December 3, 2017
December 3, 2017


I want to wish you all a Happy New Year!!

I have noted that Energold has no operations in Australia.
Is that because Australia is too accessible to need man portable drilling units?
Do you have any opinion on Swick Mining Services (AU:SWK)?

Yeah, you pretty much sum it up. There’s too much competition and it’s all flat. No need for Energold there. I have looked at SWK and owned it in the past. I cannot get comfortable with all the debt. This is a cyclical business. You cannot run a business like this with debt–as SWK found out in 2009. The technology is fascinating, but it seems that the track mounted systems break down a lot more than advertised. In the end, Energold has a better rig and is better suited to underground as well….

In your year end position update, you disclose, “I sold a few Andean shares near year end to cover redemptions.” You have no such comment for any other position. Any reason the AAG shares went first — I assume you were rebalancing and AAG had gone up the most.

That’s pretty much the reason. As a portfolio manager, if money goes out the door, you are basically getting more long if you don’t reduce a position. It’s already a big position for me. I just couldn’t be increasing it after a 3-fold move in a year. Remember, until they build the mine, it’s still a pretty speculative investment.

Kuppy, thanks for your comments on AUY. After reading your year end positions summary I think I’ll hold on to my a AUY a little longer. I bought it back when I started reading Fleck’s column around $4/ share, I agree.. the miners are about to hit stride. After all I believe someone once said “If you just bought companies i sold you would make alot of money”. Happy New Year!

Fingers crossed…. I own a lot of AUY.

I am thinking about Energold specifically as well as drilling as a whole. Just trying to figure out some assumptions and worthwhile metrics; hopefully you can share your thoughts.

1. What is your baseline rig growth for 2011, 2012 and 2013? I am using 20% YOY, which gets me to about 180 rigs by 2013. Do you think they will have to tap the equity markets again or will they be generating enough cash to finance new rig growth internally?

2. Is it fair to assume 3000-3500 meters drilled/rig? Won’t it become very difficult to model these drillers if producers start hoarding rigs into 2011 and beyond?

3. What is a fair P/E multiple to place on drillers in general? Or do you use other valuation metrics?

Either way EGD seems somewhat cheap even at these levels especially if they can get to close to 200 rigs by 2013 and pricing holds up.
Thanks for the help. Great blog and looking forward to new posts.

I’m really not a spreadsheet guy. For the first few years of my investing career, I used to build detailed models because I saw all the guys on Wall St. doing the same. When I’d look back at these models, I was never all that close (either over or under) and I have essentially stopped doing it. I just focus on the quality of the business and I build a VERY ROUGH mental model based on broad assumptions. If it doesn’t seem cheap based on a few minute analysis, it probably isn’t cheap enough for me. I mean, who could have modeled out 2009 where they added only 4 new rigs organically. I would have have thought they would keep growing 35 rigs a year like in 2008…. With that in mind..

1) Who knows. They’re 100 now with a plan to add 20-30 this year. 180 by the end of 2013 sounds reasonable. However, if they make an acquisition, it could be a lot more.

2) I think your meters/rig is too low if the business is doing well. In 2008, they did 4,300 a rig and they were adding rigs agressively. When you add a rig to the rig count, you have to wait 6 months for that rig to turn so the per rig number is understated as your denominator (rigs) is too high. I think rigs in the field can easily do 4,000 meters and maybe more if they’re on long term projects without a lot of mobilization.

3) I don’t really have a metric. I feel pretty confident that at some point in the cycle, the drillers trade at a silly multiple. It will be like CSCO during the internet bubble. No one could figure out how to value pets.com, so they instead just figured that CSCO would grow at some insane rate for decades into the future and then slapped a huge multiple on it. Why can’t these drillers trade at 30-40 times earnings? At the peak in 2008, drillers were making acquisitions at $3-$4m a rig. Maybe that’s a better metric. Of course, I think the next peak in the cycle will be crazier than the 2008 one.