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Weekly rollup | April 25-May 01 2022

Stocks Mentioned: Hafnia (HAFNI.OL), Packaging Corporation of America (PKG), Newmont (NEM), Valero Energy (VLO), Teck Resources (TECK), Yellowcake plc (LON:YCA), Adventus Mining (ADZN.V), Champion Iron (CIA.TO), Euronav (EURN), West Fraser Timber (WFG)

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April 25 2022

Sell Hafnia (HAFNI.OL)

I have been talking about this stock for a while as part of my oil tanker portfolio. Management estimates NAV to be $2.97/share (NOK 26.86/share) while book value is $3.06/share. However, given that steel prices have been falling (down over 7% since the sell-off started last week), and a potential weakening of oil demand ahead if Europe enters recession, I think the stock is close to fairly valued. The company had negative EPS of 15 cents for 2021 and is expected to lose money in Q1 as well. I bought in at around 16 NOK last July when the upside case was obvious. At 24.8 NOK, the valuation gap has more or less closed.

Looking at this trade in isolation, there is no hurry to close the trade. But given the bargains in the rest of the shipping space, I'd rather take the win and deploy the capital into other names which I believe have far more upside.

From the article: "Fuel demand in China is on track to drop 20% this month in the biggest decline since the first wave of COVID-19 lockdowns more than two years ago... One in five container ships is now stuck at ports worldwide, with 30% of the backlog coming from China."

I'm happy with the containership trade, drawdown and all. However, it is time to pare back allocation to the oil tanker trade given that

  1. recession fears and demand drop in China will affect TCE rates, and

  2. dropping steel prices will lower NAV of the tanker companies, further reducing upside.

These points are valid for the containerships too, but these stocks are so undervalued and the companies are gushing cash with which to buyback or raise dividends. Eventually, corporate action will correct the valuation discount. Not so for the oil tankers, which are still losing money and are purely asset plays at this point.

April 26 2022

Packaging Corporation of America (PKG) reported record Q1 net income of $254 million and EPS of $2.7, up 54% yoy, on revenue of $2.1 billion, up 16.7% yoy. Second quarter EPS is expected to be $2.83, a sequential increase of 4.8%. CEO commentary highlights:

  • The company set a new all-time record for total box shipments and new first quarter records for box shipments per day and for containerboard volume.

  • Expect demand in our Packaging segment to remain very strong, and we will continue implementing the previously announced price increases in both our Packaging and Paper segments.

  • Due to strong internal and external demand, the company ended the quarter once again with containerboard inventory below our targeted and historical levels.

I'd love to go through the fundamentals of the timber/wood products/paper industry because there's definitely opportunity in these sectors. However, it's all part of the inflation trade and I'd rather stick to my forte of mining, exploration and shipping in order to play that trend.

If I were inclined to dig deeper, I'd start with PKG, WRK, WY, RYN, WFG and WEF.TO. Alternatively, one could just buy the WOOD ETF and call it a day. I don't intend to take any trade in this sector for now, although I'm definitely interested.

Now is as good a time as any to exit NEM. Copper miners are in freefall and gold appears to be struggling as well. I'm still holding Barrick Gold, Lundin Gold and Alexco from the Jan 2022 PM trade. Note that even after the sell-off, we are up 19.5% on NEM from the Jan 2 entry.

Depressed by draconian lockdowns that might be extended well into May, Chinese refinery runs are set to reach a post-pandemic low this month. According to S&P Platts, throughput rates at the country’s four state-owned refiners fell to 76%, the lowest since April 2020, as movement controls in 18 provinces kept demand subdued. China’s so-called teapots (independent refiners) are seeing run rates of 50% in April, 25 percentage points lower year-on-year.

April 27 2022

Yesterday, Valero Energy (VLO) reported its best quarter in 7 years - net income of $905 million or $2.21 per share. I like the company but I have steered clear of trading oil stocks for a reason.

