Showing posts with label cyclical stocks/industries. Show all posts
Showing posts with label cyclical stocks/industries. Show all posts

Sunday, July 22, 2018

Uranium Again

A few weeks ago, I sold my URA ETF due to changes in its constituents.  Took a loss of USD 1650.

To replace this, I have bought directly into Cameco, and a bucket of small uranium companies.  This makes up around 3% of my portfolio.

Wednesday, May 30, 2018

Bought Offshore oil companies

Over the past few days, I bought a small amount of US-listed offshore oil companies.  Rig holders, OSVs and drilling.  Around 3.5% of my portfolio.  I believe that, barring a recession, both shallow and deep water exploration and development will return over the next few years.

I finished buying the day before the market dived on Italy worries. We'll see how it goes.

Monday, April 2, 2018

Short Fortescue Metals Group

I am expecting Iron Ore to drop.  Most IO is used by China for building and infrastructure.

In the long run, China is trying to move away from infrastructure and manufacturing.  Over the years they brake, accelerate, brake, they try to slow down without causing a recession.

In the medium term, I think they are in the brake stage now.  They will be slowing down now, so they can stimulate in 2020 for Xi's election the year after.  China's growth credit (Total Social Financing plus Bonds) is slowing:

Source: MB Webinar - Nucleus Wealth Mgt (abt 30 mins in).

In the short term, there are record iron ore stocks at Chinese ports.   Most of it is low grade ore, unused because of China's pollution restrictions.

FMG is the 4th largest global iron ore supplier after Vale, BHP and Rio, and also 4th place on the cost curve.  It produces mostly lower quality 58% ore, versus high-quality 62% ore from the other three, and low quality 30+% from domestic Chinese producers.  Upgrading their mix will take time - meanwhile they have have to accept discounts.

FMG's stock price has recently broken support:

I am short 6,600 shares of FMG at AUD 4.27.  This is a short term trade, hoping to make 20-30%.

Main risks are:
  • In the short term, the market shoots upwards if the correction ends.
  • China may rescind their pollution curbs.
  • In the long term, steel may be used for OBOR.  Or for buildings/infrastructure for the booming US economy.  Including a big, beautiful wall.

Sunday, September 10, 2017

Offshore Support Vehicles

Owners of Offshore Support Vessels have have been hard by the oil price downturn.  Where are we in the price cycle?

What are OSVs?

Offshore Support Vessels (OSVs) are small vessels used to support both deepwater and shallow water rigs.  The main types are:
  • Anchor Handling Tug Supply (AHTS)
  • Platform Supply Vessel (PSV) 
  • Diving Support Vessel (DSV)
  • Construction Support Vessel (CSV)
  • Utility vessels.  Sometimes with Remote Operated Vehicle (ROV)
There seems to be a clear distinction between the first 2 types: AHTS (tug boats) and PSVs (supply boats).  There is a less clear distinction between the other types - an old AHTS may be converted into one of the 3 last types.

Different vessel types support different phases of a well's lifecycle:

Industry Overview

There are currently around 5000 to 5500 OSVs globally, with around 1500 to 2000 currently idle 1,2,3,4

The industry is highly fragmented.  The largest player, Tidewater, has a global fleet of 300 vessels, but they are so small that they are also a price taker:

Vessels operate in certain areas (e.g.: SEA, North Sea, Gulf of Mexico (GoM)).  They can move from one area to another to balance out supply & demand, but there are legal restrictions on some areas, for example:
  • Vessels in Indonesia have to satisfy ownership and crewing restrictions.
  • Vessels in US waters (GoM) need to comply with the Jones Act: the vessel must be owned, crewed and operated by Americans, and must never have been owned by a foreign company.

