Added to My Shorts

Added a little to my shorts in the past 2 weeks:

My short position has also increased due to the bear market rally.  Will add a little more if it continues.  SPY is up 11% now, a 20% rally would be normal.  Wild swings in the market and the value of my short positions:

Still holding them.  At least till December.

Fundamentally, I'm not seeing anything to buy yet, except energy.  China/HK is out due to political risk.  Rising rates, a recession and an energy crisis fuck up lots of things.  Good quality companies are not yet cheap enough that I'd stick my hand out and catch a falling knife.

MetalsX (ASX)

My last piece on Tin.  There's 3 listed tin producers.  The third one produces in the DRC which is un-investible.  This one is in Australia, which is safer.

Business

A 50% JV in the Renison Tin mine, a hundred year old mine in Tasmania which is still producing.  Mine life is projected until 2030, with scope for further extension.

They also own 50% of Rentails: tailings dams from historical mining operations containing around 100,000 tonnes of tin.  Significant capex is required to bring this into production.  A new DFS should be completed this year to make a decision in 2023.

They used to own copper and nickel interests but these lost lots of money.  They sold them off and are now purely focused on tin.

Balance Sheet

All numbers are from their June 2022 Annual Report.

They has a windfall from FY2022's high tin prices.  They used it to pay down their debt, and now have 110m in net cash.   Held  as AUD.

Quick side note: They have 28m of convertible notes receivables.  After selling their Copper/Nickel operations, they lent money to develop them, and should be paid back in (MetalX's choice of) cash or shares in March 2025.  New mining operations are dodgy, especially in a recession, so let's wait to see if they get paid back.

Despite the 2022 windfall, they have not paid dividends.  I think they need the money for capex.

Capex

Sustaining capex is 8-10m per year (p10).

In addition, to continue production at Renison until 2030 (Area 5), they need 50-55m capex (p5).

Both the above can be covered by their 2022 windfall.

In 2023 they should make a decision on rentails.  An old 2017 estimate is 205m (or around half of this for MLX's share - p14).  Lets say 100m in 2017 dollars, which might be 150-200m today.  Can be funded from their cashflows if we get another tin spike in the coming years, but don't expect MetalsX to pay dividends anytime soon.

Earning, Cashflows and Breakeven

Our starting point is always the tin price:

Its hard to look at their long term profitability because past tin results are overshadowed by their money losing copper/nickel operations.  Their 2021 AR was the first time they stripped these out. My breakdown of their profits from 2020 onwards, important lines in blue:

As expected, the biggest factor affecting profits is revenue (ASP).  This company is highly cyclical.

I estimate their cash breakeven tin price at around AUD 17-22k/ton.  At that price their Cashflows from Ops would be zero.  If we also cover sustaining capex of 10m per year, we get a required tin price of AUD 19-25K (or 11.8 to 15.5K USD today).   The company estimated their AISC at AUD 17K/ton (p3), which I guess is too low.  Estimates in AUD are tricky because the AUD is so volatile.

Don't think they've been hedging the tin price, there was no mention of commodities derivatives.

Reserves

Excluding Rentails:

Misc

Information is quite skimpy.  I could not find any quarterly results on their website or ASX.  Nor any transcripts of shareholder meetings.

Yunnan Tin is the logical acquirer of this company (their 50% partner in the JV).  Unlikely to happen now since everyone hates the CCP.

Don't buy right now:

Covered copper short

Covered my COPX 4% short position on Friday.  Now around 38% short.  Specifically to do with copper, not the market.  I am following Hedgeye for my shorts.

Want to put some more shorts on to replace it, but its hard.  No one knows when a 20% bear market rally will appear.  Or if the market keeps going straight down.  If I don't make trade short term trades, I have 2 choices:

• wait for a bear market rally (which may not appear), and scale into it, or 
• just close you eves and stab, hoping you hit something.

Also added 1% more uranium (SPUT) last week.

Sold most REITS

Sold most of my remaining REITS.  Now just holding a little Frasers Centerpoint Trust.

Uncomfortable with these REITS due to their exposure to higher interest rates and inability to hedge long term.  I'll find something else to buy later.  We are still in a bear market, heading into a recession.

Malaysian Smelting Corporation (KLSE)

MSC is a Malaysian tin miner and smelter.  Most profits are from mining and are highly cyclical.  It will benefit from any future tin bubble

Its listed on the KLSE (not accessible from Interactive Brokers).  Illiquid enough that only retail players can buy it.  A secondary listing on SGX (accessible from IB) is too illiquid even for retail - some days only a few thousand shares trade.

