same-store new and used units delivered increased 9% to nearly 116,700, and same-store revenue increased 4%, including a 7% increase in service and parts revenue. Total retail automotive gross profit decreased 1% to $1.0 billion, including a 1% decrease on a same-store basis. Same-store service and parts gross profit increased 7%.

Revenue for the fourth quarter was $7.3 billion, gross profit was $1.2 billion, EBITDA was $357 million, and capital expenditures were $103 million. The current market capitalization is $10 billion. Net income was $190 million for the quarter and $1 billion for the full year.

AutoNation Inc (AN)
Highlight from fourth quarter results:

New Vehicle Gross Profit - Decreased $102 million reflecting gross profit per vehicle retailed of $3,653, compared to $5,633 a year ago, partially offset by an 8% increase in unit sales. Used Vehicle Gross Profit - Decreased $27 million reflecting gross profit per vehicle retailed of $1,455, compared to $1,847 a year ago and a 4% decrease in unit sales. After-Sales Gross Profit - $540 million, an increase of $61 million or 13% from a year ago.

Revenue for the fourth quarter was $6.8 billion, gross profit was $1.2 billion, and net income was $216 million. During the quarter, AutoNation repurchased 1.15 million shares of common stock (3% of shares outstanding at start of quarter) for an aggregate purchase price of $151 million. The current market capitalization is $6 billion. Net income was $1 billion for the full year.

Enterprise Products Partners LP (EPD)
Highlights from fourth quarter results:

Enterprise reported net income attributable to common unitholders of $5.5 billion, or $2.52 per common unit on a fully diluted basis, for 2023 compared to $5.5 billion, or $2.50 per common unit on a fully diluted basis, for 2022. Operational DCF was $7.5 billion for 2023 compared to $7.6 billion for 2022. DCF provided 1.7 times coverage of the distributions declared with respect to 2023. Enterprise retained $3.2 billion of DCF in 2023 to reinvest in the partnership, repurchase partnership common units, and reduce debt. Distributions declared with regard to 2023 increased 5.3 percent compared to those declared for 2022 and marked Enterprise’s 25^th consecutive year of distribution growth.

Steady as she goes. The real question will be, do the growth investments pay off? If so, earnings will rise and capex will go down, resulting in a lot more cash for distributions. (As we pointed out in October, the free cash flow per unit of Enterprise has grown substantially (3.3x) over the past five years.)

Altria, Inc (MO)
Highlight from fourth quarter results:

Smokeable products segment reported domestic cigarette shipment volume decreased 7.6%, primarily driven by the industry’s decline rate (impacted by macroeconomic pressures on ATC disposable income and the growth of illicit e-vapor products) and retail share losses, partially offset by trade inventory movements. When adjusted for trade inventory movements, smokeable products segment domestic cigarette shipment volume decreased by an estimated 9%.

Cigarettes volumes down 9%. Cigarette revenues down 2.4% y/y net of excise tax. They are not able to raise price of pack enough to maintain flat revenue. Operating income from cigarettes down 1.3% y/y.

Chipotle (CMG)
Highlights from fourth quarter results:

Total revenue increased 15.4% to $2.5 billion. Comparable restaurant sales increased 8.4%. Operating margin was 14.4%, an increase from 13.6%. Restaurant level operating margin was 25.4%, an increase of 140 basis points.

Market capitalization is $70 billion, they earned $282 million in Q4 on sales of $2.5 billion. Sixty times earnings is steep! Net income for fourth quarter was up 11% year-over-year.

Marathon Petroleum (MPC)
This Marathon is the refiner, not the E&P company (MRO). They refine almost 3 million barrels per day, which is the most in the U.S., followed by Valero (VLO) and ExxonMobil, each with about 2 million barrels per day. Highlight from fourth quarter results:

“In 2023, the business generated $14.1 billion of net cash from operations, driven by strong operational performance and commercial execution,” said Chief Executive Officer Michael J. Hennigan. “This enabled the return of $12.8 billion of capital to shareholders. We believe MPC is positioned to generate strong through-cycle cash flow with the ability to deliver superior returns to our shareholders.”

That's on a market capitalization of $63 billion. 

