Tag Archives: Industry Analysis

Valuing a Coal Company: How Do We Start?


From a reader: Hi John,

Thank you for the library access to VL. Responses about Value-Line from the group have been underwhelming. Got zero replies for discussion about coal or other topics. Most people just ask for certain industries (REIT, Insurance, Chemicals), so I tried to make it interesting by asking for a “quick and dirty” valuation in return for VLs, but I did not get the promised short write ups. So I have stopped uploading to the group for now.

John Chew: Sorry to hear that, but, on the other hand, most folks are too busy and distracted to do the hard work–therein lies our opportunity.

I’m trying to value Cloud Energy and am not sure how to go about it. Its proven and probable reserves are 1.1billion tons. With an average margin of $3.2 since 2010 (selling price per ton – average cost per ton), this works out to 1.1×3 or 3.3 total value of coal. But the variation low is about 2.24. Cloud makes money and is able to service debt. It is also trying to cut cost. The coal value works out to 3.3/61mil sh outstanding or about 40-$51/sh.  The highest it has traded is half this value. I understand the problems with coal now (cheap oil, natural gas, environment, competition from other suppliers), but would like to know what it is worth.

I’ve looked on your blog for examples for asset type companies, but you have not posted some like RGLD, FNV, SLV etc. The case studies on CRR and other nuggets like determining the per unit value and spread (for gold) were helpful. Could I get your write up for coal and gold?

John Chew: Ask what would you need to know to own a coal company outright? If this was one of your lifetime investments what would you look for?

If I wanted to buy a coal company outright, I would want a productive asset. How much coal is it selling, price, what it costs them to dig it out of the ground and get to market, and how much it has left, whether it is sustaining itself and has costs under control.

CLD operates ok and management is doing what it can to cut costs to weather the industry downturn.

EV/EBITDA is 4.54, almost half 8.9 industry EV/EBITDA multiple. This works out to about 38.25-40.5.

Tangible Book Value is around 17.2.  Price is significantly below. I’m surprised it went so much below tangible book.

John Chew: So why is the market pricing CLD at $4.50? (June 17th 2015). What is the market implying by the current price?

There is even cash flow and decreasing capex, So 2.4-.31 with no growth and 10% return req is about $20.

Margin between cost to mine of 10-10.19 and sell price of 13 is 2.81. Taking off tax considerations, leaves 1.9 approx. With no growth, I would pay 19. It’s 4.5 now.

Its per ton cost is 10.2 and 2015 sell price is estimated 12+ to 13. The 3.5 mines it owns are productive. Thermal coal is 44/ton but using their 10.2 sale price is more relevant. Sales to Asia seems to be the demand driver.

Vulture funds also seem to be waiting for some industry consolidation (which has not materialized yet) before buying.

Thank you. Appreciate your help.

John Chew: You ask the right questions.  If we buy a coal company we have to know how much (in total on a sustaining basis) does it take to find, mine and replenish reserves. What influences the customer’s decision to buy?  What does the demand and supply of coal look like in the past, present and what might influence the future?

Let’s start by:

1. getting an overview of the coal market


Search out all the negatives on coal like: Obama’s War on Coal https://youtu.be/a-wCC0Szx4g


To survive in an industry consolidation/shakeout, you must find the lowest cost producers on the cost curve:  http://www.fool.com/investing/general/2013/09/21/oil-and-coal-stock-valuation-what-youre-missing.aspx

Despite the hysteria of pension fund divestitures, cheap natural gas, global warming, what is actually going on?

Primary energy consumption continues to grow and will be dominated by fossil fuels and nuclear power for many years, but renewables continue to post the highest growth rates by far. In 2014, renewables comprised 2% of primary energy consumption, with hydropower adding another 7%. Nuclear power accounted for 4% of the world’s primary energy consumption, while oil continues to be the world’s leading primary energy source at 33% of overall consumption. Coal is responsible for another 30%, while natural gas makes up 24% of the world’s primary energy consumption. See statistics:


Also, http://www.eia.gov/coal/

Also, review the past annual reports and presentations of:

Arch coal, Peabody, Consol Energy, Cloud Peak Energy.

Thoughts on valuation of mining companies: http://www.avoidglasses.com/valuing-a-mining-company-using-net-present-value/


Also, an EXCELLENT annual report on the operations of Hallador Energy:



HNRG_VL 2013



The Gloves Are Off in Mining

We probably need to look at a history of met. coal prices (Newcastle) for the past 20 years and various Thermal Coal prices and compare how companies did.