The Capital Cycle

New Supply

The OSV industry has followed the normal boom-bust capital cycle.  The most recent boom cycle started in 2006, and has seen over 400 vessels delivered till now.  Vessels from this boom are still being delivered, but drop off sharply in the coming years: 410 vessels are expected to be delivered the remainder of this year, 98 in 2018, and 5 in 2019:

Some vessels on order may be cancelled (e.g.: from speculative buyers) and some may never be put into operation.


Despite lease rates being below operating costs, only a negligible number vessels have been scrapped.  Since January 2015, only 2% of OSVs have been scrapped.  OSVs have low scrap value since they have little steel.  Delivering the vessels to be scrapped may cost more than the scrap price.

Unused vessels have been stacked instead.  Its possible they will never be reactivated, as this costs more the longer the vessels have been stacked (e.g.: required 5 year survey)5.  Due to safety concerns, charters may not lease ships that have been in lengthly layups.

The industry has been rife with bankruptcies:
  • The largest global player Tidewater (TDW), has just emerged from bankruptcy.
  • Gulfmark Offshore (GLF), with 70 vessels, has filed for bankruptcy several months ago.
  • In the Singapore market this year we've had Ezra and Swissco
These bankruptcies are not reducing industry capacity.  Vessels are simply sold off at fire sale prices, giving a low cost base to the buyer.  Or the company is resurrected with new shareholders, a new pile of cash, reduced debt and a lower cost base.


Quite a few reports predict increased OSV demand:
  • Pareto predicts a gradual recovery: If oil remains between $50 and $60, they predict an additional 130 rigs from 2018 to 2020, leading to additional work for around 390 to 520 OSVs.
  • Douglas-Westwood predicts OSV expenditure to grow at a 4% CAGR between 2017-2021: DSVs at a 6% CAGR, MSVs (consisting of CSVs and Utility Vessels with ROVs) at 7% CAGR, and pipelay expenditure at negative 4%.


There will be a recovery sometime.  We are waiting for laid-up ships to slowly rust, until it is uneconomical to put them back into service, while...hopefully...demand rises gradually at a single digit CAGR over the next few years.  

I have no idea when the turnaround will happen.  From the numbers above - especially if the 400+ expected new ships are delivered - no one can see it happening this year.  But these type of industry numbers won't tell us anything till after the turnaround.  Technicals will tell us, but will give a lot of false starts.  If I was going to buy, I would take very small positions, and spread out my buying over time.

1 Tradewinds article: Crisis batters OSV hub (19th/Apr/17): "We have around 5,000 OSVs in the market and about 3,000 are working." 
2 Tradewinds article: Rig's Inflection Point offers hope of gradual recovery (7th/Sep/17): "About 1500 to 1800 OSVs are sitting idle now." 
3 Clarksons Offshore Support Vessels front page: "OSVs in service: 5301" on 10/Sep/17." 
4 Offshore Support Journal: Greenshoots of Recovery in downbeat OSV market (6?Apr/17): "There were also around 1200 vessels laid up globally of a fleet of around 5,500 vessels
5 Some numbers here: "According to Clarksons Research records, just under 50% of laid-up OSVs no longer have an active class certificate as of February 2017. Two thirds of these out-of-class vessels are older units built prior to 1990....However, 856 of the laid-up OSVs appear to still have an active class certificate. These are skewed towards the younger end of the fleet...However, this number might decline in the future: 22% are scheduled to have their five year special survey in 2017 and a further 24% in 2018.....Financing special survey costs is also an issue for active OSVs, as well as those in lay-up. Considering the active fleet (3,688 units at start February 2017), 641 OSVs have their special survey due in 2017 and a further 721 vessels in 2018. The majority of these (over 80%) were not under long-term contract. " 

Friday, June 16, 2017


Potash has been dropping for four years now.  Is this a normal commodity cycle, where prices stay low enough that new investment is discouraged and marginal players are squeezed out?  If so, where are we now?


Potash is a fertiliser which provides crops with potassium - one of the three primary nutrients for plants.  It accounts for 70 to 90% of potassium fertiliser used, and is commonly used for bulk crops or grains (1).  There is no commercially feasible substitute, although some are working on it (12).

