December 3, 2017
December 3, 2017


Apologies for the lack of writing lately. I’ve been full time focused on Mongolia. Hopefully, with this Ask Kuppy, I will go back to a more normal schedule as there is a lot happening in the world.

Kuppy, Has AAG gone the way you expected?

Not at all. I’m simply in shock and disappointed about how it all worked out. I’ve determined that I will never again invest in a mining company. They are just too unpredictable. Is it a sale here? I’m not really sure, but I think there are better uses for my capital.

Bloomberg Magazine had a article on Mongolia that painted a picture of Mongolians VS Foreign Investors and claimed the political climate was becoming challenging for non-Mongolian Investors. The author of this article seems more like a political science guy than a finance/investing guy and so I question the source.

Are you seeing a shift in the political and business climate that may make business more challenging or require more profits be kept in Country as we’ve seen happen in South America?

Thank you.

I have sensed a minor change, but I think it’s mostly related to election posturing. For the most part, the majority of Mongolians that I speak with want to see more and not less foreign investment. However, they are concerned that some investment is not adequately benefitting Mongolia. In particular, they seem concerned that some Chinese mining operations are not following environmental laws or paying their fair taxes.

Kuppy you have said in the past (’09 I think )that energy makes up about 33% of the cost of mining. Been digging through, and seeing 8-10% for fuel and 10-15% for “power”. Is this a reclassifying game or have the proportions shifted around. Do you subscribe to the mining stocks perform well in deflation scenario? Understanding that the metals must move slower than the inputs then, can this really be the case given the way generations of miners get washed out of the industry like ’01 and ’08-’09, etc. Thanks for everything

Saying that energy is a third of the cost is a very gross generalization. Every mine has different inputs. I’m not sure if there has been a re-classification. I don’t think most miners are smart enough to play accounting games anyway…

Its hard to say that miners will do better or worse in deflation. It’s all about the spread between the costs and the final sale price of the mined product. In deflation, some costs will drop, but likely, so will the price of the metals that they sell.

What’s with Energold. Good results, terrible price action.

More sellers than buyers… lol

I used to use this line with friends when I had no idea why a stock was dropping. Unfortunately, I know exactly why Energold is dropping. They did a bought deal and bagged everyone. There’s a reason that I hate bought deals.

Hello Harris,

We all know about the main banks in Mongolia offering high interest rates for cash deposits in both local and foreign currencies. Just to give an example, TDB offers a whopping 14% for 1-year deposit.

Now, in a market where liquidity is an issue, this may be actually the reason why they offer such rates. However, the other side of the coin is that they need to repay the principal + interests afterwards. So, where do they get such high returns (at least equal as the rates they offer?). From the distance, it looks like they’ll get into serious trouble in the near future (adding to the bad debts amount they may hold), whether or not it’s a ponzi scheme.

Do you trust these banks?

The banks can offer 14% interest rates because they then lend the money out at over 20%. Most of the large banks in Mongolia are getting around a 10 point net interest margin and are doing very profitable busienss. I definitely do not think it’s a ponzi scheme. It’s just a very high interest rate environment that is engineered by the central bank who is determined to tame the economic growth here as it’s simply growing too quickly.

I generally trust the banks, though each bank is different. I should point out that many banks understate their non-performing loans bad debts. Caveat Emptor…

Hi Kuppy, I am wondering if there will be enough of a surge in actual money printing that there will be a significant increase in banknote production. And if so, is there a specific investment idea or two to profit from this ?

I’m not sure if this is a really actionable investment thesis, but De La Rue in the UK naturally comes to mind. Ticker is DLAR LN.

Do you consider Vietnam a friendly country for mining? They are rich in natural resources.

Sorry, I don’t know enough to have an opinion.

Hi Kuppy,
what happening to MERC? I bought it around 7.5, and still waiting for an upward move. With economy in doldrums, is there more risk in this stock now? Is this a hold or sell?

The price of NBSK has been weak for a few months now. I haven’t sold any of mine. I’m still optimistic long term. I’m looking to see what earnings next week look like.

Hi Kuppy.

No real question, just an observation. Mainly that in my view none of the analysts covering EGD fully or completely understood Bertram’s business and the way it was purchased. Isn’t this really odd for analysts to be so ill informed?

Analysts will all have to listen to the CC and all the way till the end to understand all of this.

My conclusions and understanding of the what was said in the CC:

– for every Bertram dollar of EBITA between $5M and $8M the earn out is 3.5 dollars. So at $8M of EBITA, $10.5M is paid in earn out. Earn out is capped at $10.5 M per year. There are 24 more months in this earn out purchase of Bertram.

– analysts will all be updating their financial models for the lumpiness of Bertran’s business (oil sands work in 1Q is huge, 2Q is slow because the ground is going through Spring break up, 3Q is going to be better than the previous two years) and how the earn out should be modeled over the next 24 months, and beyond that when there are no more Bertram earn out payments. My understanding from what was said in the CC: model it as profits taxed at 30%, which are then being used to acquire Bertram. In essence, this part of the full Bertram purchase is self funded. (And highly motivational as results have shown.)

– results like this in 1Q14 would be $4.62M in net profit or 9 cents/share ($6.6M taxed at 30%, $4.62M in net profit)

– Bertram 1Q12 exceeded the combined sales of fiscal years 2010 and 2011 combined. (which were bad years for Bertram, but so what. this is a great turn around)

– Bertram will be doing oil sands core drilling this Summer. First time in 2 years this is happening in the oil sands. CEO mentioned Imperial Oil’s multi-billion dollar expansion plans as an example of a huge drive to increase production in oil sands.

– It looks like EGD energy division, (Bertram) is setting up to exceed $8M in EBITA for each of the next 2 years and then EBITA starts to drop to the bottom line directly.

– the earn out payment is not part of cost of operations (it is an G&A expense that is tax deductible), so the 35% margin of the energy division are not affected. I.e., good high margin business.

– for the mineral division, the CEO estimates 15% increase in meters drilled 2012

– EGD is ready to go after water drilling business, after some delays

Thanks for that summary. That’s how I also see it. Basically, most analysts aren’t very smart. Think of them like used car salesmen with business school degrees and nicer suits… Energold as a business is doing very well. The bought deal is a major nuisance short term as it depresses the shares, but I’m sure they’ll find something good to do with the capital.

Are you looking at GROW again now that’s it’s back down to $5?

Not really. Unless they can grow AUM, there just isn’t much of a business there.

your take on the volume of sellers after the first quarter repont by egd. missed the com call. would appreciate an up date. your thoughts.

Sellers are from the bought deal.