December 3, 2017
December 3, 2017


Hi Harris, With everything that is going on any comments on:

Andean American, Impact Silver, Energold, Fibrek

Nothing has changed that I know of with those companies. For the most part, I buy good businesses and ignore the news fluctuations unless they significantly impact the companies in question or the companies put out some news that is material. In summary, I haven’t seen anything of interest to report thus far.

You mentioned in passing that you looked at a precision agriculture company when trying to find an agriculture play. I am guessing it was Hemisphere SPS. Assuming I am right, would you mind discussing what research you did and why you ultimately passed. While it is helpful to learn about what you see in companies that you invest in, I am hoping to also learn from examples of companies you passed on as well. If I am wrong about Hemispere, please ignore this question. Thanks.

I did indeed look at Hemisphere and even owned some at one point. My concern was that the company wasn’t dominant in OEM systems installed in new farm equipment. Therefore, the key market was older equipment. However, most farmers seem to prefer to buy new toys when they have a good year–not retrofit older equipment. I was also concerned that as cell phone GPS systems got more reliable, people would just use their phone as opposed to a fancy system for applications. Basically, Hemisphere has the same risk as Garmin. I’m not a technology guy, so as soon as I get worried that I don’t understand where things will be in a year or two, I just get out. I just could never really get comfortable with the idea, even after some of my analysts visited the company’s HQ. We sold for a 50% gain or something, (fortunately) right before it went into a tailspin. I don’t know the details in the past few years, for all I know, it could be a very attractive play now. I just know that I will never be able to get my head around the technology and I know that there are new competitors entering the market as well. Hope that helps you.

Dear Kuppy. Kyle Bass’s latest investment letter (Feb 2011) is brilliant. Here it is for your benefit, enjoy: http://www.ignorethemarket.com/blog/2011/02/kyle-bass-hayman-advisors-february-2011-investor-letter/

This is worth a read for readers who have not seen it yet.


Do you have any thoughts on Andean’s drop today? I’m not seeing any news released from the Company. Thanks

More sellers than buyers….  I don’t know of any reason for the drop. These things are illiquid and volatile. Unfortunately, in jr mining, these drops happens frequently.

How do you think the Japan disaster will effect PM’s short term and longer term?

I have no idea what happens short term. Gold is trading in $50 ranges on a weekly basis now. Just about anything is possible…

Longer term, the Japanese will have to print more money (sooner) than they had planned to. Should be bullish for PMs and most other commodities as Japan goes to rebuild.

In general I am bullish on the mining services sector (Energold, Aeroquest, etc.). My question is in regard to valuation of companies in this sector. Do you have any particular metrics that you use to determine what a reasonable future value is for these firms? Do you factor in the cyclical nature of the industry?
I enjoy your column, thank you for your insightful comments.

I am on the Board of Directors of Aeroquest, so this reply is only in regard to Energold and other companies in the sector!

I don’t have a particular metric for valuation. The issue is that a growing company like Energold will report lower than run-rate earnings as it mobilizes rigs into the field. That’s why many people look at drillers in terms of value per rig. I don’t think that $2m a rig for valuation is crazy or anything. I mean, at the peak in 2008, companies were making acquisitions valued at $3m or more.

These are cyclical businesses so you need to account for that. The real question to ask yourself is: where in the cycle do you think we are? Excluding the hiccup in 2009/2010, drilling demand has grown at crazy rates. That should translate into growth multiples. I am awful at saying what the right multiple is, but I sort of think the multiples on these companies are too low currently. That goes for EGD or Major Drilling or a few of the others. These companies are just way too cheap. Why can’t a company like Energold trade at 20x run rate earnings before growth spending? That would sound like a pretty fair number to me. Right now it trades for a mid single digit number.

Warren Buffet’s annual letter had a variation on your post, “You Can’t Argue With Stupid.”

