December 3, 2017
December 3, 2017


I’m currently in Almaty, Kazakhstan. If you’re expecting to find Borat here, you’ll be very disappointed. It is an amazingly enjoyable and cosmopolitan place (think NYC but with Soviet architecture). I will write more about Kazakhstan in the next few weeks.

How does one ascertain replacement value of Mercer International?
If 4 byn Chinese need toilet paper why then don’t they just buy MERC ?

The easiest way to look at replacement value is to see what the 3 mills cost to build over a decade ago when they were built (hint–it’s a lot more than today’s EV). But the real cost is even higher because you have to factor in inflation and the substantially higher permitting and environmental costs that you would have today to build a similar asset. If you look at the cost of the new Russian NBSK mill on a per ton basis, that should be a very good starting point as it’s the only new mill to be built in ages and they’re almost complete with it.

I think you’re about 2.5 billion off on your Chinese number. Will they buy it? I don’t know. However, the Chinese have taken a very sizable interest in the pulp market lately and have identified it as an area where the government is concerned that the Chinese do not have adequate supply.

Hi Kuppy,

Wondering if you saw this and what your interpretation is:

Cheers, and thanks for all you do!

Demand fluctuates all the time. I don’t think that one quarter is very telling, especially as the Indians were boycotting gold for most of the quarter. What the story doesn’t say is that in dollar terms, gold demand was up substantially. It’s just that it takes a whole lot more dollars to buy the same amount of gold, so we saw a dip in tonnes. I don’t think it’s very meaningful.

have been looking at inflation (which isn’t good thing to do), but now I wonder if you can’t say that most of the returns of PE funds from 1980 to 2007 was just inflation plus leverage. Indeed there was so much inflation it is hard to say what businesses have been any good. Which makes me think without inflation equity multiples would come in enormously, High Yield will get smoked, making all the Public PE (they are also asset managers) Cos good short ideas even today. What say you, my friend?

When you have long term financing on an asset, inflation is your friend. Inflation has likely been a huge factor in the returns of most PE firms.

Hi Kuppy,
It is my understanding that the market for base metals is much larger than the market for precious metals (though I don’t have exact numbers – if you know where to look for those, I’d love a pointer).
Yet I was reading in Energold’s 2011 AR that last year, out of the global exploration budget of 16.3B, gold represented 50.6% of the total (with copper coming second at 22.4%).
I’m wondering why base metals represent such a small fraction of the total if they are such a big market, and why is gold being explored so much for if it’s comparatively small. Are those number a recent anomaly, or are the ratios always like that?
I’m guessing that either gold finds are much more profitable than base metal finds (except copper, apparently), or that the gold miners have depleted their resources a lot more than base metals miners (maybe they’re not exploring much because they already know where their next mines will be — their challenge is to build them, not find them)..?

Thank you for all your insights.

There are lots of factors that go into gold being such a high % of total exploration spend. It starts with the fact that most junior miners are just stock promotion toys for the Vancouver boys to fleece investors with. Looking for gold sells shares better than looking for zinc…. The game is to sell shares, but the Canadian regulators now want you to at least pretend you’re going to build a mine, and that means doing some drilling.

From there, it has to do a lot with geology. Many gold assets are non-uniform and composed of veins. Therefore, you need much more drilling and tighter spacing on that drilling in order to identify the veins and do your block models, compared to a giant porphyry that is pretty much uniform for hundreds of meters. Finally, there has been massive depletion at gold mines which tend to have shorter life spans than with other commodity types.

I’m sure that I’m missing a few other reasons, but this is my basic understanding as I’ve tried to think about this quite a bit as well.

Hi Kuppy,
I was curious if you know why so many miners are in Vancouver? Is there some tax benefit? Or, are regulations looser? There must be an explanation.

Why are all the I-banks in NYC? Industries tend to cluster together as it takes a lot of individuals to build and finance a mine. Historically, these mines were listed on the Vancouver stock exchange, but now I think it’s just force of habit. Besides, Vancouver is a great city to live in–I don’t blame these guys at all.

Kuppy–Know you don’t trust China stocks (w/ good reason) but KGJI is the best way to play the average Chinese citizen buying gold, and the market is beginning to recognize it.  Not saying it’s an honest co. but it could be a great trade. Don’t really care about KGJI but still wish you would look at SIAF, which IS an honest co.  Pays a cash dividend, has met the OTC requirements of Form 10, is 35% owned by the Jordan Fund of Sweden who has visited their operations twice.  They are planning to move to Nasdaq or Amex and list on the Stockholm Exchange within the year.  This could be the stock of your lifetime, never to be repeated.  Should make better than .68 this year, perhaps $2.00 the next, and maybe $4.00 the following.  Brilliant business plan by a CEO who is ethnically Malaysian rather than Chinese and an Australian citizen.  Subsidiaries to be spun off on Hong Kong Exchange beginning in 2014 with half of cash proceeds to be returned to shareholders.  Almost dare not say how much will be returned when the fish subsidiary is spun off in 2014 if it is half of earnings and is spun off at 8-10x.  Take a look.  YouTube has recordings of CEO speaking to Swedish audiences at meetings a couple of weeks ago.  I have owned this a couple of years and have checked it every which way.  There are some gems in the Chinese wreckage but no others like this.

I hope it works for you. I have posted this for readers as it sounds compelling, but I have no interest in owning anything Chinese. I remain convinced that you can learn more about the average Chinese company by reading a fortune cookie, and that logic has saved me a lot of headaches over the last few years–I’m in no hurry to change my mind (yet).