I find oil untradeable. I won’t be surprised if it falls to $60, I wouldn’t bat an eyelid if it moves to $140. You can find arguments for why oil is moving higher – supply destruction, Russian barrels sanctioned, demand picking up as lockdowns ease, summer driving season. You can also find reasons for why oil is moving lower – China’s new draconian lockdowns, inflation hurting demand, freight recession, excess inventory, SPR releases flooding the market, OPEC raising quotas/reducing compliance, no new shale boom to save the day. An actual recession induced by peak inflation like in 2007 would see oil prices collapse and stay down for the count. 0.5% rate hikes isn’t much, but given how long ZIRP has gone on, that could be all it takes to push the economy from inflation to recession. The Fed can end stagflation if they really set their mind to doing so. Biden can get rid of Iranian and Venezuelan sanctions and get those barrels back in the market. Not saying any of this will happen, but the market will anticipate these moves and price oil lower accordingly. The news will explain why oil moved lower ex-post.

Can oil move to $300? Sure, why not? The SPR has to be replaced. Russian oil and Latvian blends can be completely sanctioned. Norway could "go green" and choose windmills over North Sea oil. The EU could commit hara-kiri to spite Putin. Anything can happen.

Fundamentals are important for my trading style. If I can’t develop a perspective on which direction oil prices will move based on the fundamentals, I’m not going to take a position. Yes, oil has moved a lot but it hasn't been the only sector that has moved. I don't need to trade oil just as I don't need to short small-cap biotech stocks or Chinese tech stocks. For me, there are better trades than oil.

Teck Resources (TECK) announced a $500 million share buyback program, valid until Nov 1. This is on top of their $635 million capital return program for 2022. The company will release Q1 results today. I expect an earnings miss, given management already guided lower sales due to supply chain disruptions. But the buyback and dividend announcement today make it obvious that the quarterly results will be something of a disaster. Usually, companies in a strong position announce buybacks and dividends in conjunction with quarterly results, not ahead of them. With the share price already at the 100 DMA, the earnings 'surprise' could be just the catalyst for a sharp break lower. Results will be announced pre-open. There's no trade here, just an observation on my part.

Did I get this wrong. Results were announced a couple of mins after I wrote this, the buyback and dividend announcements were in conjunction with the quarterly results after all. The results beat consensus estimates and the company is more or less on track to meet 2022 guidance.

Earnings growth estimate for the S&P 500:

Buy Yellowcake plc (LON:YCA)

Trade thesis is simple. We got stopped out of U.UN but that was for technical, not fundamental, reasons. The current sell-off is a good time to re-enter. The Sprott Physical Uranium Trust (SPUT, U.UN) trades at a 4.18% discount to NAV, while Yellowcake trades at a 9.6% discount to NAV using current share price of GBP 3.978.

Plus, Yellowcake has forward contracts in place with Kazatomprom to purchase 0.95 million lb of U3O8 at a price of US$47.58/lb, for delivery to the Company at the Cameco storage facility in Canada by June 2022. The company has also exercised its Buyback Option with Kazatomprom in terms of which it will acquire 2,022,846 lb of U3O8 from Kazatomprom at a price of US$43.25/lb, for delivery to the Company at the Cameco storage facility in Canada between April 2022 and May 2022.

These forward agreements are at a discount to current spot price of US$53/lb. SPUT on the other hand will be purchasing all its uranium at the spot price. The discount to NAV is a nice cushion against falling spot prices, which are already off their peak at around US$64/lb earlier this month (follow the handle [at]numerco on Twitter for latest prices). YCA is a better bet than SPUT, and the company has a share buyback program in place to help correct the valuation gap.

If you can't access the London market, U.UN is still a decent bet.

Yellowcake NAV breakdown. Source

Buy Adventus Mining (ADZN.V) at C$0.60

I wrote up this stock for The Independent Speculator newsletter last year. The company is advancing the El Domo copper-gold project in Ecuador. The project has a 2021 Feasibility Study, funding has been secured, and pre-construction activities are in progress with first pour targeted in Q1 2024.

This is a stock I used to own, but sold on 1/18 at C$1.09 for reasons outlined below. Now at 60 cents, I think the risk:reward is right for a re-entry. My reasons for selling back in Jan were valuation related, so I'm just copy pasting those notes to show why this stock is now a good buy. For more details on the company, check out the company website.