Business

Most of their mining is from their RHT mine in Perak, the largest hard-rock open-pit tin mine in the country, operating for over 100 years.  Their lease expires in 2034.  They also have some mining at their 80%-owned subsidiary SL Tin in Pahang (Sungei Lembing), currently producing ~1% of their production, it may ramp up to 40+% in the next few years.

For smelting, they are the world's third largest refined tin producer.  "Over 10% of MSC’s smelting input is supplied by RHT, while the remaining intake comes from local artisanal tin miners and third-party tin mines outside of Malaysia, such as Australia and Africa."

I'm concentrating on mining, as its the most profitable segment and where I expect the next bubble.  Tin smelting is easy - its been done for thousands of years and you can do it in your back yard.

Resources

MSC gives "Resources", not "Reserves".  Resources infer how much of the resource exists in the ground, while "Reserves" are those "Resources" that can be economically extracted.  This is the first commodity company I came across that does not give "Reserves".   I've heard that for tin, the volume and grade of ore inside the ground is unimportant, what matters is the ore type and grain size (paid link).

Most of their exploration is around their existing mine, which is the best place to look for new tin.  It still took years of drilling and false starts to find a new ore body:

2021 tin production was 2408 tonnes, so they have 10 years of extraction remaining (assuming half of the resources can be economically extracted).

Balance Sheet

Quite clean.  As of June 22, borrowings and lease liabilities were under RM 500m, cash was RM 185m, while 6 month profit-before-tax was ~ RM100m (albeit in a boom period).  So they could pay off their debt in a couple of years in a boom.

No new shares have been issued since at least 2012.  A stock-split and bonus issue quadrupled the number of shares in 2018 (without issuing new equity).

Profitability

Profitability follows the tin price:

And the stock price has also followed the tin price:

Since 2021 was an outstanding year, they paid out 25% of 2021's net profit.  I found no dividend policy.  The shares are too illiquid for buybacks.  I like that they paid some profit as dividends to reward shareholders - too many tightly controlled Asian companies become value traps.

MSC is 52% Owned by Singapore company Straits Trading.  Might be good, as it prevents any hostile takeover (....except by Straits Trading).  I want the shares to stay listed to participate in the bubble.

Conclusion

Safe business, with highly cyclical profits, operationally levered to tin prices.  Could be a great tin play in the next bull market.  As a micro cap, it may not move till late in the cycle.

Don't buy now as we're still in a bear market heading into a recession.

Sold half my REITS

Sold half my positions Frasers Centerpoint Trust, Frasers Logistics and Commercial Trust, Ascendas India Trust, Leandlease REIT and Fibra Macquarie.

Rising rates make it too risky to hold 30% of my portfolio in REITS, and these had all their fixed-rates expiring in the next 5 years.

Sold now because I think October is either gonna be a bear market rally or a crash.  Leaning towards the latter.

Need to relook at my plan to get a modest income from dividends.  Probably buy banks in the upcoming recession.

Current holdings:

Effects of Rising Rates on My Portfolio

Half my portfolio are companies that rely heavily on debt.  REITs or infrastructure.  Need to quantify how much rising rates could affect them.

Powell has said he will raise rates as high as necessary to curb inflation.   I''ll assume he gets to 5% in 2023, same as in 2006:

Source: https://www.mortgagewise.sg/interest-rate-cycle/

I expect a fed funds rate of 5% in 2023 to cause a recession.  Then lower rates in 2024/2025, maybe 2-4%, which cause inflation.  Then higher rates of 5-6% after that.  Don't think we'll get back to zero.

I'm testing 2 scenarios:

• Scenario 1: By end 2023, we get a Fed Funds rate at 5% and SOR at 3.5%.  BBB rated companies pay 7.5% for USD debt, and 5% for SGD debt.
• Scenario 2: Extend the same rates to the end of 2027.

Williams Companies

14% of my portfolio.  Their debt is all fixed rate and widely spread out till 2051:

Source: WMB 2021 AR (p110).

I assume refinancing at 7.5% for notes and 9% for debentures:

• For scenario 1: 2021 CFO would have dropped by 3.3%.
• For scenario 2: 2021 CFO would have dropped by 10%

Frasers Centerpoint Trust

11% of my portfolio.  Most of their borrowings are from bank loans, with a small amount from MTNs:

Source: FCT August 2022 Investor Presentation

I could not find whether these bank loans were fixed or variable, or their interest rates.  Despite scrolling through years of SGX filings.  Note 16 in their Annual Report has 3 pages of numbers, but I could not find the tenor or terms of the majority of their borrowings.

