Value Hive Podcast
Thomas Bachrach: Natural Resource Partners (NRP), Coal Stocks, & LatAm Ideas
Fri Jun 09 2023
Teagas and MIT Investment Management Company (Matico)
- Teagas offers expert interviews on public and private companies for faster research.
- MIT Investment Management Company (Matico) invests in emerging managers and created emergingmanagers.org for stock pickers.
Metemco and Thomas
- Metemco, the investment office of MIT, occasionally hires new members for their investment team.
- Thomas has been a guest on the podcast three times, with increasing downloads each time.
Changing Investment Regime
- The past couple of years have been wild and interesting with rapid changes in the world.
- The regime has changed, requiring a different approach to decision-making.
- The investment regime has changed in recent years, requiring different tools and skill sets.
- People need to reassess their approach to investing as what worked in the past may not work now.
- Inflation is the biggest concern for investors, making analysis difficult.
- Inflation is a serious long-term risk, not just a short-term issue.
- Inflation is the value of currency going down relative to real tangible things, which don't change much in value.
- The value of dollars went down about 90% in medium priced home terms due to an increase in money supply that exceeded genuine demand for greater money supply from real economic growth.
US Government Debt and Interest Rates
- The speaker believes that the US government's debt to GDP and ongoing deficits will force the treasury to issue more debt.
- Third parties are willing to absorb this debt at rates affordable to the US government, but these rates may not be sustainable in the long term.
- The Fed may periodically step in to buy debt and put a cap on interest rates that the US government can afford, which could lead to literal quantitative easing (QE).
Impact of Inflation on Corporate Profit Margins
- Inflationary drivers will affect corporate profit margins for companies that investors invest in, so it's important to consider macro views when making investment decisions.
Investing in Commodities
- Commodity investments tend to perform well in inflationary regimes, particularly energy commodities.
- Top-down analysis is necessary when investing in commodities, focusing on supply risks and future demand estimates.
- Coal and oil have been disrespected despite being the two biggest drivers of human prosperity since farming began 12,000 years ago.
- Coal and oil are interesting investment options due to their potential performance in an inflationary environment.
Natural Resource Partnership (NRP)
- NRP is a natural resource partnership that offers an ultra high-yield bond with built-in inflation protection.
- The business consists of a royalty business and coal reserves.
- NRP's coal reserves have good quality characteristics for steel making.
- NRP also has a 49% interest in a soda ash operation called SW.
Valuation and Analysis of NRP
- The stub value analysis is not reliable for the business as a whole.
- The enterprise value of the business is around three times its income.
- The market cap of the business is around 600 million and it trades relatively liquid.
- The business had missteps in the mid 2010s but has since refocused on coal and reduced its debt significantly.
Risks and Potential Returns of NRP
- The true hefty dividend from NRP will come in two years when they are done delivering.
- There are concerns about what would happen if coal prices were to fall by 25-30% for a couple of years.
- Preferreds are well under 200 million and essentially done, even if coal prices crash from here.
- The beauty of the royalty business is that you lose some of the upside on coal prices going up but gain when they go down.
Lessons Learned from Allegiance Investment
- The speaker lost 80% of their investment in Allegiance, a coal company.
- One lesson learned was to be cautious about pre-revenue development assets in the commodity space.
- Margin of safety is crucial when investing in such assets.
Importance of Local Labor in Coal Mining
- Lack of local labor and COVID contributed to the failure of a coal mine.
- Restarting a mine requires local labor, which was not available in this case.
- The speaker emphasizes the importance of keeping positions small in pre-development investments because the downside is zero.
Position Sizing and Analysis of Mining Companies
- The speaker discusses position sizing and having better limits now.
- They are knowledgeable about applying value investing principles to mining companies.
- Fundamental analysis of mining businesses involves focusing on good management, healthy balance sheets, specific assets, reserves/resources, and capital allocation.
Investing in Commodities and Capital Cycle
- Value investors should focus on long-term capital allocation and take advantage of inefficiencies in the capital cycle.
- Energy names are currently generating 10% of indexes profit but only make up 5% of market cap, indicating potential for growth at the cycle top.
- Commodities have historically never been undervalued relative to the Dow Jones, with comparable periods being late 1920s, late 1960s, and late 1990s - all periods where it was beneficial to be long commodities in the following decade.
Investing in Petro-Tow (PTAL)
- The speaker suggests that value investors may want to consider commodities, but warns that it is not without risk.
- Petro-Tow (PTAL) is mentioned as a potential investment opportunity.
- The company operates in Peru, which some may view as a risky jurisdiction, but the speaker argues that all jurisdictions are becoming tougher for oil companies.
Investing in Polymetal
- Polymetal is an interesting gold producer with a well-managed business and an aligned CEO.
- The speaker bought shares of Polymetal at a low price due to their well-run gold mining operations and decades of reserves.
- The management team is moving the company to Kazakhstan, which the speaker believes will re-rate the stock significantly higher.
Importance of Underwriting and Margin of Safety
- Underwriting is important when investing and buying at a sufficient margin of safety is crucial.
- Safety margins are fundamental and critical in today's crazy era.
- Predicting the future is difficult, so it's important to structure investments in a way that minimizes risk.
- The guest can be found on the PfH Capital website or on Twitter as @pfhcapital.