Potash is plentiful, but the industry has long since been an oligopoly, due to the enormous capital requirements in setting up the mines and transport.  In 2013 the potash oligopoly broke up, with one of the players flooding the market.  Prices have headed down since:

(Source: SeekingAlpha article: Potash - a 2018 story?)


Annual demand is around 55-65 million tons.

In the long term demand is constant.  A known amount of Potassium is depleted in the soil for each crop and must be replenished.  But usage varies year by year, as replenishment can be delayed a few years due to crop rotations, rainfall, crop prices, etc:

(Source: Uralkali 2015 investor presentation)

Long term demand is has grown by 2% since 1994:

(Source: 2016 Agrium Inevstor day presentation)

Ignore short term demand since its unpredictable.  Just assume long term demand growth of 2%, and concentrate on looking at supply instead.


The latest cost curve I have, showing actual production estimates, is from 2015:

(Source: Morgan Stanley: March 2016 Report: Global Chemicals: Potash S&D Update)

Transport Costs

The above excludes transport costs, which are significant for a bulk commodity like Potash.

From Canada:
From Russia:
  • 80% of Uralkali's exports are shipped through St. Petersburg.  Total transport cost (rail and freight) for this was USD 28 per tonne in 2015 (p29).  Most of the remaining potash was transported to China by rail, which cost USD 39 per ton.
From Belarus:
  • Belaruskali gives no transport costs, but they must be lower since Belarus is so much closer to the sea that Uralkali's Perm region mines.

Future Supply

Supply is quite easy to predict.  Since potash mines are massive projects that take 5-7 years and $1-2 bn to complete, most companies' expansion plans are well known.   Most projects go belly up, especially those from small companies.

For production that is likely to be built, net depletions:
  • I get 11 mt/pa to be added by 2021.  8.5mt if you exclude Yancoal, for which the project has not started development yet.
  • That is assuming mines operate at 90% of capacity. 
  • Also excluding any additional capacity from Potash Corp (POT).  Assume they won't increase production even if they have capacity, as they continue to act as the swing producer in a low priced environment.
  • Also assumes Jansen dies.


Even taking the lowest figure of 8.5 mt net extra capacity by 2020, with the conservative assumptions above - with long term growth of 2%, it will take 5.5 years (from now) to absorb the extra supply.  That seems balanced.  We are not at a place where we can say that Potash prices will rise due to constrained supply in the future.  We're at a place where we can say they may stop going down.

Another thing to watch for are potential African projects.  Ethiopia (Dankalli) seems dead, with ICL pulling out due to lack of infrastructure.  But Republic of Congo and Gabon look interesting - very low production costs, no rail required, and easy shipping to Brazil.  Still too early to tell if they produce, but if they do hit their numbers, they'll be the cheapest producers in the world.

Appendix - List of future Potash projects

I judge the likelihood of new capacity plans to be actually built based on the track record of the company, their financial backing, and the cash costs of the project.

New production capacity that is likely to be built is below, listed from lowest-cost to highest-cost (left side of cost curve first):

Net production addition
Cash Costs/mt
Increase from 10.8mt KCl (production) in 2016 to 14.4mt (nameplate capacity) in 2020  That includes a 2mt loss from existing mine depletion, and 2 new Mines (Solikamsk No 2 for 2.3mt/pa and Ust-Yayvinsky for 2.5mt/pa).  (Source: E&MJ, 2015 article)
2.2mt by 2020, assuming operating at 90%capacity.
Same as existing Uralkali operations
2mt.  Production scheduled to start from 2021 to 2023.

Mine under design in 2015. 

This company seems very profitable, but this is their first potash mine.
2 mt capacity.