Note 14 says that 430m of their debt was hedged using swaps.   I could not see when the swaps expire.  A Phillips Securities report suggests "the tenor of the hedge is usually matched with the debt maturity profile."

So this business that is based on debt is vague about the details of its debt.  There is a reason why US stocks trade at a premium.

Effects of rising rates?

• Scenario 1: Interest payments increase by 5.5m to 9m.  2021 Distributable income would have fallen by between 2.1% to 3.7%.
• Scenario 2: 2021's Distributable income would have fallen by 20%.

Kinder Morgan

10% of my portfolio.  Like Williams Companies, KMI's debt is almost all fixed (pp99-100).  And its also rated Baa2 (equivalent to BBB).

I assume refinancing at 7.5% for notes:

• For scenario 1: 2021 CFO would have dropped by 3.5%.
• For scenario 2: 2021 CFO would have dropped by 6.7%

Frasers Logistics and Commercial Trust

10% of my portfolio.  Rated BBB+.

March 2022's debt is SGD 2.8b.  Only 170m is due in 2023:

Source: 1HFY22 Results Presentation

I do not know the interest payment on that 170m, or if it is fixed or floating:

Source: Note 18 2021 AR

The percentages of loans in different currencies are:

They also use interest rate swaps (Note 14A 2021 AR).  We don't know how much the debt the swaps cover, because they give nominal amount (value on balance sheet) instead of notional amount (the debt covered).  The only useful information is that the majority of these swaps expire in 2-5 years (Sept 2023 to Sept 2026), and none extend beyond that.

Not much to go on.  Best guesses:

• Scenario 1: Increased interest payments on the 170m for debt-due-2023.   By around  4-8m.  2021's Distributable Income (p200) would have dropped by 1.5 to 2.9%.
• Scenario 2: All of their interest rate swaps have expired.  Only 8% of the debt extends after 2026, but since I don't know how much, I'll just assume its all refinanced.  Assume similar currency breakdown but remove the small currencies: 46% debt in SGD (at 5% interest), 18% AUD (at 5% interest) and 36% Euro (at 4% interest).  Interest payments increase by SGD 87m.  2021's Distributable Income would have dropped by 32%.

Lend Lease Commercial Trust

7% of my Portfolio.  

They provided good info in their previous AR, but debt has since doubled with the Jem acquisition.  Wait for the next AR, probably October.

Fibra Macquarie

5% of my Portfolio.  All borrowings are in USD (along with most of their revenue):

Source: Note 11: 2021 Results

Increasing rates lead to:

• Scenario 1:  CFO drops 5.5%, AFFO drops 6%
• Scenario 2:  CFO drops 19.5%, AFFO drops 19%

For this company, I would be concerned with the MXN/USD exchange rate.  Even though their revenue and debts are in USD, it may be a strain for their customers to pay if USD shoots up too much against MXN.  But the chart looks OK: peak to trough over the past year its only has a 9% drop, overall it looks flattish:

Ascendas India Trust

3.5% of my Portfolio.

As of June 2022 (p20):

• 62% of their debt is in INR, 38% in SGD.
• 79% of their debt is hedged (slide 13).  Most of it is hedged by swaps.  I could not see when the swaps expire (p196)
• 17% of their debt is due in 2023 (slide 13).  Most of it INR.

I don't know anything about Indian interest rates, except that their central bank hiked to 5.9% yesterday.  Assume they reach 6.5% next year, and the swaps for 2023's debt expire with it. Assume AIT's INR new borrowing costs are 8.5%.  Assume all swaps expire by 2027.

We get:

• Scenario 1: 1H2022 Income available for distribution drops 3.7%.
• Scenario 2: 1H2022 Income available for distribution drops 17%.

Conclusion

My SGX REITs:

• show a 17 to 32% define in distributions of the Fed Funds rate gets to 5% for 5 years. 
• while I can't calculate the effects of rising rates for 1 year as I do not know details of their loans and hedging.
• and (except for Ascendas India Trust) they also pay out 100% of their distributable income, meaning they can only reduce their debt by issuing shares.

Fibra Macquarie will also suffer if rates rise long term, as most of its debt is due in 5 years.

WMB and KMI are less affected due to their decades-long-term fixed-rate debt.