Marriott International, Inc. (MAR)
We wrote about Marriott in November as a royalty-like business. Highlights from Q4 results:

Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) totaled $1,197 million in the 2023 fourth quarter, a 10 percent increase compared to fourth quarter 2022 adjusted EBITDA of $1,090 million. The company repurchased 4.7 million shares of common stock in the 2023 fourth quarter for $965 million. For full year 2023, Marriott repurchased 21.5 million shares for $3.9 billion. 

In 2024, we expect another year of solid growth and significant shareholder returns. With normalizing RevPAR growth around the world, we anticipate a worldwide full year RevPAR increase of 3 to 5 percent and net rooms growth of 5.5 to 6 percent. We expect this should yield adjusted EBITDA of approximately $4.9 billion to $5.0 billion for the year and enable us to return $4.1 billion to $4.3 billion to shareholders after factoring in $500 million to purchase the Sheraton Grand Chicago.

That would be quite a nice shareholder return on the current market capitalization of $69 billion.

Warrior Met Coal Inc. (HCC)
The market capitalization of Warrior is now $3.2 billion. Their current assets net of all liabilities (ignoring deferred income taxes) are $660 million, so the enterprise value is $2.5 billion. For the fourth quarter of 2023 (release), Warrior's adjusted EBITDA was $164 million, up from $148 million the prior year. For the full year (2023), adjusted EBITDA was $700 million, down from $1 billion in 2022. That puts the EV/EBITDA at 3.8x using the fourth quarter (annualized) or 3.6x using the entire year.

They sold 1.53 million tons versus 1.45 million the prior year. The average price was $234/t and the average cash cost was $121/t. Cash from operations was $245 million for the quarter and they spent $182 million on capital expenditures. 

For the full year 2023, $700 million of cash from operations, but they spent $525 million on capex. No share repurchases, even though the stock was trading for 1.2x EBITDA earlier last year.

The price per ton of met coal averaged $219 in 2023 vs $304 in 2022. It seems insane to invest so much (~$1 billion for the new Blue Creek mine) in producing more of a commodity that does not have a firm price. There are some good pictures of it in the new investor presentation though.

Coal Trader tweeted: "It seems like they’re really struggling to move this coal. Maybe the transition to more HVA is hurting more than I figured, or maybe the spreads in the Atlantic basin are making it more difficult than I assumed. Prices in Q4 were terrible, and inventories increased A LOT."

That's so brutal. There really shouldn't be any question of being able to move the product if you are expanding production.

Occidental Petroleum Corporation (OXY)
From Q4 results, Occidental's oil volume (total U.S.) was down 2.2% in the fourth quarter (year/year). Their total U.S. production in BOEs though was up 1.3%. In the Permian specifically, oil was flat and natural gas was up 14%. The wells are getting gassier!

Total oil and gas capex in the second half of the year was up 4.5% versus the second half of 2022, but in the Permian was actually down 20%. (They really slashed Permian capex in Q4... in Q3 it was up 8% y/y so maybe we'll see volumes fall off more in Q1 2024.)

Their operating cash flow in Q4 was $2.5 billion with capex of $1.4 billion, giving free cash flow of only $1.1 billion. Market cap is $50 billion and the enterprise value is $80 billion. So EV/FCF is only 5.5%.

Truly no idea what Buffett sees here. 

 

Royal Gold Inc. (RGLD)
Reported results: cash from operations was $101 million for Q4 2023 and $416 million for the full year 2023, virtually the same as Q4 2022 and the FY 2022. There were no capital expenditures in Q4 and only $2.7 million for the full year. They spent $325 million on debt repayment and $100 million on dividends. So the shareholder yield is 5.8% on the $7 billion market capitalization. (Net debt is down to $151 million.)

Kraft Heinz Company (KHC)
Noticing from Q4 results that Kraft's North American volumes were down 5.5% despite 2.5% price increase, resulting in fourth quarter sales down 3%. (They're calling this "headwinds that were driven by ongoing consumer pressure".)

 

The market capitalization is $42 billion and the enterprise value $63 billion. Cash from operations for the full year was $4 billion; surprisingly they actually have $1 billion of capital expenditures, so free cash flow is only $3 billion. They spent $191 million on debt repayment, $2 billion on dividends, and $455 million on share repurchases.