1.8 mt if operating at 90% capacity.
Same as Uralkali - in Prem region.
Usolskiy mine expected startup in 4Q 2017.
Volgakaliy expected mid 2018 startup.
Both projects have 8.3mt KCl production potential.
4.2 mt nameplate capacity around 2020. 

So 3.8mt if operating at 90% capacity.

8.3mt nameplate capacity afterward?
Same as Uralkali

That includes Petrikovskoye, which will add 1.5mt KCl.

Little information available about this company.
1 mt if operating at 90% capacity.
Same as existing Belaruskali operations
Produced 2.2m in 2016, which is 73% of nameplate capacity of 3mt (p8).  Expect to ramp up in 2017 .
0.5 mt, if operating at 90% capacity.
Same as existing Agrium   operations
Legacy: started producing in May 2017, expect to reach 2m production by end 2017.  Plan to sell 0.7mt to US, the remainder offshore.
Started production May 2017

K+S estimated to currently produce 6mt in Germany.  High cost operations.
2mt by end 2017

2.9 mt by end 2019
Slightly lower than Potash Corp
Potash Corp (POT)
9.3mt production in 2016.  They closed high cost mine (New Brunswick) but opened a cheaper one (Rocanville).
Total planned expansion is 10.1mt.    Morgan Stanley estimates 2015 had 9.3mt operating capacity, with 5.5mt capable of restarting in 12 months.  They model 13.4mt capacity increase by 2020.

Not all their capacity is used; POT acts as the swing producer.
Additional 10mt capacity, but may not be used if process remain low.

Part of Yanzhou Coal (HK:1171), which has been profitable for the last 5 years (p10) , but with high debt (40X 2016 income, p11). 

Are Chinese companies operating from a strategic rather than economic perspective?  ie: acquire resources, don't expect profits.

Economics should be the same as any Ssachkatchewan project. 

2.5 mt if operating at 90% capacity.
Similar to POT

Production the is likely to be removed is listed below:

Net production removal
Cash Costs/mt
Cease UK production of 1mt/pa in 2018, produce SOP instead.

High-cost US miner.  May go out of business.  I’ll be conservative, and assume they do.

Sigmundshall mine depleted by 2020.  Estimate its production is 0.3mt (p25p8)

0.5mt.  Depleted by 2018
-0.5 mt

Speculative projects, as of now, unlikely to be built:

Nameplate Capacity
Cash Costs/mt
Additional 2.8mt from panned Polovodovo mine.

Costs 1.6bn, they may not have the money.
2.8 mt by 2023
Same as existing Uralkali operations
Jansen.  8mt pa production, (10m nameplate capacity). 

I don’t think it will ever produce.
10 mt
Need potash price of over USD 400 to be profitable, says POT.
Sirius Minerlas
York project, under a national Park.  Nameplate capacity 20mt/pa.  Currently under design and site preparation.
Produces polyhite, not KCl.

May be a different product.  Polyhite is probably more useful for producing SOP  It has 4 plant nutrients, so may be better sold as as blended fertilizer that has no Cl.  Has less potassium than SOP.

LSE listed.  Stock price up to ~1.4bn pounds market cap.  Gina Rinehart has a stake.
Probably not relevant, supplying a different market.
Encato Potash
2.8mt capacity in Saskatchewan. They bought native rights. 

Encato has a market cap of ~50m.
2.8 mt
Similar to POT
Circum Minerals
New Dankalli mine (Ethopia) schedued to produce 2mnt by 2021

ICL quit the project in Oct 2016.
2 mt
USD 38/t operating costs.  But 500km rail/truck to Dijoubit. 
Dankalli/Colluli (Eritrea)
Produce SOP not MOP, not relevant here.

Elemental Minerals (Kore Potash)
Kola project. DFS to end in 2018.  Expected start of production 2022.   DFS to focus on 2mt.
Yangala (Dougou extesion)

ASX listed, small company
Very Cheap: Life-of-Mine cost $68/ton. 
Cheap transport: Only 36km from coast - use conveyor belt
In Gabon (near KorePotash, north of Republic or Cngo)
2 projects, no estimate for production capacity.