This “what-will-they-do-with-the-money” factor must always be evaluated along with the “what-do-we-have-now” calculation in order for us, or anybody, to arrive at a sensible estimate of a company’s intrinsic value. That’s because an outside investor stands by helplessly as management reinvests his share of the company’s earnings. If a CEO can be expected to do this job well, the reinvestment prospects add to the company’s current value; if the CEO’s talents or motives are suspect, today’s value must be discounted. The difference in outcome can be huge. A dollar of then-value in the hands of Sears Roebuck’s or Montgomery Ward’s CEOs in the late 1960s had a far different destiny than did a dollar entrusted to Sam Walton.

You can’t argue with stupid. Write it on a post-it and put it on your computer monitor. It all comes down to management.

is this the gamechanger it might appear to be – or 24 months from now have we forgotten it? The industry claims its newer uranium power plants do not have the same vulnerabilities. Will it even matter with NIMBY? As much as I view Chinese companies’ financials with a kilogram of skepticism, should we be buying the Jinko Solars of the world or does this end up being a buying opportunity for uranium stocks 24 months from now?

I wouldn’t go out and buy anything solar just because of the possible melt-down of a nuclear plant in Japan. Will this change the rate of growth in nuclear power? Of course it will. I don’t think people will forget about this any time soon. I have ignored uranium for years now. I intend to continue ignoring it.

dear sir; with today’s pullback in MERC would you consider adding to your position?

I already have enough from around 8. It would take more of a pullback for me to become interested. I don’t like to pay more for something unless the story changes materially for the better. Recent earnings were good, but not good enough for me to add at a 50% premium to where I bought my first batch.

I know you have made comments before about the importance of factoring in carrying costs (contango) when investing in raw commodities.  This is obviously a very important factor, and one that is not brought up at all by the likes of Jim Rogers (whose advice I respect a great deal) in his interviews or his books on the subject.

Do you think Rogers or other institutions are using special instruments to play some of these commodity calls?  As an example I’m sure you are aware Julian Robertson is playing some special long term puts that he calls ‘curve caps’ on his long T-bill short.  I assume the 3rd party offering these has hedged the trade factoring in carrying costs, risk, etc.

I’m not really an expert in this area, although my understanding is that sometimes near term futures contracts are rolled-forward continually. Why do you think this aspect is not brought up by Rogers, does he consider it an insignificant cost of the trade, or is he able to use instruments only available to institutions?

Are you aware of any resource material that would useful in explaining this?

Some larger players are using physicals instead of futures. This can lower your carrying cost but it really depends on the product in question. If you look at the term structure, the contango is normally steepest in the first few months while the deferred months are often flatter. I know a lot of fundamental firms like to hang out in the deferred months and leave the daytraders to the front months where the liquidity is. Remember that sometimes you get lucky and pick up postitive carry on backwardation.

I do not know what structure Jim Rogers is using. Rolling the front month over and over will eat up your returns over time if you are a perpetual long in various products–especially ones with steep curves.

I have read one rational article on the Japanese nuclear power plants: http://online.wsj.com/article/SB10001424052748704893604576198421680697248.html?KEYWORDS=william+tucker

The media have been hysterical about the possibilities and the dangers. The systems are being stress tested in ways no one ever hoped to see, but these plants are being risk managed in a rational way.

That is very sober reading. Thanks for sending it. Just remember that as of yet, no one is completely sure what has happened.

read your Coup d’Etat comments with interest. it occurs to me that a govt used to be able to control intl media coverge by banning press and photographers, now anyone with a cellphone can put the video out to milions of people in about 30 seconds. kind of limits ones options for squelching opposition. so i imagine priority number one would be to hire internet and cellpone experts who can disable or jam the airwaves and lines as appropriate.

the media coverage of egypt and lack of support from the us govt astonished me. my guess is that us foreign relations has suffered irreparable damage. going forward no despot will want to be entirely reliant on the usa instead he will probably forever play u.s. russian and chinese interests one against the other. its what i would do anyway.

keep up the interesting postings and good investing!

Thanks for your comments. Yes, the rules have changed forever in terms of keeping the opposition quiet. I’m pretty stunned that we let our cronies in Egypt just collapse. It will go back to the old days when dictators played us off the Soviets (and now Chinese). Now, no one can afford to lean too far in any direction. Our days of completely dominating a country’s leadership have ended forever.