We want companies that will survive/thrive in this chaos.   Right now the coal market is suffering a cascading amount of bad news: pension fund divestitures, low natural gas prices, China not importing as much, unknown environmental laws, impending bankruptcies, and falling stock prices.

Ask who is on the other side of the trades?

By next week, let’s lay out the financials and operating metrics of both Hallador Energy (HNRG) and Cloud Peak Energy (CLD).   Are we at the trough of the cycle and how long would it take for a peak in the cycle based on history?

If you use EV/EBITDA don’t forget to also deduce maintenance capex or the capex needed to sustain operations.  Since coal is a bulky/low cost product, the cost of shipping to the customer may be a major part of the final cost to the customer, so where are the mines located in relation to the customer?

What are our companies worth in various scenarios: Bad Cast, Base case, Good case?  

What is the cure for low prices of coal?  What signs to look for?

WEDNESDAY, APRIL 11, 2007 http://stockmarketnotes.blogspot.com/2007/04/costton-is-appropriate-measure.html

Cost/Ton is the Appropriate Measure to Compare Coal Companies

Part 2: Analyzing a Gold Mining Company–Initial Steps

Mark Twain: “A mine is a hole in the ground with a liar standing next to it.” 
2-BGMI-Gold both-W2 (1)

Initial Steps

We first have to understand the product/market of our gold company. Gold companies produce gold and silver which is money. What is money?  Precious metals have exchange value which makes up a large part of their value.  You first have to understand the gold market. Note: why did gold go down LESS than other commodities such as oil in the 2008/2009 credit crisis?

You need to draw up an industry map. How? Find out who the participants are.

Start with history: http://www.fgmr.com/gold-mining-stocks-have-outperformed-the-djia.html

BGMI http://www.sharelynx.com/chartstemp/free/fchart-BGMI.php

QUIZ: What is the best environment to invest in Gold mining equities. Why?

We will circle back to an industry map after you have read about the industry.

What determines the price of gold: http://www.acting-man.com/?p=10251 Also, do a search for gold and/or mining stocks and then read his posts.

The Case For Gold by R Paul

Gold Dollar by Rothbard

Roubini Why Gold Won’t work

Study: www.monetary-metals.com

Gold as collateral: http://www.alhambrapartners.com/2014/02/26/gold-and-reverse-repos/   Also, do a search for gold.

Read free research on gold as money: http://www.myrmikan.com/port/

View all five videos on money: http://hiddensecretsofmoney.com/

Two excellent books: Gold, the Once and Future Money by Nathan Lewis. Also, Gold: The Monetary Polaris by Nathan Lewis.

Gold and inflation: http://www.garynorth.com/public/department32.cfm

The case for gold:  http://www1.realclearmarkets.com/2011/11/18/my_thoughts_on_lewis_lehrman039s_gold_standard_120618.html

Understand royalty companies: http://seekingalpha.com/article/1341411-gold-and-silver-royalty-companies-part-1-the-pros-and-cons-of-royalty-companies   (read all five parts)

Then read presentations of Royal Gold, Silver Wheaton, Franco-Nevada, Sandstrom from their websites for a good overview of the gold mining market(s).

These sites can get you started. Don’t believe the hype!

www.goldsilverdata.com Also, go to http://youtu.be/VjjLhPqO8bY to view video on valuing gold and silver stocks.

Go to www.youtube.com and search for Jim Grant AND gold,   John Doody and mining stocks.  Ditto for Brent Cook, Rick Rule. Search for their comments.

That will get you started and then next week, I will post an industry map. Ask questions.   In two weeks we will crack a company.

Update March 17, 2014: Discussion of Junior Resource Sector



Part 1: Analyzing a Gold Mining Company–Where to Start?

Idaho_Gold_Minegold mine 2

Gold mine 3gold mine




Assignment: Analyze and value a gold mining company

Mario Gabelli once suggested to a group of Columbia MBA students to become an expert in an industry. The process will take at least six months of intensive reading and research to get to a level of what you need to know and what you can ignore. Then in a year or so move on to another industry. After five or six years you will have competency in five to six different industries.   Since investing is all about context, we first need to learn about the gold (precious-metals) mining industry.

Whether you will analyze a gold mining company, a shipping firm, a title insurance business or a media company, you will need to develop an understanding of the industry within which your firm operates.