Re: your recent post on gold, how concerned are you that problems in Europe will force gold selling to meet liquidity needs? I know this argument cuts both ways, but I think the liquidity needs of Europe are going to last for years, whereas the Europeans who are worried about what is going on and might look to move some assets into gold have had years to do so.

In the short term, anything can happen. Longer term, they’re going to print globs of money and the liquidity problems will go away. I own gold because every central banker in the world complains that there isn’t enough inflation…. I feel pretty confident that they’ll be able to solve that problem… lol

I’ve been wanting to trade around a core position to see how well that works out. I have a nice gain on what is a core MERC position (I kept adding as it weakened late last year). The FBK deal seems over with and the last few days the stock may have found its footing, so I bought some trading shares today with a stop loss just below today’s low ($6.91); even though I may just forget about the stop loss given how cheap MERC would be below $6.60!

Then I see this which I find ridiculous: Mercer International Cut To Hold From Buy At TD
I’m really only writing because of the downgrade and how one’s analysis can be the exact opposite of the deadfish society …just how much cheaper does MERC have to be to be a buy?
Thank you for your writings.

Analysts do what they do for lots of reasons that make no sense. Remember, when something trades at a fraction of what you think fair value is, it can trade at an even smaller fraction of fair value in the short run…I try hard to ignore all analyst research.

Hi Mate

I had some one send me your African notes recently and then they sent me a report on gold demand in China. Always a nice read.
I work for a wealthy individual investing his money. I also have two companies that invest in Diamond and Gold mining, dredging, and arbitrage.

I agree with just about everything you say about investing in Africa. I formerly worked in Sudan 12 years ago and have seen how Egyptian investors made fortunes, which they plowed back into their own country in the last 7 years. Recently I’ve been investing mainly in DRC, Tanzania, Guinea, Mali, and Ghana.

What I don’t get though is that you say “Given the massive headache of operating a gold mine, you need to make at least a 20% return on capital to even consider it. We need much higher prices for new mines to earn those sorts of returns.”
I don’t have a clue where you got that information from?

Gold mining is a bitch. Half your equipment is stolen by workers (thus you have to depreciate it over 3 to 4 years), and everything ALWAYS runs behind schedule.
But with that said on simple dredging I make profit margins of about 1000% a year, depending on the weather. For a small-scale gold mine (one that actually has proven gold) I make about 1400% profit margins per year. That’s after profit sharing with the local partner who takes home 35% of profits. With simple arbitrage we make about 40% per annum, which is the most predictable and stable income we have (gold is a very liquid arb while diamonds are less predictable. But margins at year end are the same).

There is a reason when some one finds a great business they say it’s a “gold mine”….. That’s because gold mines are famously profitable. In the last 18 months gold production in West Africa has gone up by 500%. I know that because the central banks have the numbers posted on the smelter walls.

Publicly traded gold mines might not be very profitable and have high production costs. But the rest of the world doesn’t have that problem. The numbers are pretty good, provided you have a winner.
I would encourage you to not invest in paper-gold miners on an exchange. I always laugh when I see people buy shares in Glencore etc. Starting your own commodity firm and investing physically is incredibly profitable.
Its not just Africa either. I look at projects in LATAM and Russia from time to time and their profit margins are roughly the same. There are also gold mines in Mongolia incase youre interested? You should go there and enquire about investment returns for a private investment.

Not all gold mining is profitable. That’s why dredging and arbitrage are useful. If I have a $10mn book to invest I can have 3 dredging projects which cost me less that $300,000 total and throw off about $500,000 per month in gold (we get 65% of that) and we retain $325,000 per month (with the rainy season we work 9 months per year). We then have $3.5Mn for the purpose of arbitraging 60kg of gold per month. We make 3% per cycle and have 2 cycles per month (if all goes well, Air France has misplaced our gold on one occasion!). It’s a pure arb but the traders some times take a few weeks off so we typically make about 40% per year. So our sustainable cash flow is $2.9Mn + $1.4Mn = $4.3Mn (A 43% profit margin on my $10Mn investment).

The remaining $6.2Mn is then plowed into 4 different mining concessions. Some will be winners, while others will be losers. Some will have gold of 2.3grams per ton while others will have 1.2grams per ton. The area we have concessions on are large (on the average 25 sqr km) so it takes a while to get all of the geological studies done while we are still conducting basic surface mining. Typically these produce enough gold to cover operating costs. But it only takes one hit to make the entire lot profitable.

One functioning gold mine will produce about $20mn worth of gold per annum, of which we own 65% of it). Thus I only need one concession to work to make back my money in 6 months.

Now I am sorry for rambling on as such, but Im just trying to make the point that gold is still incredibly expensive and profitable. Production costs have never exceeded $430 per Oz. in my world. People always love to tell me how production prices are incredibly high! But Ive never seen it. Not sure if that’s in Western Australia, or the US etc?????

But don’t believe them. Gold is super profitable at this point. We also have a side business renting dredges. A used dredge costs about $30,000 to buy and you can rent it out for $500 per day, on 200 day contract. We have people who rent these from us and RE-rent them for $700 per day. The demand for mining equipment has exploded in the last 12 months. Supply is exploding……

Just my 2c

I posted this longer email for readers who may be interested in some more of the details of mining. Some small scale projects are amazingly profitable. I know of guys in Mongolia making millions a month on an initial investment that is less than a nice car. That said, in total ounces produced, all these small mines are pretty insignificant to the world market. The majority of the world’s gold is produced from massive mines with very low grades and high costs. These are the mines that I talk about when I say that costs are exploding and profits just aren’t there for serious new investment yet.