Wednesday, February 21, 2024

Bought Malaysia Smelting Corporation

Update on this company - it hasn't changed after my initial post more than a year ago.

Start with the tin price - it was stable in 2023: lower than 1H 2022, higher than 2H 2022:

The company has 2 segments, Tin Mining and Tin Smelting:

Smelting profits should be more stable, but were impacted by Covid in 2022 and the closing of an old smelting facility in 2023.  Its hard to tell which of the 4Q23 costs are one-offs or which are normal operating costs (either recurring or randomly occurring ones).  They have moved to a new smelter in P. Indah, which started operating in 2021.  They will start dismantling the old Butterworth smelter in 2024. 

The biggest risk seems to be that smelting profits/losses are inconsistent (especially Q423's loss), and we don't know how long this will continue.

Mining profits tend to follow the tin price, with variable revenue and fixed costs:

Don't overthink it.  Its a company that primarily makes money from Tin Mining - the profits and share price follow the tin price.

The company has adopted a dividend policy paying out at least 30% profits.  The 7 sen dividend is 34% of 2022 profits.  2023 earnings look "normal" - not too peak-ish.  At RM 2.10, it would be trading at 10 times 2023 earnings.


I bought MSC this week on the KLSE, making up 5% of my portfolio.

Saturday, February 17, 2024

Bought Oil, Sold Gold

A few hours after my previous post, Hedgeye's trading signal on oil changed to bullish trend. I've been waiting for months for this, so I bought a whole lot of oil stocks.  From 5% to 15%.  Risky, because its overbought and the signal can always flip back, but now is as good a time as any.

I still think we are in a decade of inflation.  I expect oil to maintain its price for one or two years, then explode in 2025 or 2026.  Like Uranium now.  Meanwhile, I'm paid to wait as oil companies gush cash (at 2023 oil prices) with generous dividends or buybacks.  For context, after peaking in 2022, the oil price hovered between $70-90 last year:

CNQ is a Canadian oil sands producer with long-life reserves, profitable, with generous dividends and share buybacks:

In 1Q24 they target to reduce net debt to 10 billion, after which they'll return 100% of free cashflow to shareholders.  I estimate either doubling dividends, or more than doubling share-buybacks.  Annualising their 9M23 profits, they are trading at a PE of 13.

Acker BP is a Norwegian O&G producer, that is still paying down debt but still also pays dividends:

Its trading at 12X 2023 earnings.

Var Energy is a smaller Norwegian producer, from Modern Investing Substack.  Although they pay dividends, they are a growth story, aiming to increase production by 50% by 2025.  Its trading 8 times 2023 earnings.  This company has more operational risk. 

The risks are politics and ESG.  Norway's district court overturned approval for several oil projects. While Canada will introduce a carbon tax.

Also sold my gold I'm as no longer expecting a recession.  And I need cash to buy stocks.

Wednesday, February 14, 2024

Turning Bullish

I think we are at the start of a new liquidity cycle.  And the US PMI looks like its stopped falling:




I've changed from a bear to a bull: 
  • Used last nights dip to cover all my shorts (at a loss).
  • Bought back 2.5% bitcoin.  I like IBIT and FBTC, the ETFs with the two largest flows.  One holds their coin with coinbase, the other self custodies, giving some risk diversification.
  • Bought another 2.5% of PSE (Philippines Stock Exchange).
I didn't get the recession/correction I hoped for.  Since 2021 we had a series of bubbles deflating (crypto, profitless tech, CRE), but no big market-wide crash (buying opportunity).  Too bad.  Play the market we have, not the market we want.

I want to buy more bitcoin.  Plus oil, coal and tin producers.  And maybe later some gold producers, a local bank and a local semicon company.



Sunday, February 4, 2024

Position update

- Covered half my short France and short Germany positions, realised a loss of about 1% of my portfolio.

- KRE is swan diving, this is not a banking crisis, just banks making losses and cutting dividends.  So no Fed rescue.  Wait for it to fall further before covering.  My short position is still at a loss.  Just remember to sell once everyone is talking about it (regardless of profit or loss).

Current positions:


Nearly 25% cash and gold.  I am growing less sure we get a recession, maybe its limited to certain parts of the economy, or is a series of small "rolling recessions" hitting different parts of the economy at different times (eg: crypto, tech, cars, CRE, small banks, junk bonds), while other parts are supported by government spending.  We could be almost through it.  The Mag7 bubble will pop one day, but its still bubbling now.

Want to cover my shorts slowly.  Want to buy a bit more too.  Oil producers, the Philippines Stock exchange, Glencore (mostly thermal coal) and copper producers look interesting.

