Transcription
Hello and welcome back to the ROI Club. Got a very special guest for the ROI podcast today: our good friend Trader Ferg is back. He's been dealing with the apocalypse, cyclones, end-of-the-world offshore sell-offs, and the lot. Today we're going to have a deep dive into some of his favorite sectors, and it's going to be an absolute gold mine of information, guys. Due diligence—that's your job. Nothing we say is advice. And without further ado, Ferg, great to have you back, mate. How are things with you?
Good man, good. Yeah, no, good to be back on. Yeah, I've just got—just been to Australia. Managed to time a cyclone perfectly. Spent four days with my parents with no power and no water. We survived on whiskey and red wine and sardines, so that was good fun. But lots of um, lots of quality time on the couch because we couldn't—couldn't take the lift; they live on the 12th floor. There weren't many flight attempts to go up and down the um fire escape; you couldn't go outside anyway. So yeah, that—that was—that was quality time. But um, it was actually quite nice because I didn't have to look at the market.
From while recently it's just been um, just been opening um, the stock tickers just to torch yourself if you're if you're heavy um, pretty much anything energy related recently. It feels like whether it's um offshore, whether it's uranium, whether it's coal—none of it seems to be catching a break. But that said, there are definitely some green shoots and some of the more niche little metals, and that's where I'm trying to keep myself self-occupied as well. And got some pretty heavy positions in some of them, so hopefully that asymmetry is going to offset a bit of the damage on the other side. Yeah, it has been a little bit rough, but I mean, it's—if you've been involved in energy for a while, you know stranger to volatility, right?
So how do you go dealing with volatility? Uh, what's your process? Do you—I know you're a fan of the book um, *The Art of Execution* by Lee Freeman Shaw—when you hit those sorts of um, of—get where a position's down, let's just say 20% or 25%, what goes through your mind then in terms of going back, questioning the thesis and the age-old question between: do I cut the position or do I add more? Yeah, what it's really saying like—like I love—I love that book, um, yeah, *The Art of Execution*, because he—he just outlines perfectly like the characteristics of like someone that would be successful in the market. And he was—Lee Freeman Shaw was head of funds, and so he just saw literally hundreds of um, investors, fund managers, traders over his career, and he just pretty much segmented who were the really successful ones. And the ones that were really successful, he called them connoisseurs, and they could usually spot a trend and just ride the trend, almost being—he sort of—I think you called it almost like intentionally lazy or sloth-like—like you just um, once they're on something, they would just write it. If it went against them for a while, they were um, they would happily add to it, and they would trim it very gradually. Whereas the other side of that, the people he called rabbits were the ones that when things went against them, they just stick their head in the sand, and they'd be unprepared to add to a position, and they just write it down. And that's always stuck with me because it's like: should always ask yourself the question when you're going for a drawdown, you should be almost happy to see it because you want to um, you want to add more to the um value. If you liked it at 20, you should love it at 10 bucks; that should just be a um—unless the thesis has changed, unless some new information has come to light that would mean perhaps that company's going to run into financial trouble, it doesn't have the runway you thought it did, is there uh management doing something dumb, are they going to throw some money on a dumb M&A? And so yeah, that's just whenever you're going through the drawdown, it's um, it's just—yeah, it's easy to say it as well. Part of the problem is in capital because I—I loved—we just talked before about—I loved um offshore, and I—I exited—I like lightened up some of my Iranian positions late last year and had quite a decent amount of cash. For—sort of end of December for offshore was an absolute bargain and um, really leaned into a lot of that, and then it's—it's honestly like—but seen that it's got even cheaper since then. I thought those prices look ridiculous to me. And what's really been holding me back recently is one, just not having the capital, and two, understanding as well—my correlation in the portfolio between some stuff almost went to one. So what I've been now searching for is like good risk rewards that aren't as correlated, like as you mentioned before, really like Chinese tech because it just goes to a completely different beat to everything else in the portfolio. There—there's at some point I'm really not adding anything to the portfolio if I add another—say I fall in love with a Canadian oil producer—or it's just—it's just going to be a—a tight correlation with what I've already got; I'm just going to create even more volatility and pain. So um, I'm just as strong in the thesis, but I just know I have to accept the volatility and almost to keep myself occupied and also understand I don't know the timing on any of the stuff. So it's nice to have stuff that—like I love the fact I've got Chinese offshore uh Chinese—Chinese tech; there's a decent position now. Got rhodium, which is a decent position that goes—that's just physical rhodium that goes to its own beat, that's like completely unconcerned with what my energy portfolio is doing. Got ship builders, and some of them were just—after one of them went bankrupt twice—and so the—the amount of people that are in that to start with, such a tight little float, mostly insiders or people that have really done the work, because you're not going to have much retail participation in something that's blowing people up twice. And um—and—and they're hopeless, like even just the—to get any information, you're not exactly having analysts covering it, giving you breakdowns of it every day. And the recent one is um, 10, so yeah, I'm just riding the piece on 10 at the moment because that's—that's been fascinating what we've seen at the moment. So yeah, it's um, it's a mix of everything, but yeah, one that I've got more respect for is really having proper—proper diversification of portfolio um and not just—just keep hammering the energy trade. And then the fact as well is if you have some stuff that's really uncorrelated, increase probability that you can rotate between sectors with good timing, like it would be just an absolute dream if something ran—or something else gets absolutely punished, and you can rebalance at a point which is um, yeah, is nice as well.
Yeah, so you mentioned some great themes. Let's unpack the—the thesis. We're familiar with the offshore thesis, and has anything changed as far as day rates? Look to be flat, but from what I can tell, it's not as if they've actually plummeted. And again, from what I can tell, it's not like there's a whole new um group of new builds on the horizon, or am I missing something there?