August 15, 1971 - Richard Nixon Closes the Gold Window

What a crook:

The third indispensable element in building the new prosperity is closely related to creating new jobs and halting inflation. We must protect the position of the American dollar as a pillar of monetary stability around the world.

In the past 7 years, there has been an average of one international monetary crisis every year... I have directed Secretary Connally to suspend temporarily the convertibility of the dollar into gold or other reserve assets, except in amounts and conditions determined to be in the interest of monetary stability and in the best interests of the United States. Now, what is this action—which is very technical—what does it mean for you? Let me lay to rest the bugaboo of what is called devaluation. If you want to buy a foreign car or take a trip abroad, market conditions may cause your dollar to buy slightly less. But if you are among the overwhelming majority of Americans who buy American-made products in America, your dollar will be worth just as much tomorrow as it is today.

The effect of this action, in other words, will be to stabilize the dollar.

Royal Gold, Inc. (RGLD)

We mentioned Royal Gold in our post last October, What I Would Buy Instead of Tesla

Royal Gold (RGLD) for $7.9 billion. A great business model - streaming/royalty interests on gold mines with no debt. Net income of $200 million for the past year is expensive, but it could/should grow as more mines come into production. (They have interests in 41 producing mines and 16 in development, plus more in the pipeline.) They do about 1 transaction a year but it's lumpy - they did none from 2006-2008 or from 2016-2018.

The shares are down subsequently and the market capitalization is now $6.9 billion. The company has no net debt, so the enterprise value is the same or less. Streaming and royalty revenue was up significantly in Q3 2021 vs Q3 2020, even with lower gold and silver prices:

For the quarter ended September 30, 2021, we recognized total revenue of $174.4 million, comprised of stream revenue of $115.9 million and royalty revenue of $58.5 million at an average gold price of $1,790 per ounce, an average silver price of $24.36 per ounce and an average copper price of $4.25 per pound. This is compared to total revenue of $146.9 million for the three months ended September 30, 2020, comprised of stream revenue of $106.5 million and royalty revenue of $40.4 million, at an average gold price of $1,909 per ounce, an average silver price of $24.26 per ounce and an average copper price of $2.96 per pound.

If you annualize the quarterly operating cash flow of $130 million, that's $520 million, a 7.5% cash flow yield on the enterprise value. From the Q3 conference call:

We also had record volume of 97,400 gold equivalent ounces, or GEOs, which was a 27% increase over the prior year period. As metal prices are mixed, most of the increase in our revenue was driven by strong operating performances, as Mark mentioned in his remarks.

It is strange that cryptocurrencies are doing so well and gold is doing so poorly. It is also strange that the unprofitable Robinhood bubble basket keeps rising, from $1.6 trillion of combined market capitalization last year to $2.2 trillion today. For the same price as that basket, you could own:

• All three of the Canadian oil majors, $113 billion
• The entire tobacco industry (PM, MO, BTI, TPB, SWMAY, IMBBY, JAPAY), $380 billion
• A huge proportion of the North American pipeline industry; all of the top ten holdings of the Tortoise Midstream CEF (ENB, MMP, EPD, WMB, MPLX, ET, KMI, TGRP, OKE, DCP, WES) for $334 billion.
• The better part of the world auto industry (TM, Subaru, VW, F, GM) for $578 billion.
• Berkshire Hathaway for $650 billion.
• With the remaining $150 billion you could buy most of the gold mining industry (NEM, GOLD, FNV, SBSW, RGLD, GFI, AU, KGC) for $150 billion.
  

That is $2.2 trillion in combined market capitalization, the same as the 19 Robinhood stocks. Most of the mispricing of the Robinhood basket is coming from Tesla ($1.3 trillion), but there is a significant amount of market capitalization ($320 billion) in Zoom, Uber, Doordash, Carvana, Peloton, Beyond Meat, and Nikola, which are very poor quality, overvalued businesses.

A bubble in poor quality hype businesses and 13,000 gambling tokens while at the same time entire industries that return cash to shareholders are being neglected is evidence to support Lyall Taylor's redemption and liquidity flywheel hypothesis [See: 1, 2]. The very end of a secular trend in growth vs value is a crescendo of selling in some areas (that creates the "value") and buying in the other areas (momentum ones, which become very overvalued)!