My notes post financing deal announcement:

"Per the Oct 2021 open pit FS, copper accounts for 49% of revenues, gold 28%, zinc 16% and silver 7%. If WPM pays only 18% of spot for gold, that's a revenue hit of 11.48% of the total (18% of 14% of 100% of revenue). With total gold production for years 1-9 expected to be 234 koz, I think it's safe to say WPM effectively gets a 50% LOM gold stream, barring significant expansion in reserves and mine life. Likewise for silver, with WPM getting 75% LOM. That's a revenue hit of an additional 4.31%.

The streaming deal alone gives up 15.8% of revenue at base case prices, plus upside from rising PM prices.

This is where it gets interesting. Using base case production and copper prices, LOM revenue works out to $1.6 billion, while after-tax cash flow during production comes to $721 million, or 45% of that. The streaming deal doesn't change the cost structure (except for slightly lower taxes, which I'm ignoring). But it changes $100 of revenue into $84.2, while leaving costs at $55, reducing after-tax cash flow from $45 to $29.2. That brings down the cash flow margin from 45% to 34.7%, a full 23% reduction.

In other words, the streaming deal, all else except the minor reduction in taxes being equal, cuts yearly after-tax cash flow during production by 23%. That's going to be an even bigger hit to the after-tax NPV, since the capex is front loaded. But even applying just the 23% haircut changes the NPV-8 from US$259 million to US$199.4 million. ADZN keeps 75% of that, or just under US$150 million.

ADZN's current market cap + C$30 million from the equity raise implies a market cap of US$134 million.

Seems like there's hardly any upside in the stock.

This is without taking into consideration the potential for capex blowout (Argonaut and Artemis being the most recent victims. Btw, I'm not very sanguine about ARTG getting a new EPC contractor at the same rates as Ausenco given the massive inflation and supply chain delays. I suspect bad news being withheld there).

This is without considering the impact of rising fuel and labor costs on opex. The strip ratio on Curipamba is a whopping 8.6! Not to mention the rising cost of electricity worldwide. (Will ADZN be successful in constructing a power line? Or will they be forced to deploy a nat gas plant? Just thinking out loud...).

And let's not forget Ecuador loves to tax "windfall gains" during commodity bull markets. If nothing else, they are likely to take a leaf out of Panama's book and raise royalties, the bill for which would be footed by ADZN, not WPM. Not even SRL, since SRL will merely be deferring its payouts.

The upside from rising copper and gold prices may make up for this. Perhaps. If gold rises from $1700 to $2000, the company gets an additional $177/oz, rather than $300/oz. If the gains in copper prices far outweigh the gains in gold prices, the revenue mix shifts more in favor of copper and this streaming deal will look great in retrospect. So if I were significantly more bullish on copper than gold, I'd consider this stock. But in that case, I'd rather buy a copper miner outright than ADZN.

Unrelated, but I was rather amused to see the ADZN CEO comment that, "Based on the projected revenues payable to Wheaton, the potential read-through value of Curipamba is significantly higher than US$1 billion."

Geez, the things promoters get to say when the IIROC is asleep at the switch..."

Using my previous valuation of US$150 million implies a share price target of C$1.13. We can move that lower to take into account inflation and shareholder dilution, or take it higher to account for higher copper, gold and zinc prices. The FS base case assumes $1700/oz gold, $23/oz silver, $3.5/lb copper, $0.95/lb lead and $1.2/lb zinc. A 35% rise in copper prices increases the NPV by 63%. I'd move the share price target higher, not lower, if I were looking at sensitivities.

This is a value stock, which means patience is absolutely essential. Value plays don't have a great chance of success, but when they do succeed, the gains tend to be high to make up for the risk. I think the best time to buy exploration stocks is when there's no liquidity, sentiment is non-existent because nobody cares, and the valuation is highly compelling. Now's the time.

