Thread by @YellowLabLife

We need to talk about capital allocation in gold producers. First, the koala is referencing this off of multiple sellside comps tables that say senior producers (1mm+ ozpa) trade at 0.7-1.3x spot gold 5% NAV...let’s get into it 1/n

So what explains the variance in valuation? It’s jurisdictions of operations and in some cases market understands and prices in upside optionality in an asset being realized before it’s formally in the estimates. 2/n

But let’s step out to 10k feet. We all get dividends are value neutral, company gives the option to allocate capital to its shareholders. Dividends are a transfer of optionality. Buybacks acquire an asset (company stock) that will generate a return. Growth capex same thing 3/n

So first the koala will propose something that will be controversial. Mining companies should not pay dividends. No mgmt team has owned enough stock personally or had the track record of cap allocation to do this, but a tax inefficient transfer of optionality is irrational 4/n

I’d rather have Mark Bristow, Ivan Glasenberg, and at least 6-8 other CEOs allocating capital instead of 90% of investors, and 33% of the time probably instead of the koala bear with an egotistical god complex that makes me think I’m really a Grizzly bear. 5/n

So now let’s turn to buybacks, they sneak up in your roic and roe figures as those are basically a reflection of historical capital allocation (before the washout of impairments/write downs each cycle, that retained earnings figure over time is hilarious to monitor) 6/n

If your valued at 1.0x 5% spot NAV and you have $1bn of excess cash lying around in a zero interest rate environment you have choice assuming you believe in spot or higher prices: invest to increase NAV (implicit 5% hurdle rate) or buyback stock (literally a 5% IRR) 7/n

If you are buying back stock you implicitly are saying there are not a lot of opportunities to deploy capital at >5% IRR within your business. That’s depressing when you think about it. 8/n

But koala, what about supply discipline, more production could impact spot price and destroy value elsewhere in the portfolio! Note I said increase NAV not production.

Value over volume is not just a IR slogan, it’s a way of life.

9/n

But are you telling me you can’t deploy $10-20mm here and there in your existing operations to improve recoveries, reduce opex by capitalizing new innovative tech/automation? Just split it out as “innovation capex” and tell the street it’s all got a 15%+ IRR 10/n

Kathleen and Richard really impressed me a few years ago explaining how FCX took a small Arizona copper mine in their portfolio and turned it into an innovation lab to test ideas and with what they had road tested if they rolled it out across North American Copper...11/n

...fcx could potentially get the production uplift of multiple LoneStar’s for the Lonestar level investment. Like holy fucking shit why are you guys even bothering with a base dividend?

Now let’s turn to the Pilbara 12/n

Iron ore opex went from $30/t FOB to $14-17/t not just because of a weaker AUD and economies of scale but because automated trucks were a huge investment that led to more productive and reliable movement of material. 13/n

Blows my mind every industry conference we have never seen a slide showing opex without autonomus, opex with autonomous, just to show the IRR on the investment on a commodity price agnostic basis 14/n

So back to buybacks, unless your are trading stupid cheap (looking at you Vale) are you seriously telling the market buybacks are the best way to maximize the value of your business on a $/share basis through capital deployment? 15/n

Look I get it, you CEOs are about to get lectured for 5 days by a group of people on average 20 years younger then you who’ve never worked a mine or been to the countries you operate in. And they think they are smarter than you. 16/n

Like how dare they tell you what they would do if they had your job. And really all they care is that your stock goes up, and secondarily it outperforms your peers if they own you. And they want buybacks so there is a natural bid in the market 17/n

And further, only way value thesis seem to work in this market is when CEOs go “okay I’m sick of this, give me credit or I’m going to do something like a major buyback or spin to unlock the Sum of the Parts discount”. 18/n

Which is a nice way of saying “how are all you professional investors so lazy you can’t do the work?”. So I’d encourage more disclosure on all capex optionality at your disposal. 19/n

If you have a 20% after-tax IRR project that will cost $100mm no matter the commodity price, showcase it at a conference, and close with “I think 20% is more than a my stock trading at a less than 20% fcf yield right?” 20/n

Hell let’s state the obvious, KL for Detour was a great deal given valuation of KL stock pre-announcement and what has happened since on gold price and progress at Detour itself. Be proud of that, don’t get bullied into buybacks. 21/n

End of rant, but when the koala looks at the gold miners in particular I can’t help but wonder, why would you do a buyback at these valuations? 4-6% IRR is not exactly assume. If that excites you, why not go wild and build Donlin, Livengood, and KSM? 22/22