Thursday, January 25, 2024

Position update

 Can’t write much now:

  - Shorts have gotten killed in the last 2 month rally, have covered XLRE, XLI, XLE at  loss

  - Sold Bitcoin and Eth a few days ago for a nice profit on Hedgeye’s signals. I have faith in Bitcoin, but not enough to hold a wildly volatile asset which produces no cash flows and can drop 70% peak-to-trough.  There are things I can hold through the cycle, this is not one of them.

  - Uranium doing nicely, keep holding.

Thursday, December 14, 2023

Bought Philippines Stock Exchange

I bought half my position (2.5%) in the Philippines Stock Exchange (PSE).  I love stock exchanges - they are simple, inflation-proof businesses.  Most are expensive, but PSE is reasonably priced: ex-cash PE around 12 with a 5% yield (before 25% witholding tax for Singapore residents).  Its a dirt-poor, growing country and their stock market is cheap and unloved, with some catalysts (paid link).  Long term the key metric to tracks is the number of listed companies.  In the short/medium term, it depends on the cycle.

Why buy now?

  • We are nearer the end of the bear market (started end 2021) than the beginning.
  • Hedgeye's trend signalled the Philippines stock index is in bullish trend.  And the country has expected increasing yoy gdp growth in the next 2 quarters.  This trend might last for months, quarters, or change tomorrow.  But since I was intending to buy a some anyway, buy a little now.
Why buy only half?
  • I'm expecting a US recession and bear market in 1H24, if this happens, other countries' indexes and stocks will probably follow it.  Final leg down.
Long term, the key metric to track is the number of companies listed.  The market will go up and down when it wants, but long term, you need to have companies listed for people to invest/trade.

PSE is a *very* illiquid stock, even buying a few thousands dollars worth can set the price.  Long term holding, not a trade.

Saturday, December 9, 2023

Uranium supply and demand: John Polomny and Justin Huhn

Sprott Uranium Trust is 6% of my holdings.  Uranium has now reached an $80 spot price where it may be profitable to mine it (the incentive price is probably $80-120).  Should I keep holding?

This is the best discussion of uranium I have heard, they give names and numbers, and good insight into Kazatomprom's production process and capex cycle.

TLDR: No meaningful supply coming on for the next 3 years, *might* happen in 5 years.  He thinks Kazatomprom cannot meet their targets and will have to report this around Jan/Feb.  

Points:

  • (1:00) High level view?  30-40m pounds shortfall this year, glut of demand for next 3-5 years which cannot be met by supply. (2:26) Current producers: Cameco, Orano, Kazatomprom, Uranium One, Uzbekistan, Namibia, BHP, thats it.  In future: Paladin (Langer Heinrich starts production next year, full production aimed 2025).  For the next 3 years, all this production capacity is sold out.  Start seeing new production capacity in 2027/28.  (3:33) Reactor (uncovered) demand for existing operations (not talking about new builds or currently under construction) is greater than what is set to be purchased.  Secondary variables considered: producers & financial entities buying, inventory restocking.  Inventories are not at dire levels - they never are - he sees does not see a utilities panic.  Thinks we will have a 'musical chairs' moment after 24 months.  Starting now with a very thin spot market.  Only current relief valve is Kaz, but he thinks they cannot increase production enough to meet their targets.  In the next 5 years, he does not know where U308 price will end up, but far higher than the 'incentive price'.
  • (7:20) John: twitter rumours that utilities put out RFPs for 100/200K pounds of Uranium, no one responds.  Whats happening with term price (instead of spot)?  Justin: (8:00) Term and spot are connected. Term is lower than spot ($66 term vs $82 spot), but you can't arbitrage it.  (9:24) Term contracts have floors (sixties) and ceilings (nineties, maybe 100s).  (10:21) Now have fewer contracts referencing the spot market.  "Everyone knows we are in a bull market".  Floors and ceilings continue to inch up, and are for longer periods.  Enrichment contracts into the 2040s.  Utilities signing contracts delivering 7-10 years out.  (12:09) Spot and term are connected, though spot is more visible.  Spot is so thin we have multiple dollar moves with very few pounds traded ($2 or 3 move on zero pounds traded, when bids come into the market offers get pulled back).