April 28 2022

Champion Iron (CIA.TO) provided a production update for the last quarter. Iron ore production was 1,869,000 wmt as compared to expectation of 2 million wmt, with cash cost/wmt increasing slightly to C$60/wmt. Commissioning of the Bloom Lake Phase II expansion project is nearing completion, which means initial production will soon begin, and commercial production is expected by year end. The expansion will increase nameplate plant capacity from 7.4 mtpa to 15 mtpa. With over 20 years of mine life, this is a cash flow machine. I first wrote about this stock when it was trading at C$4 per share back in December 2021. At C$6.6, it is still a steal. Even if the company only earns $1.5 in EPS after the expansion, at a 10x multiple this should be a C$15 stock. I still feel as bullish as ever and continue to hold my position, FUD about China and steel production be damned.

Updated valuation:

If you haven't sold Euronav (EURN) already for sentimental reasons or just plain laziness, this is for you. Sell now before your investment dollars get decarbonized and added to the ESG scrapyard.

Data from VesselsValue shows that TEU (twenty foot container equivalent units) exports out of Shanghai are down 22% over the period of March 28 - April 23, when compared to that same period last year.

April 29 2022

Raoul is still not ready to give up on Cathie. He just doubled down on his call. When your business is geared towards retail subscribers who don't understand how trading works, better to go down with the ship than admit being wrong and taking a reputation hit.

West Fraser Timber (WFG) reported Q1 2022 EPS of $10.25. Share price as of 4/28 close: $89.54. Is it any wonder the company is aggressive in buying back shares?

Yellowcake purchased 100k shares at GBP 3.93 yesterday, taking advantage of the discount to NAV.

SPUT now trades at a slight premium to NAV, making YCA the better buy for uranium exposure. You can track the NAV here

YCA news source here

Merger arb opportunity for those capable of taking such trades on the ASX:

Uranium explorer Vimy Resources (ASX:VMY) is in talks with Deep Yellow (ASX:DYL) for a proposed merger. VMY shareholders will receive 0.294 DYL shares for each share of VMY, representing a 13.4% premium based on the 4/29 closing price of both shares (DYL - 94.5 cents, VMY - 24.5 cents). Note that there is no cash component proposed, it is a simple share swap. DYL is shortable as per Interactive Brokers.

I raised cash and de-levered heavily this week, selling low conviction positions, especially among the gold miners and oil tankers. Added to uranium, gold explorers and one freight play: KNX. Expecting another wave of sell off next week, so prepared for it. This is a probabilities game - not about being right or wrong, but about surviving the tough times so I'll be around to capitalise on the better times.

Also, being out of positions helps me think better over the weekend. If I'm firmly convinced I need to be in the trade, I can always get back in at the open on Monday and pay the slippage.

April 30 2022

France will host a meeting for EU energy ministers on May 2 to discuss what to do about Russia’s gas supplies–specifically what steps to take now that Russia has suspended gas deliveries to Poland and Bulgaria–two “unfriendly” nations that have refused to pay for Russian gas with rubles.

When a market is being moved around by such momentous events, the best trade in my opinion is no trade at all. I have no exposure to oil & gas producers and wouldn't want to. If I traded futures, I'd not have any position in the underlying either. Every new trader is thinking this is the kind of news that should send NG and crude futures soaring next week. Could happen, but even without the help of backtests, I know that has not always been the case. During the Gulf War, for instance, oil eventually moved up, but not before a steep plunge which took the market by surprise.

"One day after the United States and it allies launched a massive attack on Iraq, oil prices in New York plunged an unprecedented $10.56 a barrel to $21.44--a dime below its price on Aug. 1, the day before Iraq invaded Kuwait. The free fall confounded predictions that a war would cause oil prices to soar as high as $60 a barrel."

There is never an obvious trade in the market. Gold initially spiked during the Gulf war, but the downtrend remained intact. My point is not that history will repeat, but that price action should take precedence over what should 'obviously' happen. Can gold move to $1800 while Russian missiles rain down on the UK? Sure. Can nat gas fall to $3 while Russian gas supply gets completely cut off in Europe? Sure. Will the Fed raise rates and further weaken the Euro when the EU enters a recession? Sure. Will the BoJ practice yield curve control while the Yen moves to 200? Sure.

Not likely, but can happen. Anything can happen.

There are never any obvious trades in the market.

First they burn down food processing plants, then they roast alive chickens. But it's Putin who's causing soaring food prices. No hidden agenda here. And if you say otherwise, they will sic the Ministry of Truth on you.

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