On Commodities and Climate Change, Exor, Glencore, Watch Lists and more

I have tried to write posts more often but found myself struggling with finding the perfect balance between depth and relevance. On the one hand, I would like to publish well thought through messages which require quite a bit of analysis, but on the other hand, I would like to keep a good discipline of recording my thoughts regularly to improve my process.

So, today’s post is a bit of such a ‘balanced’ approach: there is no one single deep thought here, but this is also not just a collection of links to Youtube videos and articles that I have come across recently (on investing and everything else).

The two main projects I have been working on in my free time was an update on Exor’s investment case and an investment case on Copper (and the broader subject of Climate change). I refreshed the key numbers for Exor’s subsidiaries, parent level net debt and made other adjustments and arrived at a NAV of about EUR 120 per share, almost 79% above the market price. I then started doing more valuation of individual businesses, particularly those that are more cyclical (Stellantis, CNH), to make sure I am not valuing Exor at peak market values. Also, I wanted to get a better sense of the mid-and long-term growth potential of the underlying businesses, rather than just focusing on the discount of Exor to its sum-of-the-parts valuation.

The project started to take me longer than I thought. So, in the end, last week, I increased my Exor position (by about 20%) and reduced half of my position in Fairfax Financial Holdings (FFH), which some people refer to as ‘Canadian Berkshire’. With all respect to its founder, Prem Watsa, Berkshire has a stronger culture and a more solid business model. Fairfax has more exposure to the global economy (less US-focused like BRK) through its JVs in Africa and India, but FFH’s track record in stock investing is worse than BRK’s; its insurance business also trails BRK. It is trading much cheaper than BRK (on P/B at least), but I think quality matters, and I don’t want to hold stocks just because they are cheap.

A separate topic caught my attention and is another reason why I didn’t finish the full analysis of Exor. It is climate change. Generally, I avoid anything that is a ‘hot topic’ with millions of opinions, wide media coverage etc. However, I think it is getting harder to avoid the subject. I decided to read the book by Bill Gates on Climate Change and have written a  review  on it.

The book strengthened my conviction that this is a big multi-decade theme with many investment opportunities. One of the immediate and quite unexpected consequences is slow supply response by traditional commodity producers to rising prices as almost every new expansion faces more opposition than before. Besides, executives treat new investments with much more caution facing the pressure from shareholders to pay higher dividends and disclose more on CO2 and other issues (recent events around Exxon and Shell are just some of these examples).

I think Renewables and all other Climate-related sectors will be growing fast and for a long time as there is much stronger demand from society and investors for ‘cleaner’ products and solutions, governments are looking for ways to stimulate the economy after COVID, there is much stronger global consensus around this topic for the first time, perhaps, and, simply, there are just too many alarm bells that start to ring with heat waves, hurricanes and droughts gradually becoming the norm, unfortunately.

The only point that makes me a little cautious is that I know that a fast-growing industry is not enough to generate superior investment returns. Remember how Google and Facebook launched their services after Yahoo and MySpace and still became the dominant players. Buffett also reminded during the 2021 meeting that even though there were thousands of automakers in the US a hundred years ago, just two have survived (and no one can doubt that auto was a great sector with a long-lasting impact on the economy, human life etc).

Currently, over 60% of power still comes from fossil fuel (35% - coal, 25% - gas) and only 11% from renewables. By 2050, many estimates point to 70% contribution from renewables (and close to zero from fossil fuels) - this means not just simply replacing one source of energy for the other, but consuming several times more copper for the same amount of power generation. The reason for that is that wind power requires 5-6x more copper than fossil fuel power plants, and new sources of power have to be connected with consumers of electricity. We will need to build new transmission lines.

Gates writes: “With all the additional electricity we’ll be using, and assuming that wind and solar play a significant role, completely decarbonising America’s power grid by 2050 will require adding around 75GW of capacity every year for the next 30 years… Over the past decade, we’ve added an average of 22GW a year”.

Copper is simply the best electricity conductor. Unlike natural gas, it has limited competition. Gas competes with coal, nuclear, renewables, and there is also rising gas-on-gas completion with Australia and the US becoming top LNG producers in the past 10 years. Copper’s only competitor is aluminium which is a much worse material for electricity, and I think from a purely human perspective, if you build your new house, you would not want to save on wiring and would go for copper even it is 2x more expensive. Same when buying your new EV, especially since copper accounts for just about 2% of the final price.

I decided to buy a small position in Glencore. I estimate that at today’s prices, it can generate about $20bn of EBITDA and over $10bn of FCF, which puts it at 3.5x EV/EBITDA and 17% FCF yield. I like the fact that it has a complex structure which limits competition among shareholders and allows the assets to be priced at a discount. I also like that key managers have almost all of their net worth tied up in the company’s shares (they collectively own close to 20% of the company). The company was very firm in saying that it would not pursue new investment projects and will run down its large coal business.

The main risk I see is various investigations launched on Glencore and some of its employees about its relationship with host countries. No decision was made, but this is an important risk to keep in mind.

I am also a little discouraged that the market has been discussing the “new supercycle in commodities” since at least December 2020, and prices have rallied (sometimes over 100%).

I plan to do more work on the copper market to better understand the supply/demand situation, especially in the next 2-3 years and also to identify the best companies as potential investment opportunities in the sector.

Finishing my thoughts on investment opportunities around the Climate Change theme, I should note that I also added another book that I just finished reading recently - The New Energy Map by Daniel Yergin. I have added my  review  in the Library as usual.

Speaking of books, there was one more book I read this month - “Alibaba: The House That Jack Ma Built” with my review  here.

I decided to read it as I wanted to understand Alibaba’s investment case better, especially after the stock has underperformed recently and was bought by Charlie Munger’s Daily Journal. I have finished my analysis yet, but I am leaning towards ’Too hard pile’.

Finally, a bit of housekeeping points - I added a few other sections to my website which are part of my investment process. In the  My Portfolio  section, I added ‘Stocks Under Consideration’, which is made up of ‘Watch list’, ‘Wish List’ and ‘Too Hard Pile’. The idea is to keep track of companies that catch my eye for some reason (they can be very cheap, have a great product, may have seen large insider buying, is facing temporary issues) - that’s my Watch List. If the stock is too expensive, but I really like the business - I would keep it on my Wish List, which I would refer to during broad market sell-offs or if any of the companies fall out of favour with investors. There are also companies that are just too complicated to estimate their fair values because the industry is just too competitive and consumer preferences may change too fast, business depends too much on regulation, I do not understand the business well enough, I will never get an edge in specific sector/region and so on.

There is no specific schedule for how often I add stocks to any of the groups. It could be a few within a week or zero for the whole month. It is also a relative game - meaning that I can add a stock that looks interesting and start deeper research, but then another idea comes across, which is even more interesting.

In the same section (My Portfolio), I also added a sub-section called Third Party Research - these are interesting cases which I found on various public forums which I don’t want to forget and may use later when the stock sells off, or I analyse its competitor or in other instances.

As usual, I would like to remind you that this is just my personal blog and not investment advice. Some of the information I used in this post is relevant only at the time of writing as prices can change, and other developments could make me change my views in the future. I do not plan to update this particular post in the future. Readers should do their own research. Please check the full Disclaimer on my website.