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, 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.

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.

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).

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.