This Is A Value Investing Market | The Acquirer's Multiple®

During their latest episode of the VALUE: After Hours Podcast, Costa, Taylor, and Carlisle discuss This Is A Value Investing Market. Here’s an excerpt from the episode:

Tavi: If you looked at the commodity space in terms of the chronic under investments in natural resources, and looking at aggregate Capex, things I was looking at back in 2018, it’s pretty obvious. We would have a bull market on commodities. The question was, what was the trigger? The same way, it seems to me obvious that it’s going to be difficult to maintain the returns in equity markets for the next 5 to 10 years given where valuations are. Now, what’s the trigger? I don’t know. Would I, as an investor, raising money today, be deploying capital in equity markets in a heavy way, particularly in overall markets like the S&P 500 index and other things like NASDAQ? I don’t think so. I think this is obviously always going to be a stock picking market, but today, more than any other time perhaps, and starting to see finally again, the value investing principles being rewarded here.

There’s a thing that I calculated here recently that is interesting in the energy space, because it’s the first market to really develop in the commodity side that I think it requires closer attention to, what we were the companies that really performed very well in that camp. I suggest you guys do that research as well, because I know you guys are really into the value side as well. But what I found is that majority of the companies that did better in the energy space realm were really the companies that were aggressively doing Capex, aggressively increasing production. In other words, not being conservative. That is almost the opposite of what I see in the major companies in the gold space.

I also noted that, if you look at the companies doing lots of buybacks and dividends, they’ve been performing much less than the companies are being aggressive. You may say, “Well, that’s maybe market cap related. No, larger companies maybe returning more capital to shareholders, smaller businesses may be more aggressive.” I thought that too and it wasn’t the case. It’s not really market cap related. So, I think that will translate into the mining space. If you look at the mining industry today and you look at the top 50 companies and take the top 10 versus the bottom 40 again in the top 50 businesses, you’re going to see a drastic difference picture.

Capex for the top 10 is historically depressed. Those companies are doing buybacks, which we haven’t seen through all history really. Dividends to magnitude as well that is almost unprecedented. When you look at the bottom 40, it’s complete opposite. Capex aggregate is back to 2011 levels, back to prior highs. They are being aggressive. You look at the performance, medium performance between the bottom 40, top 10, they are not being penalized by being aggressive. What does that mean, knowing what happened with the energy space? That means you want to be buying companies that have a vision that are trying to do something aggressive and really capitalize in this, what we believe to be a gold in commodity cycle.

Tobias: Is the lack of the lower grades and just the reduced supply? Is that we’re just getting to the end of what we can find? Because I think that technology is so much better now for finding deposits. It doesn’t seem to be yielding much more. What’s going on there?

Jake: Coders and not geologists.

Tobias: Yeah.

Jake: No, I’m just kidding.

Tavi: AI has helped in some senses, actually. Especially, I’ve seen some companies that have tried to apply that. I know some other businesses actually provide a service for that. It certainly helps, but I don’t think we’re yet in a place where the exploration endeavor is as easy as it may sound. It’s extremely difficult. When I hear people talking about bringing gold and other things from Mars, and I’m like, “We can’t even get it stuff out of Idaho, how are we going to get stuff out of Mars?” And so, maybe it will happen in the future. I’m not saying it won’t, but I think it will require a lot of understanding.

A great example of this is lithium, for instance. Lithium is incredibly difficult to extract. There is this new understanding of or lack of understanding really of, I think, it became a popular view. It’s a question we get the most from institutional investors. We love what you’re doing, why you’re not investing heavily on lithium?

To me, it’s attractive in a sense. But the valuation of the same deposit that has nickel, cobalt, and other things that will be just as useful as lithium are trading peanuts relative to lithium projects. And so, as a value investor, those are things that are interesting. To me, it was very difficult to start really investing in the space, because I also like cash flow, I also like bottom line improvements and so forth.

When you buy in an exploration business, you get nothing of that. Essentially buying a business or investing in a company that is going to be continuing to dilute themselves over the years, that capital is used in the ground. The beauty of it is that it’s very different than the energy space. It requires $5 million, $10 million. You can create a very, I would say, a very successful, potentially drill program for a season relative to energy where you have to spend $150 million just to try to work on something. This is really because of how deep you have to go for energy projects usually relative to metals and mining as a whole, where I think it became more, I guess, a lot easier to understand the space was how takeout prices happen in the space.

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