ASX listed, small company

African Potash
Lac Dinga: In Republic of Congo.  No estimate provided for production capacity.

Small AIM listed company.

Highfield Resources
1.6mt production for 2 Spanish projects. Plus 1m for another project.

ASX listed, small company
3.6 mt

Sold Pacific Basin Shipping

Sold Pacific Basin Shipping (HK:2343) at HKD 1.60 on 8th June, for loss of SGD 1703.

I've changed my mind.  Not confident on this one, as new ships can be built in 18-24 months, limiting any sustained rise in prices.  We can't just look at a 10-year chart and say the BDI is gonna go back to 2008 levels. I think the time to buy shipping stocks is when even the best players have been losing money for 1 or 2 quarters - when things are so bad they can only get better.  At that point, you may get 50% upside.  It would be a small trade - trying to catch a falling knife - and I would be dribbling in slowly... maybe 1% after one bad quarter and another 1% after a second.

If I want to play at all.  Shipping is a tough sector.  There's no way to value a shipping company - earnings and vessel values are cyclical.

Saturday, April 1, 2017

Pacific Basin Shipping (HK:2343)

Pacific Basin shipping is a bulk carrier, operating Handysize and Supramax ships.  These ships carry minor bulk cargo (e.g.: logs, steel products, cement, grains), are smaller, and often have their own cranes, allowing them to dock at small ports that do not have loading or unloading facilities.  So they operate in a different market from the major bulk carriers (iron ore, coal, and sometimes grains), which form the majority of bulk shipped materials.  Despite being in different markets, the Baltic Dry Index (BDI) and Baltic Handysize Index (BHSI) follow each other:


Pacific Basin has the largest market share in the handysize segment, but is still a price taker in a fragmented market:

Pacific Basin has 111 Handymax ships (75 owned) and 34 Supramax ships (20 owned).  To get an idea of the market, some competitors are:
  • Western Bulk: 3rd largest owner of Supramaxes in the world.  Private company, releases short annual reports.  126 vessels in 3Q16.
  • Navibulgar: Privately owned Bulgarian shipper, expanding rapidly (1), (2).  20 Handymaxes and 9 Supramaxes.
  • Maybulk (KLSE: MAYBULK): 7 Supramax and 7 Handymax.
  • The rest seem to be small, private companies.  eg: Falcon Marine (17 Handymax),  Apex Marine (5 Handysize), MT Marine (13 Handysize).
Dry bulk shipping is highly cyclical.  In February last year, the BDI & BHSI dropped to there lowest levels in 15 years.  Every player in the industry was losing money.  

The key for future profitability is in these numbers.  All are from Pacific Basin's annual report:

  • New supply of ships.  New supply is still coming online as orders places several years ago are fulfilled.  The bulk of these orders are expected to be delivered this year (9.2% fleet growth), then dropping off sharply next year:

  • No new dry bulk ship orders have been placed this year (except for 31 Valemax iron ore carriers, which serve a different market).  A five year old second-hand Handysize is benchmarked at USD 13.5m, far below the estimated USD 19m for a new one.  This excess of second hand vessels on the market means new ones are unlikely to be ordered soon.
  • Scrapping: Last year, 3.6% of global dry bulk capacity and 3.1% of Handysize capacity was scrapped. New ballast water treatment regulations from September this year (requiring the costly retrofit of ballast water treatment systems) may encourage ship scrapping.
  • Demand: Demand is unpredictable, and depends on global growth and industry specific factors.  No point trying.
A bet in this company is a bet on the industry.  I'm hoping that the industry will continue to improve, and stock prices have not yet taken it into account.  Bought 62000 shares on 29th Mar at HKD 1.69, for a cost of SGD 19,076.

Of course, it would have been better to buy in Feb last year.