No, you're not. We're probably just going to stroke each other's population bias at the moment. I start with—if anything, suppliers continuing to tighten it. So I—I was never in the camp that we'd see the sort of—some of the stuff scrapped that we've seen um, like scrapped in the moments. Yeah, kind of—if anything, feeds into the thesis. It's just disappointing that all been pushed out a few years. As for um, as for just looking at insiders, which is good, and it would have served me better if I'd kept a closer eye on the like Tidewater when um, those insiders headed for the exits. If I lightened up then, would have—would have helped the performance. But yeah, that's—stepping up to buy a CO recently stepped up and is quoting in their recent commentary, I think, with—to is like 81% of their um, of their backlog is um, is now—now covered. Like if you just look forward on their valuation, think L seemed higher; it's like 85, 86%, probably even higher since I um, since I last looked at it because it pulled back to where we are today, 36. And if you look historically at how solid water books have been, they only sort of um, oscillate sort of like 3, 4%. Granted, you can have—if you have a big surprise, like I think CO—both of them took a—took like 12, 15%, but it's—it's fascinating that this got that cheap, and it's um—and that shorted as well. And it just seems to me—I think Cy explained it a while back that there's a lot of um, pods—pods running around making great um returns by just um, shorting companies based on earnings revisions out the next quarter, so that they couldn't care less where the company's going to trade in a year; they don't—they don't care how much um, it'll print cash because they—they'll be long on—they're just um, saying is it going to print negative for the next quarter or two? And they do it across the basket, make um, great returns. So yeah, it's um, it's painful. PFC something—take it as just—they're just massively bearish on the sector. It's not nice to have a lot of um, short—you're constantly questioning if you're missing something really obvious, but at the same time, if um, things turn, they're just fuel on the fire as well; they've got to cover. Yeah, I just think it's a big opportunity, particularly if you can just look—like it's what Brad always says to me, my mentor, whenever I try and get too smart on um, the next quarter or two or even the next year. He's just like, "That's interesting, but everyone's blamed for that; usually get any edge in that; it's just too hard. But where will this be in three, five years?" And I think the absolute writing is on the wall that these are going to be um, these assets are going to be in massive demand in that time frame, and they'll be very hard to build; there is no room in shipyards. And as a result, uh, think we're going to have a period of just extraordinary earnings. And they've already shown—the likes of—Lis cedal—if it's probably merged with someone by then—the shown a willingness to buy back stock; it's pretty exciting. I'd love to see them really lean into the um, the buyback programs before they even consider a new build. It's—it's going to be a real sort of—timer—like start stopwatch when the day rates—the first new build and see what time frames—what it—it is a be case because I just went through um, some of my—my ship out holdings because I've got this whole thesis: you want to be long whatever the Chinese want or where the his money is going to flow. And the one area in my portfolio that—that's questionable is I own a few ship builders, and I could very well be like positioning myself to get like—it—like EVD—like they just—they just attack that industry, and before you know you—you don't want to be messing with the Chinese in a C industry um, so yeah, keeping a close eye on that, but as for now, I don't really see that as an issue. And yeah, probably rambled a bit much now, but especially with regards to drilling, I mean, I can understand, I guess OSVs maybe they've got a shorter turnaround period, assuming you can get an available shipyard, but eighth-generation drill ships are not something you can turn out uh overnight if you've got the—the know-how and the capacity to build it. And so until we start to see, you know, 1.1, 1.2 billion dollars being shelled out to get some more of these on the water, I think the difference between now and CO—and balance sheets look pretty clean—how long can these companies just kind of sit at these day rates for? They're not in any bankruptcy pressure.
Oh, it's—yeah, I think it's um, just a waiting game honestly here. I think these are the biggest layup really, if you got patience. No one's got patience these days, so um, yeah. And you've also got to have done the work that um, there's not going to be a massive oil glut, and shale's not going to um, do the next ramp. I kind of see it across the board. I was just um, I was just—because I've got—been asked a few times recently about like my arc coming back on with a tin, and then you've got like the um—we're—we're in this period where—where there was like a real supply crunch coming; there's been some miracle that kind of saved it, like you had like—you had um, obviously like conventional oil rollover, and then shale just came out of nowhere. And there was two Saudis of energy equivalent found. You had uranium where Kazatomprom just massively ramped uh the last like decade—super low cost, super quick to bring on like ISR. You've had um, even not so much PGMs, but you've had like the sort of NorNickel; there was supposed to be a large expansion project on that that's all zero cost because it's kind of a um, it's a byproduct of their main production. So was always just like, "It'll be fine; you don't need to worry because um, about those sort of rollovers and suppliers because there'll be another um, Saudi kind of oil." Often see it mentioned with Argentina; it'll just—it'll just be a massive ramp. Thing is, it needs capital, and people forget how easy capital—how cheap capital was—how abundant it was. And just PTSD from people that like—let money on fire during the shale boom; they're not just going to be in waiting in line to go um, to have another go down in Argentina, especially when they're still trying to get rid of the last of capital controls and make sure that Milei gets everything across the line. Like he's still—yeah, he's doing amazing things, but he's still got um, a way to go. They did—if you're questioning the—the shale boom in Texas in terms of capital incineration, you—you're not ready for Vaca Muerta and some of the things in Argentina. I mean, just take a look at the YPFA case um—this—they still owed I think 16 billion dollars that the Argentina government has to pay. So we're a little way off then, but I think it can get—one of your pieces you were looking at maybe an 8 million barrel a day capacity for Vaca Muerta. You think that's possible in say a decade, two decades' time?
