Still on the Ag Train
Every so often I go through the stocks that I own, work out their weightings in my portfolio, and evaluate what I am doing with each. Its surprising how sometimes you can go through your investments and be shocked that you are much more heavily invested in one space while your real convictions lie elsewhere. Or on the other hand, how well your weightings line up with your intentions.
As I went through this process this time, it became clear (and no surprise) that my main conviction remains in the Ags. But I am also gaining conviction in stories that depend on China and India continuing to grow. Coal, copper, and zinc are all representing a higher proportion of my holdings. I spent this weekend listening to presentations of Dry Bulk Shippers and diversified miners, and the impression I get is that we may all be surprised with how little the developing world needs the developed world to grow.
PotashCorp (50%) - hmmm 50%... well I'm definitely not operating a diversified fund here. PotashCorp makes up a risky majority of my portfolio. Nevertheless, I am comfortable with that. Look, this is not for everyone and I would not recommend it to anyone, but this is how I invest. I find something I like and go with it big. At various times I have had over 35% of my portfolio in Dynegy, in Hudbay Minerals, in Aur Resources, and then in Quadra. Over the last 10 months it has been PotashCorp. I do run the risk of a black swan event, and that is the risk I accept. My strategy has been that I am young enough to recover, so while my responsibilities are few, I'll bet big when the house gives me the cards. PotashCorp has been, and I believe still is, a royal flush. The mantra is simple: 3 cents a bushel corn costs for every $100/t increase in the price of potash, 5-7 years and over $2B to bring a new mine on, and no new greenfield production in the works. Until something comes along to change that story, the rest is just noise.
Hemisphere GPS (11%) - The stock is finally moving up like I expected it would. I do worry that HEM is competing against companies like Deere in the auto-steering market, and that it will be difficult to get their products into new tractors once the existing tractor market gets saturated. However, from what I read on the farm boards, the S3 is doing well, and after listening to the last CC, I got the feeling that an earnings beat may be in the cards. Such is the life of agriculture these days. Eventually I am hoping that the stock will get taken over by one of the large equipment makers.
Western Canadian Coal (8%) - I've built this position up on weakness over the past few weeks. This stock reminds me so much of Hudbay back when HBM was at $5. I hemmed and hawed about buying the stock, trying to pick a dip, and not wanting to jump in after the big run up from $2. In the long run, that was noise. If coal does what I think it is going to do, which is stay stronger for longer then a one year spike, then the stock is silly cheap. I really like the $4 convertible debentures that they have. You can buy those for around the same price as the stock itself, get a 7% return, and basically have a floor of $4 on the share price.
Skygold Ventures (8%) - Ah yes, the last remaining of my forays into the golds. I've sold SGR, I've sold LGC, I've sold OSK. This one I will hold onto until it gets a little more respect. Low grade? Yup. But $25/oz? Come on. The deposit is no lower grade then Osisko's Malartic, its nearer surface and looks to me to be more conducive to an open pit design then Malartic, probably has a lower strip then Malartic, and it has shown better metallurgy then Malartic. Yet Osisko gets more then 3x the value for their resource? To look at it another way, I did a quick comparison of the 6-month chart of a bunch of stocks in the same boat: SKV, ATN, SEA, BBR and FMM. They are all off ~30%-40%. This is not stock specific, it is sector specific, and while I have been wrong about the junior golds and have pared back my positions accordingly, I'm not convinced that this is the time to bail out completely. So I hold SKV.
Golden Arrow Resources (6%) - My other remaining gold play. Not the same as the others I bought, because GRG has always been a 'moon shot', a speculative junior that will go to the moon if the right drills hit gold. They did hit gold and the stock did approach the moon briefly, but then it came crashing back to earth. Nevertheless, 61m of 3g/t and 266m of 1.2g/t is still a heck of a drill hole at Poncha. They will follow that up after the Andean winter. Meanwhile they are drilling at San Jose and will have results in June. The royalty at Gualcamayo gives them $2M-$3M in cashflow a year and leverage to the gold price. And they have $4-5M in the bank. All with only 15M shares outstanding. I have done well on GRG thus far and will continue to wait it out, at least until they get closer to drilling out Poncha. And if gold stocks ever come back into fashion, I suspect it is going to go off.
Agrium (5%) - I don't even want to talk about this silly stock. I sold a large chunk of my Agrium at $72 because I looked at their margins and saw that a large part were coming from nitrogen. Nitrogen margins, IMO, are going to get hit because of reduced corn planting area and higher natural gas prices. Well Agrium promptly went up $15 and I looked like an idiot. Oh well. I note there was a fellow on BNN last week who said the same as I. Maybe we are both fools?
Copper (4%) - I own Quadra and a small position in First Metals. I wish I would have bought more Quadra when it got down to $16, but I didn't because of my worries about the economy. First Metals is a speculative value play, but I am very aware of the dangers of start-up mines, so if the stock begins to reflect the cash flow potential, which right now on a yearly basis is around the price of the stock, I will quickly take profits.
Zinc (4%) - Again this is a two stock basket, with Strategic Resource Acquisition and Blue Note. Both of these companies have been beaten up by low zinc prices. Here's what I think. The costs of a new mine are going through the roof. To build a mine of the scale of Cariboo or Gordonsville would cost what? $200M? $300M? More? Yet these stocks are trading at a fraction of that. The increased capitalized costs tell me that there is no way we are going to see new mine supply in a few years unless we see much higher zinc prices. Therefore, the value of assets like Gordonsville and Cariboo should eventually reflect that. If the economic conditions were less uncertain, I would be backing up the truck to these stocks. As it is, I am watching them, and the zinc market, closely.
Kaminak (2%) - My other moon shot and a play on uranium. I don't know what to say about this. There is a historic resource for the Kivalliq property that they just agreed to explore that makes the stocks look cheap in comparison to its peers. On the other hand, the property is in Nunavut, and I am very aware of the skyrocketing capital costs of new mines in remote regions.
Intrepid Potash (2%) - Because I don't own enough potash already. If the market does another swan dive, this will be the first position I add to.