Since we do not have six months to study, we will move at an accelerated pace.

OK, so what do you need to start with and how would you begin?  Pretend that you wanted to build a mining company from scratch, how would you do it? If you were airdropped into Northern Pakistan, what would you first need after hitting the ground?

Friday, I will post my suggestions and information sources. Meanwhile, you can think and search for yourself. Eventually, we will move on to the particular company.   Don’t hesitate to post questions if you are unclear or my instructions are incomprehensible.

Good luck!

Readers’ Questions: Studying a Company; Gold Stocks; Down and Dirty on EGD.V

Mkt Cap to GDP

Investing, when it looks the easiest, is at its hardest. When just about everyone heavily invested is doing well, it is hard for others to resist jumping in. But a market relentlessly rising in the face of challenging fundamentals–recession in Europe and Japan, slowdown in China, fiscal stalemate and high unemployment in the U.S.– is the riskiest environment of all.–Seth Klarman

Read more on Buffett’s market indicator flashing red: http://greenbackd.com/2013/05/22/warren-buffetts-favored-measure-of-market-valuation-passes-unwelcome-milestone/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+Greenbackd+%28Greenbackd%29


Reader #1: To give you a bit of an introduction about myself, I am based in Singapore and a third year accountancy student. Have been researching Asian equities for quite a while and would like to seek your opinion on my analysis process.

I have read many books on value investing; Greenwald, Graham, Fisher and also accounting books like Financial Shenanigans. However, this is what I noticed whenever I am about to start working on a company.

Financial statements: I am able to pinpoint out the basic stuff like gross margin, ROA, ROIC, balance sheet ratios etc. But to be able to paint the full picture of a company, I am still not quite certain of my ability to do so yet. I have seen how some investors are able to tell a story using the financial statements (Have seen in newsletters of funds, books). Like picking out the nitty-gritty stuff.

Qualitative aspects: I start out first by reading the past few years of annual reports to get an idea of the corporate structure of the company and the business model. This step is generally OK. However, I am kinda unsure how to proceed on from here. What I usually do is that I just google the business model. Etc this company sells jewelry. I google jewelry business/how is jewelry manufactured and sold…you get my point. 

But somehow, I still feel kinda lacking when I compare my analysis with the fund managers here. I read their newsletters, download conference calls transcript to see what questions they ask etc. And their level of understanding of the business simply astonishes me! 

Not sure how you go about doing it but would like to hear from you!

My reply: You may need to learn more about analyzing an industry/business. As you first look at a company you want to answer several questions:

Does the company have a competitive advantage as shown by fairly high and consistent profitability and/or market share? If yes, then what is the source of competitive advantage? Patents/Copyrights (Disney), Unique Asset (Compass Minerals) , economies of scale coupled with customer captivity (Coke), etc. Is the moat weakening or strengthening?   What price will you pay for growth?

You could draw up an industry map to understand the business better. Read Bruce Greenwald’s Competition Demystified or (Use search box on csinvesting.org and follow links to download cases on Coors, Coke, etc.).

Read: Strategic Logic by J. Carlos Jarillo and The Curse of the Mogul, What’s Wrong with the World’s Leading Media Companies by Jonathan Knee and Bruce C. Greenwald.  Also, The Profit Zone: How Strategic Business Design Will Lead You to Tomorrow’s Profits by Adrian J. Slywotzsky.

If the business has no competitive advantage–95% of most businesses–then can management earn a fair return on the company’s assets?  Does management allocate capital effectively; do they eat their own cooking?

Always try to find a thesis for a variant perception. Is there hidden value in this company like shutting down a losing subsidiary, NOLs, underutilized assets, etc. Where can I develop an understanding that will give me an edge?

Read with a purpose. Develop a checklist of your own. Try to determine the key metrics of the business. What are the risks in the business?

Try to read biographies of business leaders in a particular industry. You can find  books about the cruise ship industry, steel, beverages, sports, media, and airlines. Also, try to speak to people in the business and industry once you have a basic understanding of the business. Read about the history of the industry–its booms and busts–what are the opportune times to buy and sell such a business?

But until you spend about ten years studying hard, it is difficult to develop proficiency in anything, so patience.  Good luck.