Um, I don't think it was that high. I think the—the guy was saying that if you could get the equivalent rigs on it, so this was—this was Bill—forget his name—he's like a um, he like a real old-school um um petroleum engineer and been right through all the shale booms and seen all them, and um, he was down there working for one of the Argentinian um, juices, and he was saying if you could get 200 rigs on it, like peak um, people like US shale boom—all the wells are super productive, so you could um, you could easily do—I think it was four or five million barrels um, with that. But at the moment, when they asked him at the end of the interview, they're like, "What's—what's actually probably possible?" And he said um, within 10 years, like um, 1 to 2 million barrels, depending how they can scale rigs. Like the key way to track it is just to look at the rigs in Argentina. They can add five a year, then they're on track to do a million barrels per day by 2030. Something to remember this is that they—they're doing it out of um, like the um, it's mostly the two largest um, Argentinian producers. And whereas with shale, they were—they were F around dead, and there was a point there where it was like over 200% um, of um—yeah, was—yeah, extra 100% was—200% was being reinvested in um, growing production. So yeah, all that cash flow and then obviously the rest was debt or equity that they were using, and did that for years with um, it was like—yeah, with—with cheap capital I mentioned, and with the whole juicy baby draw incentives as well. People have kind of—obviously as we were just talking about—have PTSD from that, so not going to be launched into that. Then lastly, it was interesting to see even the likes of Exxon—they—they said did the math and said, "Yeah, we'll just sell it." I block to one of the national guys. We're going back to Guyana where um, the math and it's not—it's not interesting enough um, doesn't—yeah, obviously didn't stack up. So that was interesting, seeing them sell off the block, and that—that was when—that was recently because that was when Milei was making good progress as well, so you would have thought they would um, at least try and keep some exposure there. Wasn't the case. I think some—some of those decisions were made prior to the election, and I think it's a one or two-year process to actually up and leave. I'm not sure about that specific case. That makes sense.
Yeah, yeah. I was just reading in the London Times because it's a very kind of left-wing propagandist newspaper that they—they were using it as a—an example of how badly Milei was doing, that people—but they made the decision like two or three years beforehand, so that makes sense. Yeah, the situation. Someone who thinks that oil is still valuable—Fergus apparently is—uh, nearly called him Ken Griffin, the—the Citadel guy. Citadel's buying some—some oil in the shale cash. What do you make of that, mate? I mean, they obviously think oil's going nowhere.
Yeah, um, I just think anyone that's um—like I—I—I read HFI Research, and he just had a piece today; he was just like, "No one cares." Like he said, "I can point to everything moving in the right"—like IEA is completely just muffing it as they always do. I love when you search like IEA—"Who's the best research house for like oil?" And that's like—IEA is the gold—gold standard for oil forecast; they literally never get anything right. They're like a broken clock, like they—I think last year they got the correct forecast, and it was because they're always bearish. And it's like—like having a broken clock, and you pointed at their one time of the day and like, spot on. Whereas like—Goe Rosen been great with them—they just point to the fact that they um, they've got this quirk where they—they literally just miss developing market growth every year. They put it down to missing barrels; it's sort of like a almost like a footnote, and then they um, slowly try and revise it and everything down there, and they're just so far behind; they just have to revise like a whole lot of years, and it literally adds up to more or less like a million barrels, I think. Yeah, they—the Goe Rosen joke was—I think they like the 12 largest oil-consuming country, if you added up their misses over the last um, last decade, I think it was. So yeah, the fact everyone takes them so seriously—like there's—with Trump coming in, they're actually pushing them just to reinstate this um—what is it—the current trajectory of current policies. Because for anyone that's been reading their work, you notice they literally taken away just the trajectory we're currently on with current investment, current policies, and it's all just these stated policy scenarios that are just—just fairy tales; none of them exist. They—they just miss it by more and more each year. Like I've got a few charts where it's just like—this looks like a step ladder; like they just—they miss it that year, like, "No, coal will rollover next year," and then it starts at the next step up—all-time new high—this is the final year, and then it steps up again the following year. The annual event—the upward revision that happens every year. Set your clock to it.
Yeah, are you in the camp the shale patch is likely to rollover in terms of its new growth, and that's what's going to drive some of the capital back towards offshore projects given that they're now such a—a low break-even um, per-barrel scenario?