Wednesday, March 22, 2017

Boustead Projects

BP has 2 businesses:
  • Design-and-Build: Undertake construction projects to design and build industrial properties for clients.  This is project based, so is lumpy.
  • Leasing: Lease industrial properties to clients.  This is recurring.
Breakdown of profit segments:

Theses two ways of looking at this company: as an asset play (buying $1 for 50c), or as a cyclical play (buying near the bottom of the industrial property market).

As an Asset Play


BP holds its assets on the balance sheet at less than market value.  Considerably less, in fact.   Going through the items:
  • Properties held for sale (4 in SG, 3 in China) are held on the 3Q17 balance sheet at 30.5m.  However they have a 2016 valuation of $103m ($107m for 2015).  This is based on "income and comparable sales".
  • Investment properties (all in SG) are held at 141m, but their 2016 valuation is 259m (265m in 2015).  
  • Since the 3Q17 results have been released, a stake in Triple-One Somerset has been sold, with an 8m profit (before tax).   This is recorded on BS as Available for Sale Financial Asset at 17.8m.  Assuming a PAT of 6.5m, this gives 24.3m.
  • There is another financial asset for sale held at 22m, but this is a share of a China project.  Impossible to value, so ignore it.
  • Also ignore investments in Joint Ventures (15m).
  • Looking at current assets & liabilities (working capital, receivables/payables, WIP, deferred tax) gives -10m.  Small enough to ignore.
  • No borrowings.  Net cash 9m.  Small enough to ignore too.
With 320m shares outstanding, that gives $1.13 per share.

As a Cyclical Play


  • Subtract the Triple-One Sommerset stake, sold for 7.5c/share from the market cap.
  • Assume they sell their 'Properties-held-for-sale' at 50% of the market value.  Thats 50m, or 15.6c per share
  • Assume their leasing revenue then drops proportional to their market values, as those properties sold were previously being leased out.  Now the leasing business is earning 11m a year (before tax), or 3.4c/share.
  • At an 80c share price, minus the first two items above, this makes it 17X before-tax-earnings, just for the leasing business.  These are recurring earnings.  And we get the highly cyclical design-and-Build business for free.

The Industrial Property Cycle

The industrial property market is cyclical, and past downturns have been long and painful:

(Source: Singstat)

One reason for the downturn is excessive building bought about by endless QE.  This will peak this year:

(Source: JTC Quarterly Report 4Q16)

The other reason for property market downturns is lack of demand.  The chart below overlays recessionary periods onto the industrial property index:

So recessions are not the sole cause of property cycle downturns.

DBS expects "further weakness till the end of 2017 before bottoming out from 2018 onwards."  Unless there's a recession, in which case all bets are off.

My expectations are:
  • No recession soon, probably a mild global recovery in the next 6 months.
  • But property supply has exploded due to 7 long years of low interest rates.  This is now reversing, so we can expect the downturn to be long and deep.
Though its tempting to buy due to the discount to asset values, I'll wait till the end of the year at least.   This is my gut feeling, or judgement call.  Or I'll wait until the price drops enough that its irresistible.  And I need to remind myself that markets look forward, and we want to buy before things get better - we want to buy when they are getting less worse.

Tuesday, January 3, 2017



The price of uranium has been going down forever.  For 5 years, since the 2011 Fukushima disaster.  Or for 10 years on a longer term chart:

Source: Cameco

Although uranium use has been falling since 2011, 60 new reactors are now under construction, mostly in Asia:

Source: IAEA.  See World Nuclear Association for an updated & detailed table.

This is a 13% increase in the current 450 operational reactors.  The bull case for uranium is that an overreaction to Fukushima and the multi year slump in prices has undermined sentiment in the industry, halting exploration and curtailing mining.  And prices should see a massive jump when new demand comes online.

Economics of Nuclear Plants

Nuclear fission makes up 11% of the world's electricity.