Two Updates

Looking at Gold Miners

Last week, we mentioned Gold Miners and the Net Issuance Anomaly. The gold miners are profitable, have low debt, and are paying dividends and buying back stock. Investors were slow to respond when the airline industry consolidated down to four players with better discipline - until Buffett, who had always badmouthed the industry, bought big stakes in all four of them at single digit earnings multiples.

Mining (and maybe especially gold mining) has been a long bear market. The gold miners ETF (GDX) has been in a bear market since 2011 - a decade! - and is trading where it was 15 years ago. The junior gold miners ETF (GDXJ) is trading for half of what it was at inception in 2009.

Producers of natural resources - energy and metals - have the worst trailing performance of all the industries in the entire economy. Trailing performance this poor means that they should be cheap:

A fund manager might have a huge number of very cheap stocks they would love to buy, but if they do not have any available cash, they do not get to 'vote' on the market price by buying in the open market, as they lack the liquidity to do so - in the short term at least (longer term, you can reinvest dividends). Furthermore, if the said manager is suffering investor redemptions due to recent returns being poor, then regardless of the underlying managers' views on the long term attractiveness of individual securities, they will be forced to sell. It is therefore not uncommon for those most informed about the opportunities in undervalued securities to be actually selling them rather than buying, in direct contradiction to the EMH.

The market cap of Dogecoin ($31 billion), the sixth most valuable cryptocurrency, is twice the AUM of the GDX ETF. I would much rather own the entire energy production, energy transportation, and mining industries than all cryptocurrencies and the Robinhood 19 stocks (probably about $4 trillion combined!) Let's look at some possible gold miners.

• Kirkland Lake Gold Ltd (KL) - market cap is $10 billion. They have no net debt. In 2020 they made $1 billion net, selling gold at an average price of $1.7k per ounce. They had $1.6 billion of operating cash flow, spent $582 million on capex and $848 million on share repurchases and dividends. They say that $400 million of last year's cap ex is "sustaining", so that would mean FCF of $1.2 billion or a 12% FCF yield. It's a shareholder yield (dividends + repurchases) of 8.5%. 
• Gold Fields Limited (GFI) - $9 billion market cap, plus about a billion of net debt. They made $745 million net in 2020. They generated $1.3 billion from operations, spent $584 million on capex.

We also like the business model of Royal Gold as mentioned in our original value post last fall. I think a basket of these gold miners is cheap and adds diversification to similarly cheap investments like tobacco companies, oil and gas royalties, and pipelines.

Gold Miners and the Net Issuance Anomaly

From Crescat Capital's March 2021 letter:

Gold and silver companies continue to report exceptionally strong fundamentals. Free-cash-flow estimate for miners keeps improving despite the recent correction in precious metals. As we have seen throughout history, stocks tend to follow fundamental growth. We believe there is a major catch up in prices ahead of us. There used to be a time when all gold and silver miners would do was to invest in unproductive assets and dilute their capital structure to pay for it. Those days are over. For the first time in history, aggregate net equity issuance for the top 10 precious metals mining companies is now falling. In other words, these companies are buying back stock like we have never seen before. These are fundamentally cheap stocks that continue to benefit from this macro environment.

I'm a believer in the taking advantage of the net issuance anomaly (i.e. companies retiring debt and repurchasing shares outperform those raising capital).

Where does the anomaly show up today? Industries with companies that are returning capital to investors are banks, tobacco, energy, miners, pipelines. Industries that are raising capital are electric vehicles and many types of growth and tech - especially considering stock based compensation. (Although some tech is negative issuance, e.g. Apple.)

The net issuance anomaly is related to our Sector Rotation Value Strategy. One logical mechanism which would cause the net issuers to under-perform is that they are in the "over-investment" part of their industry cycle. They take the proceeds of their equity and debt issuances, and they expand capacity, driving each other's economic rents down.