I think they're already done, so it's already—if you take out the revisions, RoW already stalled out since late 2022. And if—if you look through, you can work this out as well by looking through the um, the kind of proven reserves of every um, asset within that produces within the US basins. The most interesting one was Pioneer; you kind of see—whereas Exxon was talking about a game—you could see that their—their crude was rolling over quite heavily, and yet their NGLs and their um, natural gas was up. So I think it was—it was something like the crude was rolling over five um, maybe 5% in the um, the gas and the NGLs were up about the same. And so that's generally what happens when you're um, you sort of—the basin's maturing; it's getting far gasier. And the Pioneer CEO, he came on and said like—he's like, "Yeah, we—we've worked through the tier one"—no one seems to want to talk about it, which—it's—it's really logical when you—if you go back in history like in the um, the start of the 1980s, the same thing happened, whereas everyone pats himself on the back for productivity, but the rig counts dropping. And it—it's just logical when you think about it that if you're cutting rigs, you're going to be cutting the least productive rigs one after the other, and your productivity is going to rise because you're keeping the good stuff um, running. And so the real test is when the rig count starts rising—what are you—what are you working with then? This is what they found in the 80s was the rig count um, climbed, and it was just all tier two, and it was just hard going, and it was um—productivity just fell off a cliff. And I think we're at that stage again, and it's what you can see if you see the reports from like Chevron—they've realized this, and they're like dialing back capex, and they're just going to try and um, try sort of maintain because they know if they really um, throw more money at it, they're just going to shorten the assets' life and um, work through it quicker. And people will probably start clicking onto that by the end of this year when it becomes really clear they'll um—this—the IEA's massive glut won't appear, and we'll end up—nothing crazy, but probably like a slight—slight deficit by the end of the year. And so the—and that to the fact that um, all the—the Permian growth won't show up—that's—that's the—that'll be the biggest short, and largely demand will just keep surprising people. Forget like it's been quite low growth across the developing world. One thing that's not entirely clear to me is if the tier—the tier one ACR obviously is—is coming to an end, but what's the likelihood in your—in your mind in terms of the majors—I think—will increase some of their capex in order to maintain production, and that certainly seems to be what Goe Rosen were talking about in that quarterly commentary you mentioned. If that's the case, are they going to spend money offshore or are they actually going to spend more money onshore? The oil services and—and some of the landowners there might benefit, as I'm aware—been one for the onshore service guys. Is there a particular reason for that? I just see far larger moat around offshore and the—the break-evens keep coming down. If you look where the big reserves are, it just makes sense that once we get this like um—I got this great chart that's just essentially illustrating where the IRRs are, where the um, the break-evens are, and offshore—deep offshore and um—and shale are like neck and neck for all the returns apart from just payback period. And it just um, makes sense that once understand that just throwing money at shale—it's not going to um, it's actually going to be a lot more expensive moving forward once you finish off that um—one—that—yeah, you have to start fing out for these big long-term projects. It also ties in a bit with like the whole Net Zero—like why would you um, long-long cycle when we're going to be off oil? So I think you've seen some of this play out. And if anyone's been paying attention to some of the—I think like BP was the funniest—like they—they—they do it every few decades where they—they say they're getting off oil. I think it was back in the—the early 2000s that was sort of—Beyond Petroleum—and um, had a whole lot of ading and greenwash. And this time around it was like—it was Looney who sort of said—yeah, we um—don't—that was Shell that said that—"Don't call me an oil company anymore," but BP was most notorious for like lighting money on fire, spending double whatever's were at wind options to hit their quota for like new wind farms and um, hydrogen projects. And—and yeah, as a result, they let a whole lot of capital on fire, and the—the um—I said the new CEO is just taking a 30% pay rise. He's—he's um, dealing with all the fallout of it, and they're just pumping it really heavily back to oil. Yes, to answer your question that um—this—certainly some stuff that can move the needle kind of—some of the more shallow water, but yeah, the longer term, I think the break-evens are—it's just a no-brainer to start allocating—they're going to have to start allocating money to that, and it's just such a small pool that can do that stuff as well—they specialize assets. And as we talked about before um, they've really been like sort of trimmed down—it's—it's call it like kind of—culled—that's finest you um—what happened there—a bankruptcy cycle where—not only do you—you just—it's um—I remember looking at back in 2020 how much more efficient—got just keep coming down, and with every asset that goes—still got it loading in the other—TC out a whole lot of um—it's like—just same contracts—you go the internet still running, ped video instantly—that's going to be—that's going to set up for um—yeah, like the one shale's off the table—those will make sense. Yeah, there's some um, some other stuff. Should I close out this other tab? That's open—it is using your camera and microphone, just—but I think it's off. Definitely have to play a big part. Yeah, makes a lot of sense. And the uranium thesis is one would be waiting to—I mean, it is playing out, but not as quickly as some others uh would like.
It's funny you mentioned tin. I see people on Twitter today talking about a Cigar Lake 2.0 moment. Scares me when anyone says that because I knew you're about—you're about to get your—I was handed to you. Think it was um, which one—Ocean Wall or yeah, they were saying like Cigar Lake moment was here um, few months ago of uranium. And yeah, here we are—painful. But um, yeah, the—the thesis—the thesis is intact; there's just absolute pain on the um, on the equity side. Everyone's been horrendously wrong, myself included, on when the utilities were actually going to have to show up. They um, they're still there in the wings; they have to buy, particularly in the US. Like even if you go through—if you segment who's done buying, like you—the key thesis was always that um, you got kind of, you know, the utilities that have to come, and they have to buy replacement rate, and that whether that's 185, 190 a pound, they're going to have to contract. There isn't enough to go around. If you sort of look out the deficits, it's getting bigger and bigger by—going blow out to sort of um—it's big enough already, but by 2030 you're already sort of nearly a quarter uh mismatch, and that's as of nothing when you consider they've got to get the uranium and put it through the fuel cycle, and they just haven't been showing up to um, to contract. And—and—so like if you look at 2023, it was um, 8 million against—yeah, as I said, 185 um, placement rate last year was only just over 100—not even um, just over sort of half of what they even need. And most of that was Chinese; it wasn't even the Western utilities. So doesn't change the thesis, but it is definitely something I take into when I look at other commodities is whenever you have someone that has an exit view on how much inventory is floating around out there—like probably take that with a pinch of salt, because um, it can be a lot more floating around, and it can take a lot longer for things—for a supply-demand thesis to really gain traction. But with that said, it's um, it's going to matter at some point where spots run dry, like there's—there's no real contracts, no real—no real pounds that are—I mean, the fulfilling utilities needs. And um—and yeah, it's this weird waiting game. And yet, at the same time, you got like the—the shorts, which—it's looking increasingly likely that they're just playing for the likes of um, Sprott Physical Uranium Trust to need to um, sell a few pounds to raise a few dollars. And if that's in a super liquid market, that could cause quite a panic across the space, which would um, which would just be—
Yeah, yeah. I—I wanted to ask you about that—if they're trading at a discount to their NAV, and is that part of the reason why the spot market has been kind of flattered down because the term market seems to be going ahead—staying through around the 80s? It's hard to really—unless you read what U put out—it's hard to really know exactly what—what they're being signed at, but does anyone have a definitive answer as to what the spot can do in the events? Can they sell these powers uh, because I can't find a definitive answer on that?