Nuclear plants have high fixed costs, but have low operational costs and run for a minimum of 30 years.  It is hard to vary their energy output, so they are best suited to base-load power plants.

To startup (or restart) a reactor, you need twice as much uranium in the first year.  Most reactors will stockpile 7 years of fuel before starting.

Nuclear plants need water for cooling, so can only be operated in costal areas.

In the US, cheap natural gas may make nuclear plants uneconomical.  Exelon came close to closing 2 Illinois plants which were losing cash on an operating basis.  Even though the 2 plants were saved, I think its unlikely many new plants will be build in North America, due to the high upfront cost.  This won't affect nuclear plants in Asia - cheap natural gas cannot be exported from the US to Asia - once you do its no longer cheap1.

Solar and wind power are getting cheaper and may already be a parity.  But they don't provide electricity throughout the day unless we get improvements in battery storage.  So the alternatives for base-load production are nuclear (expensive, risky), coal (cheap, dirty) or natural gas (clean, expensive in Asia) or oil (expensive).  So I'd expect that nuclear plants will continue to be used for base-load power generation where cheap piped natural gas is unavailable, water is plentiful, and air pollution is a concern.

Uranium Demand, Supply and Stockpiles

Demand is straightforward as the only commercial use of uranium is for fuel.  The number of reactors operating, under construction and planned is known.  Forecast uranium demand is from up 10% over five years to 26% over 10 years.

Mines supplied 60,469 tonnes of Uranium Oxide concentrate in 2015.  The amount required was estimated at 63,404 tonnes in 20162.    The difference was made up by drawing down stockpiles.

No one knows how much is stockpiled.  Early uranium production first went into military stockpiles, then later on in to civil stockpiles.  Since the 80's, these stockpiles have made up the difference between demand and mine output:

Source: World Nuclear Association

Even the size of civilian stockpiles is uncertain.  It is suggested that China has stockpiled more than one worldwide year's supply of uranium.  Japan has been selling off its stockpile since 2011, and nobody knows how much they have.  Global inventory estimates are all over the place.  Nobody knows.

Cost Curve

The latest cost curve I can find is here, but its not labelled.  The article says that most mines were cashflow positive in 2015, due the falling currencies of commodity producing countries.  Long-term contract prices fell by around 30% in 2016, so some may be losing cash now.

The lowest cost producers are ISL mines in Kazakhstan, and Cameco's mines in Canada.

Cameco (NYSE:CCJ)

The textbook strategy while awaiting a commodity price turnaround is to buy the lowest cost producer.  Cameco is the lowest cost (listed) producer - its two biggest mines, McArthur River and Cigar Lake have ore grades of 16-17%.  Most other mines have grades of less than 1%.

Some quick back-of-the-envelope numbers for Cameco:
  • Profits in 2014, 2015 and 9-months 2016 were CAD 183m, 63m and 85m respectively.
  • You could add another 40m to 9-month 2016 profit, due to one-off costs in winding down Rabbit Lake 3
  • Debt is around 1.5bn.  Long term notes, mostly due between 2019 and 2025.

The trouble with Cameco is their massive tax dispute with the Canada Revenue Agency (CRA).  They are alleged to have engaged in transfer-pricing from 2003 to 2015, by selling to Swiss subsidiary at below market prices.  They may receive tax expenses of up to 1.7bn (maybe more 4), plus interest and penalties.  The case for years 2003, 2005, and 2006 is under trial now with a result is expected in 2H17 - the company says the amounts claimed for these 3 years are 'modest' and can be covered by cash.  But the results may be later applied by the court to the other years.  Cameco says they have not broken the law, and have only recorded a provision of $54 million (as of 3Q16).  The case is too complex for a layman to understand (1) (2).

