Some key lessons on mining companies:
- They regularly withhold key information from investors.
- Technical reports should not be relied upon because many of them are disconnected with reality.
Without key information on a mine’s economics, these companies cannot be accurately valued. So… mining stocks aren’t a great place to look for longs. You might spent a lot of effort trying to value a mine and still fall short of being able to find reliable information on that mine.
On the short side, there are some opportunities.
My July 8 post “Mine economics explained” explains why I think capitalization of stripping expenses is bullshit. The current trend is for miners to make more aggressive assumptions in that department to boost their earnings. This is contrary to reality. Lower commodity prices means that mines will close earlier. It would make sense to take impairments on previously capitalized expenses. (Or better yet, accounting rules should be overhauled to reduce accounting shenanigans, investor transparency should be improved, and the accounting burden on public companies should be reduced. Simpler rules would benefit investors. The problem is that the system has been co-opted by public companies that want to play games with their accounting and rulemakers who enjoy lucrative consulting gigs helping companies game the complex rules that they created.)
In the past, I have repeatedly criticized Cliffs as the company has done a lot of things that it should not have done. The new CEO (Gary Halverson) is here and he is cleaning house.
- The Ring of Fire chromite mine is cancelled and halted “indefinitely” (Nov 2013). This is smart because the project isn’t close to being economic.
- Phase II of the Bloom Lake expansion has been put on hold “indefinitely” (Feb 11 2014). This is smart because the expansion project is risky and very marginal.
- Halverson is willing to talk to activist shareholders.
- Halverson strikes me as open and honest with shareholders.
If I was any good at predicting commodity prices, I would seriously investigate a long position in Cliffs. Unfortunately I am terrible at predicting commodity prices.
*Disclosure: No position in CLF.
KWG and Cliffs have been embroiled in a legal battle over the surface rights for a transportation route to mineral deposits in the Ring of Fire. On Sept. 10, the Ontario Mining and Lands Commissioner released its decision (you can download it from KWG’s website) and KWG won. It wasn’t a close decision judging by the wording:
[…] the law is clear; the application must fail.
Cliffs could find an alternate route, though it could cost hundreds of millions more. It makes more sense for them to buy the rights from KWG. KWG is sitting on an asset that is worth tens of millions of dollars to Cliffs, if not more.
A year ago, Cliffs put out some information on the economics of its Black Thor project in its Investor’s Day presentation by Bill Boor (see Cliffs’ website). I’ve only stumbled across it and read it now. In the figures given out in the presentation, there are some extremely aggressive price assumptions used and the stated IRR is only 14-17%. The projects’ economics are overstated and this project doesn’t look economic at all. I wish I had realized this sooner.
Now I’m in an uncomfortable position with KWG Resources and Noront. Both their fortunes are tied to Cliffs building a mine and smelter that it shouldn’t.
Noront has updated its feasibility study. “At current metal prices (August 31, 2012), the DCF indicates an after tax NPV(8%) of $233 million and an IRR of 18%.” If you use the 3-year trailing average for metals prices, the NPV rises to $543M. Noront’s current market cap is around $86M, so this stock could be undervalued.