Yes, I—so there's—Triangular Institution did an interview with um, John Ch—Chani—I've probably messed his name up—but yeah, he was saying it was um, seemed entirely possible that they could liquidate a few pounds, which I wasn't aware that they could do that um, to—to raise funds for overhead. And a—yeah, not far from ideal, but far from the thesis breaker as well, like it's just um, selling a—selling a few 100,000 to keep the lights on—it would be more—it would just be more pain for the sector as well if spot traded somewhere silly for a short period. But ultimately, yeah, you just—back to what—spot's on a good year; spot can make up to sort of um, 15, 20% of utilities' contract. When it runs dry, it's just pretty much all term. And what we're seeing term as well is just the lowest quoted price that's not—it's—it's just weird how the whole market—the whole market's just so opaque that no one can really know what's going on. And you um—there's copy of them say is like the um, most of the utilities is just like a—a WhatsApp group of people; it's not—there's no—there's no futures market to keep everyone honest. And I found myself in a few of these markets now—like rhodium—it's—it's the same thing; it's just um, you really are big on the fundamentals, but the thing can trade wherever it wants to for um, periods. And if you—having mine has been priced off that, you get no price discovery, which is just a um, nightmare if you've um, if you are basing a lot off that, which I think a lot of people are. And so yeah, it's um, it's going to be an interesting few months. If it doesn't gain any traction—if the price gains some traction, some utilities come um, come to the table, then could see fireworks as well. Like I know some of them are um, getting up to like—like the likes of um, Boss—Paladin—that's like three weeks of volume to cover the positions they have. It's—it's interesting—this kind of mismatch between the long-term fundamentals and what might happen in the next few months. Yeah, after paying the—been through just crazy. Then it also kind of fits with the fact that this is so hyper-cyclical; it almost makes sense that to wash out the very last retail investor before doing something crazy.
Yeah, yeah. That's the thing with—the thing I've always heard with uranium is that the thesis does—it makes sense from a macro point of view, but how am I actually going to make money on these things? I'm just laded to buy miners in the back of Africa somewhere. I don't know how else can you play this thing? Can you—have you looked—I'm sure you have looked at the bottlenecks around in Richmond and some of the technology companies—any of those take you fancy, or you still just producers, developers, maybe an explorer for good measure?
So I owned these for a while um, back in sort of 2019 to 2021, and then it just got crazy expensive, and I thought it was ridiculous and sold it, and then it's even crazier since—think I wrote it from three bucks to 20 something, and then it—it since touched 100. So that's—I look at that, and I'm like—should have just—a lot of the stuff—a lot of the stuff if you um—yeah, you're prepared to—it comes back to what you're talking about—like position sizing can drive you nuts if it's all over it if you're too large and it makes up—and it really runs because you—there's not the—it's not like only car where you just stare at your cash flow—eat in 10—the moment you just stare at the cash flow, and it—it's quite comforting. This is—this is an inherent bit on there is such a gap between supply and
Pick on Tesla, but it's kind of priced as if it's going to capture all that growth, even though it's been chased down in the Chinese market. When you see people trying to value it, they're just getting increasingly desperate. So to say there'll be 90% margin selling robots in another two years or something like it—they're literally getting eaten alive in China. You only have to look at what BYD's putting out—it's just the quality, the price. It's like Apple releases back when a new iPhone was every new iPhone was super—um—just always had a new innovation; it was fascinating. Like BYD—like, why would you buy another car when you can buy one for $14,000 US with um, that can do 2,100 charge in a tank of gas? Because just—it's um—I, I want to be, I want to be long there, and I want to capture that. And I love the fact that it um, it's completely uncorrelated to all my commodities and energy; the rest of my portfolio is essentially commodities.
I think also with you've got such a tailwind with um, the CCP behind it and will keep propping it up, as well as the Chinese um, sitting on record levels of cash. They're um, they're known for being big momentum traders, and with the property games that have been over there, I can see sort of a, the stocks kind of um, investing in the local champions being pushed and that being a um, really big trend that you don't want to miss, and and that do it cheap as well. It's not like you're jumping in there at crazy valuations, like I, when I first wrote my piece, I was comparing some of them to um, Co stops—like, some of them were like a third cash and um, trading like single, low single PEs. You're not taking that much risk.
Yeah, it would be a major cultural shift, and obviously, you know, as Copy said, you find out what the Chinese want, buy it, and and ride that capex way. How are you looking to to capture that—single stock and piic, or are you taking a basket approach, say an ET one that you are?
Yeah, basket with ETF. I'm um, do not beg myself to pick any Chinese stocks, like I was um, 's the example of um, of Alibaba. I thought it was quite dominant until I saw a chart and there were like three other names that I hadn't even ever heard of that were eating its market share the last few years, and I was just like, Jesus, like I um, I really, the the amount of competition, it's kind of fascinating because um, I don't know if you've ever read the book like *The Myth of Capitalism*, and it's essentially this book that goes through the US and it's just the consolidation of all these different sectors in the US and how they then get, they become oopes goopies, they have regulatory capture, and then once they've consolidated enough, then the company gets massive, and it's essentially prony capitalism—like you're just, you're just killing competitiveness. We've got China, which we all hype up as sort of the bad Communists, and they're actually practicing perfect capitalism in all these areas, and um, you're getting this perfect—what we would like BYD is like the pinnacle of um, capitalism, if you will. I know people say it's yeah, obviously subsidized, and they gave them tons of state orders from government, but yeah, this, it's um, the way that they started with over 400 EV companies and now they're down to sub 100—that's pretty pure capitalism.
