mercredi 8 janvier 2020


You're a new investor or a gambler investor and you want to invest in resources? It's not a good idea. 

Every serious book about investing will tell you the same. And every serious investor (just take a look by yourself via dataroma) avoids resources.

You don't give a fuck about all of these opinions because your friend has made a lot of money with gold during the last crisis?

Here's some observations:

Exxon Mobil:
Current price: 70$
Price 10 years ago: 69$

Agnico Eagle Mines Limited
Current price: 60$
Price 10 years ago: 54$

Canadian Natural Resources Limited
Current price: 41$
Price 10 years ago: 36$

BHP (formerly BHP Biliton)
Current price: 55$
Price 10 years ago: 70$

Barrick gold
Current price: 18$
Price 10 years ago: 35$

A good way to lose against inflation is to invest in natural resources. OK, there's only 5 stocks in that list, but they're big companies, so, the picture would probably be worse with smaller companies. 

If you're serious, don't touch natural resources, even if they're sold for 3 times their earnings. It's only slightly better than micro caps: with resources, you'll do fine 2 times out of 10 while you'll do fine 1 time out of 10 with micro caps. 

8 commentaires:

  1. Your numbers are not accurate

    CNQ closed at $25.37 10 years ago
    It closed yesterday at $41.01

    AEM closed yesterday at $77.19
    Close 9 Jan 2009 $52.46

    CNQ current close $41.01
    10 years ago to the day $19.90

    XOM current close $69.23
    Ten Years ago $54.88

    They all made money in 10 years.

  2. I sold DSG (Descartes Systems Group Inc) and bought WCP (Whitecap Resources Inc) on April 6th, 2019…It was not an easy decision. I was convinced that in the long run with its recurring revenue business model that DSG was a great buy and hold growth stock. It was at the time about 51 dollars. But it was expensive…very expensive. The trouble was like all great growth companies it was always expensive but this time it was especially so.

    But on a risk-adjusted basis I decided to sell my holdings and put the money into WCP which was dirt cheap at the time. My thinking was the energy sector had just gone through a horrific bear market over the last 5 years and I thought a long term bottom was in there somewhere. WCP with its long life assets and low decline rates seemed like a terrific buy and it paid a very nice dividend. Any energy stock that survived that bear market and could still generate enough cash flow to pay a dividend is telling you something about their management team.

    As I get older I have to put more of an emphasis on income generating assets in my portfolio. The point of all of this is an investor’s personal circumstances will alter the way he invests. On top of that, investing involves making difficult decisions and you won’t always be right, but that’s investing. Being a value orientated investor I felt I had to remain loyal to my underlying philosophy.

    Both stocks are up since I made these transactions…I still feel that the energy sector is cheap and offers solid risk adjusted opportunities to investors who have no trouble being contrary and insist on investing with good management teams.

    1. Good luck. I don't believe in this sector for the long term, but if you want to try short term, maybe it could work.

  3. In general I agree. Nonetheless, I have been looking at some royalties / real asset / and resource services companies in the past. Labrador Iron Ore (ROE 35%), Westshore Terminals (ROE 21%), Freehold Royalties (ROE negative but historically in high teens), and some energy services companies (dealing with consumable chemicals, environmental effluent treatment, transportation infrastructure, or software like CMG etc.) all appeared very interesting to me at one point or another. Problem with many of them besides cyclicality are current poor growth outlook which has kept me committing to them. Software companies can sell double, triple, quadruple the software licences or service agreements with a few clicks on the computer and on-demand cloud computing. A resource related company relying on physical assets cannot compete with this scalability. Many of the markets are also far more concentrated and the roll-up consolidation is not really possible as a business model (which is the model used by most successful Canadian companies - MTY, CSU, ENGH, ATD, BYD, CGI, etc.). We just don't have thousands of neighbourhood corner world-class resource mines operating by soon-to-be-retiring moms and paps.

    Growth in resource stocks and world economy will largely depend on what will happen in China (and lesser extent in other more messy emerging countries). China's demographics, financial markets, and political/legal rule look very scary for the future, even though I do not understand them. If the world of the future will be dominated by grumpy old plutocrats with sky high entitlements, concentrated power, lots of autonomous weapons, and super high unpaid debts, we might enter stagnation, proliferation or petty conflicts, and gradual civilization decay phase. Economic and technological growth might be stifled. Young and poor people will either rebel (and vote in fringe left or right wing parties) or give up and so will the innovators and entrepreneurs because of high asset prices, high taxes, austerity cuts, stagnating wages, and limited advancement opportunities. This decay with subsequent nationalist political response will also impede resource demand and global supply chains, on which modern resource companies rely (most of Canada's resources are not used locally).

    1. I never try to speculate on politics to justify an investment. To me, it has to work whatever the economy or the politics look like.

    2. Thank you for your response.

      As mentioned above, I agree with your thesis. My point was that there are some good management teams or assets in the sector as well. Nonetheless, the limitations of the sector as a whole might outweigh the company-specific qualities.

      I remember being super eager about buying Computer Modelling Group during the first year of investing as a super naive and lazy "investor". Several years later, I am still about 1/4 underwater (excluding the modest dividend) and disappointed about my own naivety. The company is largely owned by the management, it has a niche "keystone" product which is best in its class and taught as standard tool-of-trade in universities etc, company is very efficient and productive, it had excess cash or very little debt throughout the years, it has large recurrent subscription rather than one-off licence sales, most of its customers are investment-grade behemoths who survive or even instigate wars with budgets of nations for whom the modelling software expense is negligible, it is not diluting shares, shareholders a few years back included institutions and endowment funds etc. BUT it does not grow and will not grow unless there is another massive resource boom or will be acquired by larger company with cross-selling potential. This seems to be one of the most important factors for share price performance and something I naively ignored a few years back during my stock "research". Growth on free cash flow or income per share drives the price. The potential for resource-related companies to grow earnings without favourable commodity cycle is very limited. Not to mention the investment exodus and capitulation which has caused a concurrent double-whammy of multiple contraction. As Driveshoe points out, this might open up opportunities for people who have the time and know-how to see the big picture.

      Sometimes when you look at the numbers of cyclical companies on the paper and evaluate them in the context of our own lifetime length, they can appear very attractive. See my comments from few months ago comparing future cash flow / owner's earnings from Linamar versus Constellation Software over a few year horizon. We do not know what will happen in the future. But sometimes the valuations seems to be very irrational relative to how much actual profits we could theoretically extract from the specific investment and how much reinvestment compounding the investment might offer. Fundamentally, current stock prices seem to move away from the economic value they can provide to owners to the hype of hoping for a bigger sucker to bid up a higher price for the company which often does not have any or even has a negative economic value. I might be a little bit of a primitive simpleton, but I still believe we will need to eat and build physical stuff in the future to live our lives and having a great experience and efficiently structured ability to do so should merit some sort of a tangible valuation. I don't get the new economy and how bankers and some software geeks can make or break entire economies (and I am in my twenties and grew up in the digital world) while people growing and making real stuff are being thrown under the bus as useless relics from the ancient history.

  4. You have to work in this industry and have the knowledge to understand the engineering and environmental risks of mining projects before even considering to invest in this industry. Many projects failed, even if the feasibility is positive. You never know what is underground until you dig the mine.

    Still, you can make money in mining stock if you take advantage of the cyclicity of this business. Buy when the drilling company, mining contractors or engineering firms are laying off their staff rapidly and sell when everybody is busy. It is fairly easy to figure out these cycle if you work in this industry.