Reader #2:

I have been dipping my toe into gold stocks having owned Yukon Nevada and Energold (EGDFF) over the last year or so.  I am thinking along your lines that I need to diversify into ten or so names with a mix of producing and near producing.  I wondered if you knew the current top 10  GSA recommendations and if there were any other stocks at the exploration or near producing end that you thought were worth further investigation. I see Weiss has a large position in Seabridge, but I don’t really know how to analyze the opportunity?

My reply: Like this gentleman, http://truecontrarian-sjk.blogspot.com/, I am drawn to cheap assets.   Precious metals miners (GDX and GDXJ) certainly qualify. The more I study mining, the more I dislike the business. These businesses are highly capital intensive, they are price takers and subject to many operational risks. Right off the bat, you HAVE to buy these assets cheaply to reduce your risks and you must diversify (8 to 12) names to take advantage of the insurance concept of GENERAL cheapness. One of your companies could get swamped but overall your other companies will flourish. I bought Energold last week once it went 15% below $2.00 per share because then you were buying  the company for less than its working capital of which 40% of that was cash. I don’t buy the thesis that Energold has a competitive advantage. I am buying cheap assets.

The mining industry has four tiers: Senior Producers like Yumana, Newmont, Agnico-Eagle, Goldcorp, Barrick. Then you have mid Tier Producers like EGO, GORO, and NGD, then you have developmental companies like Seabridge, Pretium and  others which may be years until production. Finally, the lottery tickets like explorers found in GLDX.

If you want exposure to bullion, I recommend CEF at a 2% discount or more. Avoid GDXJ because of some of the low quality names in that index. You might want TOCQUEVILLE. John Hathaway, the fund’s manager, has a long experience and good reputation. Read his letters for several years. See his fund below:TOCQUEVILLE


Above, is GROW (US Global Investors) this may be a cheap way to participate in the rebound in precious metals and commodities. The current price seems to be at a discount to its cash and AUM of $1.3 billion using 2% of AUM (pay less than $3 per share).

Another way to reduce your risk through diversification and avoiding operational mining risk is to look at the royalty/streamer companies like SLW, RGLD, SAND, FNV. Though they are not as statistically cheap, they have huge free cash flows. I think those companies will be needed more and more to finance future exploration and development. Put your hat in the ring with experts. Now is a better time to be buying than in the past five years based on valuations.

The safer strategy would be to go with Tocqueville because you get broad diversification with a manager who knows his companies. The downside is the annual fee. However,  You can make decent returns when this sector rebounds and be ready to sell when his fund become popular again. Look at Fairholme last year with its heavy investments in financials–a formerly out of favor sector:


The downside in gold and gold stocks may not be over. My thinking is that the current events are VERY bullish for gold long-term but bearish short-term. Japan’s insane policy of currency debasement is forcing down interest rates (for now) and leading to a reach for yield (return) so gold might be under pressure as investors leave gold to pursue stocks.  Eventually, Japan’s currency will implode, leading to massive unintended consequences and a rush back to safety.  But, gold miners don’t necessarily need gold to go up, they need their inputs to decline more than gold, so their margins widen/stabilize. 

Also, gold should just be part, not all, of your portfolio.

P.S: ENERGOLD (EGDFF): Down and Dirty Analysis

Someone sent me this……sometimes the best ideas are the simplest.

Or even better, Energold. I am a proud shareowner. But emotions and will aside. Here you have a biz with 3 operations. Earnings power is the best way to look at it and most valuable, but let’s imagine we just sold for parts:

Dando (worth 3mm or so – bought for 300k or so plus put in working capital)
Bertram (paid 18mm for it. But EBITDA now back up in the low/mid teens – worth at least 30mm today)

Mining Biz (133 rigs, let’s be super conservative and say 250k per rig – so worth floor of 33.25mm)

Impact Silver Stake (3.8mm at today’s prices)

In addition, 91.2mm of working capital (incl. cash and inventories)
Minus the 43mm in total liabilities = $3+30+33.25+3.8+(91.2-43)= 118.7mm ($2.59 per share) vs today’s EV of 68.15 mm.

I am no genius – but that seems silly cheap to me. What’s more, earnings power is substantially higher, and the company is growing, and it has amazing operational leverage. Sure, results may not look amazing until they are back towards 5000k meters per drill annually. But even if they were to only get 3500 meters per drill @ 180 per meter (assuming cost per meter is ~138 per meter) the minimg biz is still FCF positive and earnings positive. And these are bad times. Bertram still doing fine, as is Dando.

Another good blog:  http://brooklyninvestor.blogspot.com/