So what I was going through is you've only got a handful of options, which you've got like KWEB, which I wasn't as big a fan of because you um, it'll do amazing, but I don't want to limit just to sort of the internet sector. Then you've um, you can go up slightly bigger baskets every time, so you can go to Hong Kong um, H sing Tech index, and then you go up to UK, which is um, a bigger basket again that's like 60 companies, and then you can go up if you want to just capture the whole theme, you got FX, which is um, pretty much Chinese large caps. It's kind of fascinating those as well, was because they're all shorted um, really heavily; FX is like got um, I think it's 40 to 50% um, of it floats short.
Yeah, large capf, yeah, and um, and at the same time, I've kind of observed like the other side of it, you got Tesla, which is getting eaten alive by some of these companies, and it's, people have given up shorting it. It's gone from historically like 25% short float for a number of years, so it's now 1.9% short when I last looked, and I think it's, I don't know the company that I think's in more trouble at the moment with still was 100 times Ford per, but it's now probably like, with the recent fall, it's probably 90 or 80.
I guess that's very interesting, and you wrote in a recent Substack piece around some of the changes in the US most likely leading to Chinese leaving capital; they're already kind of leaving the treasury market, and the question is where is some of that capital outflow going to end up? One may well be in the Chinese stock market itself, and another likely beneficiary mentioned is the the shiny metal gold. Have you come around on the gold thesis? I haven't always been a fan of it as such, but now it starts to, starts to seem to me at least that you're entertaining the idea of entering into the gold sphere.
Yeah, no, I, I always like the concept, but I just always wanted to separate paper from physical, and so um, I never liked the idea of betting on gold when there wasn't any price discovery if you were going to um, be traded something like GLD where there can just be issuance of the paper market, and so you're never going to have that. It was essentially political metal because I remember, I think it was Coinbase, someone was like, it's um, you could tell it's political metal because someone, if they wanted to, could just go to COMEX and um, have a whole lot of gold futures and just demand delivery, and you can run on the bank that way. And the fact that that doesn't happen just means, yeah, it's political metal, and whenever um, you manage the price by issuing paper, and that game was all fine well it was in Western hands and under their control, but what we've seen lately, and it's, it's really fascinating when you look at um, what the gold price has done and how it's been pretty much absent of any retail investment in the West anyway, you can see this if you look at um, you look at GLD, you can see inflows; it's actually been negative—was negative like 3, 4 billion despite gold going on the run. It's been so, just um, the miners are all negative—highly negative; I think GDX is negative, yeah, 2, 3 billion in GDXJ, which is most interesting because it's actually got outflows have got like accelerated as the price has gone up, which is kind of doesn't really make sense at all—that you'd think they would be more attractive as the commodity they're mining for is spiking. But yeah, what it, what it's essentially telling you is it's all um, central banks and foreign buyers. I think Louis Gave puts a good case forward that with the lack of trust in China for a long time, a lot of businesses, entrepreneurs, and just retail there were parking a lot of money in gold, granted that the vast majority is obviously central banks have been buying it up, but um, yeah, even sort of foreign um, retail buyers picking it up, and it's just, yeah, it's there's been almost no participation from sort of the Western, Western investor or the Western speculator, which is, you can behind that maybe it's cuz a lot of the sort of more spy stuff has been replaced by crypto. But yeah, it's, it's fascinating to see how hated gold miners are compared to what the commodities done; it just, that kind of fascinates me. And yeah, run a whole lot of ratios, and they're like beautiful charts—it's like a joke before—joke you want, you want the charts that represent like a patient dying, like the S of the heartbeat that goes lower and lower and that flatlines, and that's what gold juniors are.
Yeah, I mean, is it in a way kind of like a a hedge against the oil sector as well? I mean, if the oil sector is depressed and gold runs, these guys are going to do well on their margins, or is that same old problem with junior miners—no matter what commodity they're digging out of the ground, they're always junior miners?
Yeah, probably more of the L as well. If you look at like the the O sustaining cost margins, like any any increase in the miners you generally lost it because their margins just exploded—as um, their their costs, sorry, exploded, not their margins, their costs exploded, and um, yeah, you didn't get to take much home of the increase in the price. Just miners been minus—it's largely been my um, my experience as well. We've all been in miners, granted there times, yeah, if you're getting really cheap, hugely profitable, but um, wish I'd cut some of them earlier than um, trying to carry them into production or anything like that—that's just proving put in a too-hard basket a lot of the time now as um, L of people found out with the likes of 10 recently—like, even if you have a fantastic project um, that you have political risk can really whack you around the ear as well.
Yeah, TIAA and in Gold, are we looking at, have you got names that you like, or are you looking to take a basket approach? So yeah, I still haven't pulled the trigger on it; um, it will be more of a basket approach, cuz I follow quite a few people that um, and once you, the junior space, it just seems like a VC basket to me; they're just um, they're just always having a few misses, and then they just point at their one winner that ends up a big multi-bagger, and I just don't, I don't want that stress. I've got enough stress with having enough misses in the mining space and having bought enough stuff in Africa that keeps me up at night that yeah, I don't, I don't need to add—pretty much my new rule—I'm trying my best not to add any more miners; I'm trying to add real businesses or or even stuff that hates miners, like I like, like yeah, like rhodium—like I kind of, I make out like a bandit if the miner actually screws up, which is a nice probability. Yeah, you kind of get, you get an inbuilt hedge trying to be a bit smarter like that moving forward. And I think I asked RI Ru a couple of days ago what he thought the odds of the gold revaluation were, and he gave a zero uh, % probability; he doesn't think that governments will will move in any way that might restrict their fiscal profus here.
And do you see something like that on the horizon though, maybe like a shadow evaluation or some kind of Bretton Woods 2.0?