  • John (13:55): Demand: COP28 announcing tripling of nuclear capacity by 2050.  Justin: Sweden, & UK are planning new plants, Poland alone planning 24.  Gives permission to the left to embrace nuclear.  But it's not needed in a 3-5 year timeline: icing on the cake.
  • (21:28) (John) Can Kaz increase production as management says?  (24:05) (Justin) Mining is never on-time and on-budget.  Langer Heinrich's restart capex has gone from 84m (Autumn 2021) to 120m (five months later) simply from inflation.  Shortage of plumbers, electricians and ppl who can drill wells.  (26:06) Even nuclear fuel analysts like UEC and TradeTech are skeptical about supply timeframes, and are telling their customers that we are years away from supply.
  • (26:31) For Kazakistan, sulphuric acid is an issue, they were supposed to produce 23.5 thousand tonnes this year, will miss that by about 1000 tonnes (2.5 to 3m pounds) off their target (on a 100% basis), they're projecting next years' production 10% below their subsoil-use contract (25 to 25.5 thousand tonnes), so trying to produce an additional 8-10m pounds next year.  But from their capex this year, he thinks they cannot even maintain last year's levels.  Speculates is may be because they don't have sulphuric acid.
  • (27:43) Kaz production process and capex cycle.  ISR operation needs to inject the acid into a series of wells to impregnate the ore-body, then it takes time for the ore body to be impregnated.  From drilling the wells to first production is 6-8 months, full production is 12-18 months.  From that peak, it only declines.  So they must constantly drill.  But they don't drill much in Winter (Dec-Feb), so we can see their capex  in Q2 & Q3 of every year, and get an idea of what they produce the following year.  He thinks they will have a hard time even meeting 2023's production (let alone a 10% increase), and they'll have to tell the market this in Jan or early Feb.  
  • (29:14) Kaz production guidance for 2025, they say they want to hit 100% of topsoil-use contract (30.5 to 31.5 thousand tonnes, or 80m pounds, a 33% increase from 2022) - does not see how its physically possible.  Even if they increase production, most of that increase is from new deposits (Budenovskye 6 & 7 is a JV with Russia, and another one which is JV with Orano/France), Russia's share will go to Russia (who are short Uranium).  And more of Kazatomprom's share will go to China. So Kazatomprom's pounds won't be dumped into the spot market.
  • (31:33) Other new large projects in the next 5 years: a) Dasa b) Arrow c) Phoenix d) big Namibia mines (final investment decisions in 2024, first production 2027/28) e) Kazakistan increasing f) Uzbeks increasing g) small stuff in US/Oz.  Thats all we have.
  • (32:18) (John) Why cant Kaz increase production? (Justin) In my personal opinion, not enough workforce and sulphuric acid, running up against limits of physical reality.  They signed a lot of production contracts at lower prices.  Their current production is already 55-65m pounds, to expand that by 30% is a a big undertaking.  High grading and resource depletion: new projects not as good.  Building sulphuric acid plant, comes online 2026, that should help increase production.  More commercial incentives: instead of jist flooding the market.  Their max production level was back in 2016.
  • (37:15) John talks about the US.  Only produces 40K pounds.  What price is needed for US production to be sustainable?  (Justin) Old mines from the 70s/80s are from New Mexico with a bad legacy.  So looking at Texas, Wyoming, possible Nebraska, maybe South Dakota and Utah.  Lots of companies are moving towards production.  We are at the incentive price.  Still capital and labour constrained.  (42:00) Justin talks about Section 232, Trump's Nuclear fuels working group, IRA, restart Palisades and building SMRs
  • (49:12) Investment implications.  Currently 130-140 uranium companies.  3/4s of them have have no intention of producing.  Same for any mining industry (eg: gold juniors).  Have't seen animal spirits in market yet (M&A pickup), usually happens last 1/3rd a bull market.  Could be years away.  Best companies have 'X-factor': what will they potentially do that they are not thinking about now?  Management's ability to create value in a bull market.  
  • (1:01:40) (John) Where are we at in the bull market?Thinks this bull market will be longer and more drawn out than previous one.  "Stair stepping its way up".  There will be downturns/consolidations.  (Justin) Uranium can spike without conversion and enrichment doing so.  Buyers are price insensitive.  (1:08:00) China is the only one with inventory, they may sell it, but unlikely.  (1:0:47) Where are we in the cycle?  Clearly not at first inning, he doesn't know where we are.  KISS, we are in a multi-year U bull market.  U stocks still sensetive to general stock market decline.
  • (1:12:30) Whats the bear arguments?  Apart from another Fukushima.  A large holder of inventory selling into the market.  Only one is China.  They had 5 construction starts this year, they need 8 per year to hit their targets.  They have 26 under construction.   They do not have a lot of domestic Uranium in the ground.  Their goal is to produce 1/3rd, contact /3rd, and overseas acquisitions for the last 1/3rd.  They cannot produce the first 1/3rd and are relying on Kazatomprom instead, singing contracts so large they were more than Kaz's book value. They may be sitting on 6 years of inventory, not enough for them.  He does not think China will sell, as they think of energy security/stability, not profiting from Uranium.  Unless they can replace what they sell.
  • (1:18:30) At some time the price will be high enough for new U to find its way into the market (eg: if it stays at $200 per pound for 5 years we will get U from phosphates and seawater).  But there's nothing in the next 3 years.

Update Jan 2024: On 12th Jan, Kaz warned it can't meet 2024 production targets.  And Uranium is finally starting to make it into the mainstream (financial) media.