Back in May 2014, I did a large cap value screen. It was based on highest trailing 10 year earnings yield and shrinking share count. The top 15 candidates were:

Apollo Education (APOL) - this went private, would have lost money
American Financial Group (AFG) - this has doubled
Coach, Inc (COH) - now TPR, this is flat
ProAssurance Corp (PRA) - got cut in half
The Gap (GPS) - down about 25%
Magellan Health (MGLN) - up 50%
Bed Bath (BBBY) - down 50%
Exxon (XOM) - down about 25%
Intel (INTC) - doubled
Microsoft (MSFT) - up 6x!
Murphy Oil (MUR) - down 2/3rds
Chevron (CVX) - flat
Apple (APPL) - up 7x!
Occidental (OXY) - down 2/3rds
Marathon (MRO) - down 2/rds

If you had owned them equal weight (6.7%), the Microsoft, Apple, and Intel positions would have returned your whole fund. However, the energy stocks killed the overall return. 

Maybe the key here was that the earnings yield didn't account for capital structure the way the "acquirer's multiple" (EV/EBIT or EBITDA) would.

The other thing is that with the acquirer's multiple, you don't just hold for 7 years but rotate every year to whatever is screening cheapest. So you wouldn't have held the oil (and also probably not the tech) this long. Now you would be in tobacco and mining companies!

Berkshire Bought a Tiny Gold Mining Stake - Should We?

In the wake of Berkshire's purchase of Barrick Gold, a friend wrote up some thoughts about gold miners:

Buffett’s purchase of [Barrick] is interesting and suggests this could be the start of a new investment cycle for gold miners. I think there have been two major cycles previously and this one looks like it could be different. For a good part of the last century, until 1975, it was illegal to own gold bullion, so investors who believed there would be inflation and wanted exposure to gold could only get that exposure by owning gold miners, which were trading vehicles that were habitually overvalued. More recently in the 2000s commodity super cycle, gold miners were not good investments. Investors anchored to historical (overvalued) metrics from the days before bullion ETFs as an alternative were proved wrong. More importantly, gold miners were not good absolute or relative return investments because their costs went up in line with gold prices, partially due to falling grades but mostly due to higher input costs - labor, tires, and especially diesel. But this time, it could be different (dangerous words for sure). The price of gold is rising due to inflation expectations, but the cost of labor is falling - especially due to automation - and the price of fuel and other inputs has also fallen. Perhaps gold miners with established operations and falling costs will now benefit operationally and have a “moat” for some time due to a dearth of upstream exploration spending, partially due to cannabis and crypto replacing that sector for Canadian investors. 

This is something to think about. We don't love gold the metal because at $2k per ounce it is trading for about double production cost. You can see that in Barrick's Q2 2020 results presentation:

A million Au ounces per quarter is $2 billion of revenue and $1 billion of profit at their claimed cost of $1k per ounce. Market capitalization of $53 billion does not seem to imply a sustained $4 billion of annual profit.

And their 2020 guidance is actually for 5 million ounces of Au with a cash cost of $650-700 per ounce. (Which further underscores how overpriced gold is and how profitable a major miner is going to be.) Note that they also sell 500 million pounds of copper but they only make about $1 per pound at $3 copper, which makes this business a sideline to gold, at least at this gold price.

More than half their gold is produced in North America, with most of that coming from gold mines in Nevada that are joint ventures with Newmont Corp. Something kind of amazing is that the ore concentration is in the single digit grams per ton. That's on the order of one part per million, an incredibly small concentration. Amazing that they can wring that gold out of that rock for under $1,000 per ounce. An ounce is 28 grams, so to recover an ounce of gold they have to process 28 tons of ore. And for every ton of ore, they seem to have to also move 6 tons of waste. So an incredible amount of digging and moving - and yet, so cheap.

Some recent links regarding gold:

• Central planning requires central money, and gold stands apart by its very decentralized nature. It is indifferent to human conceptions, and can be discovered and summoned from the earth only with tremendous risk and effort. It cannot easily be manipulated or destroyed, and its value cannot be decreed (though they try mightily). It is unchanging, unyielding, and stubbornly at odds with the political visions of Fed bugs. And so they hate it. [Deist]
• Just try to buy a deep freezer or pressure canner these days. They’re all sold out and on back order for months. The price of canning jars and lids has more than doubled since the Big Cooties hit five months ago and they aren’t always available. Emergency preparedness websites were picked clean in the early days of the Covid freak out and are only now partially catching up as supply chains wobble. I cringe as folks rush to buy gold at all time high prices in a panic as if it had talismanic powers. What good will a few Krugerrands do if you have no food in the house and the store shelves are bare? [Granola Shotgun]
• The chart peaked in 2000, which was really the peak in worldwide optimism. Not just tech stocks, but world peace, world trade, and a bunch of everything else. Then the optimism faded for over a decade amid terrorism, war and a financial crisis. The ratio started rising again in late 2011 which is also when the U.S. housing market started to rebound. What's also interesting -- and clear in retrospect -- is that the optimism cycle that started in 2011 didn't just come to a screeching end in early March. The optimism cycle ended in the middle of 2018. This was in the wake of the tax cuts (late 2017) and the early 2018 budget deal, which actually boosted spending substantially. Not only did the stocks/gold ratio peak then, but so did the Russell 2000 small cap index, which never regained its 2018 peak. An overlay of the stocks/gold ratio against small cap stocks is shockingly consistent. [Joe Weisenthal]
• The banks in San Francisco (and even banks "back home" in St. Louis and New York) were getting in constant jams because of fractional reserve banking. One thing I hadn't realized is that San Francisco business conditions were levered to the amount of gold coming in from the mines, and the amount of gold mined was, in the short run, a function of rainfall. (Water being used to separate the gold from dirt.) In the long run, of course, the gold production decayed steadily as the most easily discovered and extracted deposits were mined. The "Hubbert's Peak" for California gold was in 1852, before Sherman's bank was even set up. [CBS]
• American Eagle gold coins are selling for $200/oz over spot! When I last bought kruggerands (almost 20 years ago), they were at a discount to spot. In 2008, I bought tarnished silver eagles for a discount to spot. Now, silver eagles are selling for an $11 premium to spot - that's 70%!  As I put in in 2011, a better inflation bet than gold and silver coins is to hoard nickels, because you have a put option at your cost of five cents.  Silver is down more than 50% nine years later, even at the current exorbitant premium to spot. Gold is down maybe $100/oz or so. But the nickel is still worth a nickel. [CBS]
• Wikipedia says it's either 165,000 or 174,100, PIMCO said 155,000, and the goldbugs think it is less due to exaggeration and double counting of paper gold. Call it 150,000 metric tons. That's 4.8 billion ounces. Only 2/3 of an ounce per person on Earth is the "fair share". So it would be pretty trivial to own a multiple of your fair share of gold. Incredibly little per person! There are about 12 million square miles (8 billion acres) of arable land in the world. That's just over one acre per person. The U.S. has about a million square miles, or 640 million acres, of arable land, which is just over two acres per person. M1 money supply is about $8,000 per person in the U.S. and M2 is $30,000. Try getting $30,000 in cash from a small bank branch someday. If oil reserves are 1.5T barrels (generous) than the amount per person is 250 barrels. You could buy that for the price of a decent car. The deliverable on an oil futures contract is 1,000 barrels and the initial margin for that contract is only $4500! There's only one cow for every three people in the U.S. What I am getting at is: it probably wouldn't be a bad idea to own more than your fair share of all of these resources. [CBS]

Second Piece of the Puzzle - the Texas Bullion Depository

Sec. 2116.002. TEXAS BULLION DEPOSITORY. 
(a) The Texas Bullion Depository is established as an agency of this state in the office of the comptroller.
(b) The depository is established to serve as the custodian, guardian, and administrator of certain bullion and specie that may be transferred to or otherwise acquired by this state or an agency, a political subdivision, or another instrumentality of this state.

Sec. 2116.005.  DEPOSITS AND DEPOSITORY ACCOUNTS; STANDARDS. 
(a) The depository may receive a deposit of bullion or specie from or on behalf of a person acting in the person's own right, as trustee, or in another fiduciary capacity, in accordance with rules adopted by the comptroller as appropriate to:
(1)  ensure compliance with law; and
(2)  protect the interests of:
(A)  the depository;
(B)  depository account holders;
(C)  this state and the agencies, political subdivisions, and instrumentalities of this state; and
(D)  the public at large.