Yeah, definitely possible, where they've kind of found themselves—like they've made a lot of big promises with what like Doge is going to achieve, and um, M Bess's kind of, he's, they said he wants to do it, but that's never proven anything, or someone in government they'll say it's off the table till they do it. Uh, but yeah, it's, I don't know what form it would take. Certainly interesting that the um, the the Chinese have been buying up like crazy, and it makes sense that like, what, what you mentioned before when I, I wrote the piece that was with the recently released um, America First investment policy that they've, that looking to revoke a treaty which essentially allowed China to buy US assets with zero withholding tax. So if they remove that policy, then the withholding tax jumps up to 30%, and so that obviously scared the last um, of the treasuries, which not a lot of treasuries have already been like a massive decline since 2008, really kind of accelerated with nailing the coffin was confiscating the Russian um, assets, but this is like, yeah, another another sort of get out essentially was my, the title with um, and I think yeah, that's another 800 billion, but more importantly, it was like the US equities—like, get out of US um, equities, which is a decent amount again; it was like 760 billion. And the real question is like, yeah, if those are now off the table because they'll get 30% withholding, where's that that money going to flow, and flown into gold will um, can gold take those inflows, and if China's, I follow Luke Roman's work, and he's got a few different ways they can do it. If they just peg it to oil, then they could, they could um, have a revaluation scenario, and it's almost in everyone's best interests in a way because it doesn't actually blow anything up. If you, if you increase substantially any other commodity, you're going to um, going to hurt some part of the economy—like if you severely increase the price of um, of copper or anything like that, you'd um, damage economic growth, but gold, since it's not used for anything for anything, it could help shore up um, un—it's like with the US, it's all held on the Fed for was it $30, $40 an ounce, and so that 40, 4262, I think that raises like, was it 7800 million? Uh, yeah, but probably outside my circle of confidence to say whether that will happen or not; just the fact that it's a probability, probably means um, a possibility means that's a nice call option to have if you do own gold, and I certainly wish I had a bit more gold with what's happened to use it as a sort of a rebalancing tool; it would have been nice to um, to have sort of carried a a bit of a bit of gold to use that almost like a sort of a, a what is 60/40 sort of rebalancing tool; if things just get silly, you can move, move it across. So yeah, that's, and in time, yeah, the meantime, you're protecting yourself from that inflation or or or cash burn.
Some of the things that you mentioned might lead to an argument of just, if they want to buy the the metal, if it's good enough for central banks, maybe, maybe that's good enough. That's Luke Roman; he's um, he's just a big camp of um, really short-term paper gold and Bitcoin, then he said um, sort of apportion them to your risk tolerance; if you're more risk-averse, more short-term, really short-term treasuries, more gold in this Bitcoin, and if you're willing to stomach a bit of volatility, up the um, the Bitcoin allocation, which is um, it's worked so far, maybe worked a bit less recently, but yeah, you come around to the Bitcoin camp, mate, or you sticking with your rhodium?
Sticking with the rhodium. Yeah, I, I like it when I can't even talk to someone about it because no one even, there's no one else in the market that's even put an investment thesis out about it. The mate, R him, I wouldn't even know, is there, what a, there's no futures for it. Is no, no, no futures. Yeah, I was quite sad because the one guy that was kind of an expert on it, he died last year, so I, I ended up talking to like Drop Free saying like, could you um, could you, could you give me um, Dr. Aid Davis's um, opinion on rhodium? Here goes for all this work and has a conversation with me from this. So now you, you are the expert.
Oh, I'm not the expert, God, though, not on something so illiquid. Yeah, but I just like the asymmetry of it. Yeah, it's a byproduct, so it's really hard to increase supply. I think everyone sees it rolling over on the back of um, the supposed sort of EV boom, whereas coming back to um, to BYD, they're, they're absolutely dominating the Chinese and the world market, and if you look at their month-to-month production and sales figures, they're pretty much reporting their their production to plug-in hybrids. And once you have that, like going, going back two years, they were mostly um, BEVs—like, straight battery electric vehicles—with um, s of less than a third plug-in hybrids, and now it's switched around, so now it's 2/3 plug-in hybrids, 1/3 BEVs, and that seems to be still dropping, we at least holding steady. And the key point there is that when you have a plug-in hybrid, you're swapping back and forth between an ICE engine and a and a um, a battery, and so the initial start phase when you have the most emissions, emission standards are getting stricter and stricter, and I just see a um, quite strong demand for PGMs and a particular rhodium on the back of it that no one's projecting because I think EVs are the future. And so with what's happened with platinum and palladium, shot up, platinum and palladium have just kind of crawled along and got lower and lower and lower over the last few years—like, Plum's been completely smacked.
Do they fit the same thesis? Because if so, how come we've got such a disconnect in the price?
