December 3, 2017
December 3, 2017


I’m confused about your Andean statement.
Has something happened that makes you less convinced this a slip through the cracks winner?

This is mining. Something always seems to go wrong and there are quite a few steps until they are making money (or even building a mine). I think the company will navigate those steps, but it’s risky all the same. Just remember, mining isn’t a real business. It’s a hole in the ground that you throw money into….

Nothing has happened to change my conviction on the company. However, this is a speculation and a bet on the asset/management. Not an investment.

There seems to be some differing opinions on ways to calculate return on capital. What formula do you use? Do you exclude cash?

I look at EBIT/Assets. I include cash that the company needs, but if a company obviously has excess cash, I take that out. Think of it like a businessman who would acquire the thing. How much cash do you need to run the business if you have a standard working capital revolver at a bank?

Hi Harris, I really like your NBSK thesis on Mercer International. Just a question on the valuation, in the article you said MERC could have $140MM free cash flow in 2011. I saw that in 2010 3rd quarter MERC has a $30MM FCF, but after deducting interest payment, the FCFE number is lower. Would it be better to use FCFE because of MERC’s big debt load?

There are lots of different ways to value a company. I like FCF because they will be deleveraging and a lot of the debt is higher interest rate paper. This should make it like a public LBO. Don’t confuse Euros with USD where it trades. They report in EUR, so having 30m in FCF (120m in cash flow) is really 160m USD. I wanted to be conservative so reduced it down by 15%. There are a number of catalysts like the Celgar mill’s electricity that should hopefully mean that my estimates are even more conservative. I don’t like to get too tied up in the exact numbers though–there are a whole lot of moving pieces here. I don’t think anyone can realistically calculate future earnings for a company like this with any level of confidence. I just focus on if it’s cheap or not. Unless pulp prices collapse, this is a very cheap company. I’d therefore rather put my energy into figuring out the direction of future pulp prices.

Just wondering your take on royalty companies such as Sandstorm Resources or Altius Minerals ..
Thanks for your time and excellant info site ..

Conceptually, I like the idea of royalty companies. I don’t know the details on either of these two businesses, but the concept is much better than buying miners themselves.

How do you size the three types of positions that you mentioned?

Of course there are exceptions, but investments tend to be bigger than speculations which are bigger than trades. Sizing has to do with how confident I am and how much downside risk I see if wrong.