Sec. 2116.015.  DEPOSITORY ACCOUNT AS LEGAL INVESTMENT. 
(a) The following persons may invest the person's money in a depository account by purchasing precious metals and depositing the precious metals with the depository or a depository agent:
(1)  a fiduciary, including an administrator, executor, custodian, guardian, or trustee;
(2)  a political subdivision of this state or an instrumentality of this state;
(3)  a business or nonprofit corporation;
(4)  a charitable or educational corporation or association; or
(5)  a financial institution, including a bank, savings and loan association, or credit union.
(b)  An investment by an insurance company in a depository account is eligible to be applied as a credit against taxes payable under Chapters 221 and 222, Insurance Code, in accordance with rules adopted by the comptroller after consultation with the commissioner of insurance.
(c)  An investment by a school district in a depository account may be made instead of an investment as provided by Section 45.102, Education Code, and the depository may be used by a district instead of a depository bank for the purposes of Subchapter G, Chapter 45, Education Code.

Sec. 2116.022.  CERTAIN ACTIONS PROHIBITED. The depository may not take any of the following actions, and any attempt by the depository to take any of the following actions is void ab initio and of no force or effect:
(1)  entering into a precious metals leasing, sale-leaseback, forward transaction, swap transaction, future transaction, index transaction, or option on or other derivative of any of those, whether in the nature of a cap transaction, floor transaction, collar transaction, repurchase transaction, reverse repurchase transaction, buy-and-sell-back transaction, securities lending transaction, or other financial instrument or interest intended to or having the effect of hedging or leveraging the depository's holdings of precious metals, including any option with respect to any of these transactions, or any combination of these transactions, except that the limitation provided by this
subdivision does not apply to a transaction entered into to limit the depository's exposure to post-signature price risks associated with executory agreements to purchase or sell precious metals in the ordinary course of depository operations and does not apply to policies of insurance purchased to insure against ordinary casualty risks such as theft, damage or destruction, loss during shipment, or similar risks;
(2)  crediting the depository account balances of a depository account holder, or disposing of any precious metals, if to do so would cause the aggregate depository account balances with respect to any precious metal represented by all depository accounts to exceed the aggregate quantities of such precious metal held by or for the benefit of the depository and the depository's depository agents;
(3)  entering into or maintaining a deposit, trust, or similar relationship for the custody of precious metals by a third party outside this state, directly or indirectly, for the account or benefit of the depository if the comptroller by rule establishes that:
(A)  the custody or intermediary arrangements in question do not meet the comptroller's standards of safety, security, and liquidity; or
(B)  except in those cases where such relationship may be incidental to the performance of or preparation for purchase and sale transactions with counterparties located outside of this state, suitable alternate arrangements for physical custody of the precious metals inside this state have been established and are available;
(4)  extending credit to a person, including credit secured by a depository account or other assets, except an extension of credit incidental to the performance of the functions and responsibilities otherwise provided by this chapter; or
(5)  engaging in a business or activity that, if conducted by a private person, would be subject to regulation in this state as a banking or savings and loan function.

Sec. 2116.023.  CONFISCATIONS, REQUISITIONS, SEIZURES, AND OTHER ACTIONS VOID. (a) A purported confiscation, requisition, seizure, or other attempt to control the ownership, disposition, or proceeds of a withdrawal, transfer, liquidation, or settlement of a depository account, including the precious metals represented by the balance of a depository account, if effected by a governmental or quasi-governmental authority other than an authority of this state or by a financial institution or other person acting on behalf of or pursuant to a directive or authorization issued by a governmental or quasi-governmental authority other than an authority of this state, in the course of a generalized declaration of illegality or emergency relating to the ownership, possession, or disposition of one or more precious metals, contracts, or other rights to the precious metals or contracts or derivatives of the ownership, possession, disposition, contracts, or other rights, is void ab initio and of no force or effect.

High Plateau Drifter: "Portrait of a baby boom mania"

Price of an XF 1873 Carson City $5 gold piece in year 1974: $200 (Handbook of United States Coins with Premium List, 1974, R.S. Yeoman)

High Plateau Drifter sale of an XF 1873 Carson City $5 gold piece: $21,000.00 in 2014.

A 105 bagger in 40 years!!

That is 12.3% compound rate of return for 40 years.

Over the same period, the S&P 500 did 11.2% compounded, assuming reinvestment of dividends (which would have actually been taxed). That ends up being a 68 bagger.

However, people are paying 10x the value of the gold content of these coins. It's a bad bet. They would make a great short, because the coins obviously do not generate any income, hence no negative carry.