Brum's literally a byproduct in them, so, but um, it's mostly a byproduct. Platinum is the most sort of um, the highest split, so over 80%, nearly 85% of rhodium production is just in one little belt in the bottom of South Africa in the bush, and and actually in just a handful of deposits um, that get a rhodium split of 8%. Once you go outside that, the rhodium split and like Norilsk Nickel in Russia drops to like 2%; you go to the US, the PL heavy it's like 1%, and so that's another reason I'm a huge bull is the fact I can see the sort of um, particular rhodium-rich racehorse is being worked through and rolls off a cliff 2030. So many commodities I look at and I sort of, I joke about a lot of them, like sort of, yeah, this is going to be important, but no one cares about it now. And so with rhodium, yeah, you've got this sort of this demand driver that no one really—because 85% of rhodium is in catalytic converters, so you are, it is slightly dangerous in that and that maybe it gets engineered out, but I'm guessing it's not when it's a um, sort of a a generally engineered stuff out when it gets too expensive, and now it's pretty, pretty cheap historically. But yeah, for your question of it being tied to Plum, platinum, it's um, it's obviously a byproduct, so it's completely tied, which is interesting as well because with PL and PL been below their cost curve for most producers, all the sort of like, going to shut in—like, Sibanye has been shutting mines in, and Impala just talked about shutting a mine down early that was going to last another year or two. You had Norilsk Nickel, which was going to bring on, supposed to be bringing on by 2027 additional 8% of global PGM production, granted that's very platinum-heavy deposits, it would have been low in rhodium anyway, that got uh, um, postponed due to sanctions at 2023 was when it was supposed to start and come online 27, and that's yet to um, yet to sort of, they need to give a timeline to restart that, and that's like a real, they're like the real Kazakh problem, if you will, because there's is like a negative cash cost for their PGMs because it's a byproduct and nickel. And so when I go around the um, world and look at like that the sort of um, the market makeup for PGMs, the sort of the Russian addition isn't arriving; yeah, they're going to bring on, but that's not gonna, that's again platinum-heavy, rhodium-light, and uh, South Africa is rolling over in an absolute basket case in almost every way between between the load shedding with power, between the governments just doing some silly stuff recently, and between the price obviously been in the doldrums as well—that's not incentivizing anything anyway.
I love it. Okay, so you're playing that by the physical; you still interested in Sibanye Stillwater?
Yeah, I am, but I've made that a far smaller position than that originally when I went in, just cuz I like the old exposure, and then they sold most of it off. I also dislike that they have a few silly projects um, sort of battery metals and lithium that make no sense. See, yeah, it's a far smaller position; I like, I like the optionality with it still on the sort of the platinum and the palladium. Maybe I'm wrong on rhodium—nice to sort of have cool options on those um, as well. Overall, one watching is um, Anglo American Platinum because the parent's spinning that out; it'll be interesting to see where that trades in the coming months as well, because that's a lower-cost producer, and it's, it's getting pretty cheap. But coming back to my rule, I'm trying not to own any more miners, especially in South Africa, and yeah, just African miners in general are a recipe for heartache. And so this disclaimer—goes on your eyes open because it's um, it can be a rough ride.
Yeah, indeed, it can. Is there anything I've missed? Is there anything out there that you're looking at that we didn't cover today uh, that you think is either still good value or could be into the future?
T's the obvious one with um, just being sort of inl with um, Alaman just being having the mine shut for safety with the yeah, management deciding to um, bu for the safety of the staff, and who knows how long that'll be off. And so that's um, it's a pretty decent slab out of um, global supply. It was quite interesting with that is that was um, if you look what happened in China, they were mainly importing from Myanmar, and they shut down with the, they've had their, they were their main um, supplier—with them shutting down, they've actually switched a large amount—was coming in from um, from DRC; it's now they shut down as well. It um, does s make the question just how tight this market is going to be moving forward, and does that mean MLX can make some money now?
Yeah, yes, hopefully, that's that's my big bet. Yeah, I'm reasonably waiting in that, and hopefully they can't screw this up and pour it into Specky gold juniors or, yeah, just had to say it. You just had to say it.
Yeah, I know. We'll wake up tomorrow now, yeah, some, yeah, some mov pasture somewhere. But um, no, hopefully they can't screw this up. The major shareholders that were selling a bunch of shares, have they left Metalex now?
It's been a while since I've been on; it's been pretty, it's been pretty clean up. I actually like what they've been doing recently—between First Quantum, I guess you, it's a CO option unless it's in their wheelhouse, it's not gold, and then building up the cash and not doing too much with buyback; it's kind of annoying, but now they're trying to hun down the um, get control of the, of all the remnant um, that's that's a worthwhile use of the money, granted that sort of low ball probably isn't going to look nearly as attractive with um, what's just played out in the market. I don't, the success of that's probably dropped off, but they've got a decent amount of cash to keep pursuing her. So if they could get that across the line, that would be massively agative here because they're um, they're pretty damn cheap, and now they're the only game in town. Really, you look around, and there's, there's really no other options. And I think even if Alman comes back online, like, you know, a few people with PTSD and that's going to trade a lot cheaper moving forward with that sort of history, and I think people—what's thing to get—you've only got to have a few sort of of these outcomes—between like Global Atomic—like everyone s of tell you how—not tell you but work out how good that deposit is and sort of turned the blind eye to the geopolitical risk and then just get absolutely cleaned up and then realize, yeah, I'll take, take a little bit lower-quality asset for a safer jurisdiction. Granted, I say this and I got my ass banked in Queen's limb of coal—like, safe jurisdiction—and got robbed with pin for egregious royalties. I think that was the, that was pretty harsh um, you, easy, easy to be blindsided by something like that; it's not something that you would normally expect, but these things happen.
Thank you very much, mate. Uh, great chatting with you as always. Guys, if you're interested in learning more about Trader Ferg's stack, the link will be in the description. Any wise words you want to leave us with?
My front—not really. Just, I think I put a quote in my recent piece that was like, value investing is pain, and the higher the level of pain, the better the future performance. So just know that, yeah, being when I look back at all my biggest winners, I was like literally tearing my hair out when I was seeing the buy orders hit, and I just wanted to go open my brokerage up and go in and sell immediately. I was like, no, this is just ridiculous; how can they be trading there? I'm missing something. And so yeah, just know—feels really good at, when you buy it, you're probably doing something wrong, and if you come feel sick in your stomach and you hate even seeing it, then um, yeah, that's often what's required for real outperformers, real multi-baggers. Value investing is indeed an acquired taste, guys. Thank you very much for tuning in, and look forward to catching up with you in another episode of the ROI podcast. Take care.