The possibility of such a large payment adds an unknown binary element to investing in Cameco.  There's a small possibility the company is screwed.  In the worst case for example, having to issue 1.7bn in bonds at a 6% interest gives an expense of 100m, raising doubts about their ability to survive when uranium prices are so low.  Or issuing more shares, which would dilute shareholders, and come close to nationalising the company.

Global X Uranium ETF (URA)

Due to Cameco's potential tax problems, its may be better to buy the URA ETF instead.  It holds:
  • 22%: Cameco
  • 39%: Other Uranium E&P companies, that are currently producing.
  • 24%: Uranium exploration companies, not currently producing - more speculative.
  • 8%: Nuclear companies (involved in mining, processing and building/running reactors).
  • 7%: Uranium ETF (holding actual uranium)
Around 50% of their holdings operate primarily in North America, 10% in China/Kazakistan/Mongolia, and 8% in Europe.


Risks to the bull case are:
  • China's nuclear plans do not work out, perhaps due to economic problems.
  • Advances in battery technology make solar feasible for base-load generation.
  • We may simply still be in the downward part of the cycle - people have been saying that uranium will recover for years.  There still may be years more to go, especially since the size of stockpiles is unknown.
  • Cheap supply from Kazakhstan.



1 Majority of LNG price is from liquefaction - see the third slide here.
2 This was not actual demand, as it excludes some outages, but it was potential demand.
3 See question by Greg Barnes in 3Q16 Transcript.  Care and maintenance for shutting down the mine is immediately expensed from COGS, not capitalised over time.
4 Its unclear, see page 11

Monday, November 7, 2016

Sold Seaspan

Sold Seaspan at USD 9.57 yesterday.  The stock was still falling in a rising market.  The market is now valuing the common shares as though the dividend will be cut, possible eliminated.  Loss of USD 5311.62 (incl. dividend).

The shipping sector is still interesting, and I'll look at Maersk or Seaspan again later for a cyclical recovery.  But its a long way off.

When I'm so far underwater on a position, better to sell and realise the loss first.  It helps me to clear my head when thinking about whether I would buy the stock at the current price.

Saturday, October 1, 2016

Singapore Banks: Part 4: Returns and Valuations


So far we've been looking at different aspects of the business separately.  All these parts operate together to generate a return.  How do we measure the returns generated?

The most common measure is ROE:

This doesn't account for differing leverage that different banks may have, so its used in conjunction with ROA:

ROA doesn't take into account the quality of assets.  To do this, we would look at Returns over Risk-Weighted-Assets:

Finally, we can use Revenue over Risk-Weighted-Assets, for cases where the banks have a lot of one-off expenses that affect their returns1:

Why the spike in OCBC's in 2012?  They had an one off $1.3bn sale of securities2.


We use book value to value banking stocks for two reasons.  Firstly, because earnings are highly cyclical.  Secondly, because for a financial business, accounting rules require the assets (i.e.: loans) on the balance sheet to be constantly updated to reflect future earnings3.

Specifically, we use Tangible Book Value (Book Value minus Intangible Assets):

How are the banks valued compared to the past?  I have to use simple book value to compare this, since I can't find any past P/TBV values4.  Price/BVs over recent downturns were:

                (Source: Share Investment: Ernest Lim: Singapore Banks Trading at near Global Financial Crisis Low Valuations).

Current Price/BVs are close to 1:


I would buy either UOB or OCBC, because of their historically high returns and lower write offs.

Would I buy now?  Banks stocks have been grinding lower for the last year.  They are fairly cheap, though not at crisis levels.  If I bought, I would only buy half a position now.  No telling when the next recession or crisis will come.

1 Not for these 3 S'pore banks, but may be used when comparing them to other countries' banks.
2 Note 7 in 2015 AR.   1.35bn "Disposal of securities classified as availiable-for-sale", which is 27% of PBT. 
3 Unlike other businesses where where the amount recorded on the balance sheet is the amount paid minus depreciation.
4 To calculate them I would need past stock prices un-adjusted for dividends/splits.