Baby boomers are hoarders. Their formative experiences must have involved scarcity of material goods, which are now ubiquitous. See Paul Graham's essay on Stuff. Also, rising asset prices have conditioned them to hoard things that they think are investments - houses and cars - but are really consumables.

Review of The Age of Gold: The California Gold Rush and the New American Dream by HW Brands

The Age of Gold: The California Gold Rush and the New American Dream follows our other California gold rush book reviews [1,2,3,4,5,6].

Unlike the other books that followed specific individuals like William T Sherman or the Grosch brothers, this is a more sweeping history of California from James Marshall's discovery of gold at Coloma in 1848 to the connection of the Central Pacific and Union Pacific railroads on May 10, 1869, at Promontory Summit, Utah. Those twenty years in California were probably one of the most interesting two decades one could have lived in history.

Initially about half of the "Argonauts" going to California went by sea and half overland by trail. Most of those going by sea - which was quicker but more costly - lived on or near the East Coast of the United States and were familiar with ships and shipping. Most of those going overland already lived in the midwest or near the Ohio, Mississippi, or Missouri Rivers and had working knowledge of overland trips.

Overland travelers could buy oxen, cows, and sheep, plus dense valuable tools like those of a blacksmith, in the midwest and herd the animals over the trail to sell upon arrival in the west for a significant markup. This profit opportunity required more capital upfront than a sea voyage to California but had a much lower (potentially negative) net cost. The more, the more.

Trading posts along the way were in the business of buying worn down teams at low prices, grazing them, and then reselling them as fresh to subsequent travelers. A group of wagon travelers mentioned in the book complains about prices of goods in St Joseph, Missouri (the "jumping off point to the west") compared to St Louis. It's a distance of 300 miles - maybe it would've been smart to arbitrage this with wagons full of goods, like the opportunities in the Pennsylvania oil boom?

At river crossings, wagon travelers' possessions like food usually had to be removed and carried across on a boat or raft to keep it dry—one of the reasons toll bridges or ferries were popular. Operating a ferry was another good business - $50 to cross the Missouri when bacon cost five cents a pound.

The technical advances in gold mining in California were also interesting, and not something discussed in the other two gold rush books. The amount of gold per ton of ore declined continually throughout the gold rush, meaning that more men and more capital were required for mining as time went on. Pressurized water hoses were used to erode entire hillsides and send the slurry coursing through sluces that would trap the gold.

Clipper ships operated during a brief period in history. Their speed came from being tall, long, and narrow; which meant they could not carry much cargo. They were for transport of dense, valuable things where speed was important (tea from China, opium, spices, people, and mail). They were displaced by the transcontinental railroad and by steam ships, which coincidentally happened at about the same time.

3.5/5

Recent Illusions of Prosperity

• "Gold became too expensive relative to wages. Been there, done that. In hindsight (again), working 90+ hours to buy one ounce of gold seems excessive."
• Private Office Construction Spending: The Pot of Gold!

Amounts of Scarce Resources Per Capita

The total amount of gold ever mined seems to be about 150,000 tons. Wikipedia says it's either 165,000 or 174,100, PIMCO said 155,000, and the goldbugs think it is less due to exaggeration and double counting of paper gold.

Call it 150,000 metric tons. That's 4.8 billion ounces. Only 2/3 of an ounce per person on Earth is the "fair share". So it would be pretty trivial to own a multiple of your fair share of gold. Incredibly little per person!

There are about 12 million square miles (8 billion acres) of arable land in the world. That's just over one acre per person. The U.S. has about a million square miles, or 640 million acres, of arable land, which is just over two acres per person.

M1 money supply is about $8,000 per person in the U.S. and M2 is $30,000. Try getting $30,000 in cash from a small bank branch someday.

If oil reserves are 1.5T barrels (generous) than the amount per person is 250 barrels. You could buy that for the price of a decent car. The deliverable on an oil futures contract is 1,000 barrels and the initial margin for that contract is only $4500!

There's only one cow for every three people in the U.S.

What I am getting at is: it probably wouldn't be a bad idea to own more than your fair share of all of these resources.

Gold to Aluminum Price Ratio

A 747-400 consists of 147,000 pounds (66,150 kg) of high-strength aluminum. Selling just 7.75 pounds of gold will now allow you to buy all the aluminum needed to make a 747-400.