October
2015
The
Financial Passage Maker
The
Voyage
This edition is somewhat later
than normal. Travel and summer life on the boat have priority over
the world of investments. This edition is also briefer than normal
as life has been exceptionally “interesting” in recent months.
1.
The Financial Log Book
The
decline in resource stocks, especially those in the oil and gas
sector, has adversely affected the portfolio. I've been through this
before and will address the issue at some length in a future edition.
2.
View From the Masthead
The oil and gas sector in Canada
has been devastated ... and changed. And a rant about the perils of
an ideologically-driven government with a well-developed aversion to
evidence-based policy making.
3.
View From the Gun Port
Caldwell
Partners (CWL-T) noted in the June 2015
edition was sold a few weeks after the purchase for a gain of 25
percent – something which I was happy with given the volatile state
of the market.
I have increased my holdings in
Rocky Mountain Equipment (RME) and Clean Seed Capital (CSX).
I have also started to speculate
in gold mining companies.
4.
Recommended Reading for the Moorings
Bare shelf.
5.
In the Wake
The
joys of life afloat.
1.
The Financial Log Book
| Entity | Initial Price/ Purchase Date | Price Oct 27/15 |
Gain/Loss
since Jan 1/15 % |
Gain/Loss Since Purchase % |
|---|---|---|---|---|
Central
Fund of Canada (CEF.A)
|
9.77
2007-09-04
|
14.89
|
10.6
|
52.4
|
Silver
Wheaton
(SLW)
|
12.37
2007-09-04
|
19.23
|
-17.9
|
55.5
|
| Polaris Materials Corporation (PLS) |
10.70 **
2007-06-01
|
1.83
|
-19.4
|
-82.9
|
| Cenovus (CVE) |
32.39
2010-07-27
|
18.93
|
-18.4
|
-41.6
|
| Canadian National Railway (CN) |
48.88 *
2009-04-14
|
SOLD
|
||
| North West Company (NWF) |
16.23
2009-05-07
|
29.02
|
15.6
|
78.8
|
| Oceaneering International
(OII-N) |
52.95
2012-12-13
|
43.68
|
-24.5
|
-17.5
|
| Deere & Company (DE) |
88.07
2013-01-03
|
76.12
|
-12.1
|
-13.6
|
| Rocky Mountain Dealerships (RME) |
11.89
2013-01-03
|
6.9
|
-24.1
|
-42
|
| HollyFrontier (HFC) |
47.95
2013-01-28
|
46.92
|
28.1
|
-2.2
|
| Oak Tree Capital Group (OAK) |
56.45
2013-10-28
|
48.55
|
-3.1
|
-14
|
| High North Resources (HN) |
0.62
2014-03-06
|
SOLD
|
||
| Fairfax Financial Holdings (FFH) |
477.98
2014-3-25
|
654.57
|
9.7
|
36.9
|
| Clean Seed Capital (CSX)*** |
.51
2015-01-07
|
0.48
|
-6.4
|
-5.9
|
| Ceres Global Ag. Corp (CRP) |
5.75
2015-02-19
|
SOLD
|
||
| Hi-Crush Partners LP (HCLP) |
37.65
2015-02-16
|
5.16
|
-85.5
|
-86.3
|
| Questor Technology Inc. (QST) |
1.74
2015-05-22
|
0.75
|
-56.8
|
-56.9
|
| Caldwell Partners (CWL) |
1.30
2015-05-2
|
SOLD
|
*CN
split 2 for 1 on 2013.12.02
**
does not reflect impact of follow-on investment @ $.67 per share***does not reflect several additional purchases
General
Comment
I am not particularly perturbed by the recent
performance of the portfolio for a variety of reasons:
- The size of my holdings are roughly proportional to the size of each company. Recognizing that smaller companies are generally more volatile, I have invested proportionately less, meaning that my losses are less than would appear on the table. Further, the profits taken on recent sales has been such that I am in the black on the year to date.
- Dividend income has cushioned the impact of declining prices.
- Some very sound companies have declined significantly as a result of sour investor sentiment. To my mind, they represent potential buying opportunities e.g. Questor, Rocky Mountain. By investing more in Polaris Materials when its share price fell into the pits, I made a significant amount of money on the rebound. I have maintained a small “watch position” in order to remind me to monitor the company and watch developments in the sector. It may be positioning itself for a take-over. To my mind, its management is not the equal of its stellar resource base. It needs better management with deeper pockets to unlock the value of the company.
The
Oil Patch
See View from the Masthead. For patient
investors, there may be a few opportunities in that cash-strapped
juniors are ripe for the picking. It will be interesting to monitor
the activities of private investment funds with the “long view”.
Canadian
National Railway (CNR)
I sold off my position on June 10, 2015 for
$72.34 in order to take some profits (which were more than 200
percent excluding dividends). I plan to use the funds for a “higher
purpose” (part went to a new piano fund). Nothing is forever.
Ceres
Global AG (CRP)
Sold on June 6, 2015 for $6.59, a profit of
14.6 %.
Rocky
Mountain Dealerships
I plan to increase my stake in the
company. Shares have fallen in response to investors' concerns about
the impact of lower sales of new equipment. (See the company's
quarterly reports for a more detailed assessment of the company's
operating environment.)
The company is sound and its
management has experienced similar challenges in the past. My
expectation is that the company's share price will improve
significantly once the agricultural cycle turns. (I suspect,
however, that it's non-agricultural market will continue to languish
as the woes of the oil patch will remain with us for quite some
time.)
If there is any concern about the
company on my part, it is that the senior executives are accountants.
The experience of running the day-to-day operation of a dealership
and consolidating dealerships into a going concern generates a
perspective which differs markedly from one which is focussed in the
office and the bottom line. Will this result in a change in the
company over time? What impact will it have on customer
relationships and service, the key elements of farm implement
dealerships? Many expanding companies have experienced this type of
change in leadership, often with less-than-desired outcomes.
However, in the case of Rocky Mountain, I am comforted by the long
relationship that the President and CEO has had with the company and
especially, by his experience in navigating through tough times.
(Read the 2008 Annual Report.)
Clean
Seed Capital Group (CSX)
My investment in this company has
quadrupled since my initial purchase. CSX has made steady progress
and, unlike many nascent enterprises, its burn rate is sustainable.
Financing has not been an issue even in today's climate of caution on
the part of lenders. In fact, the agricultural community has
invested heavily, a vote of confidence by people in the market for
this equipment. Readers may be interested in the following report.
In my opinion, some of the conclusions are not unreasonable even if
the piece is a bit boosterish.
l like the
“chemistry” of this enterprise. It is still directed by people
with “muddy boots” - individuals who have a long-standing
connection with the technology and the experience of the farm field.
I also have the sense that the company has a participatory culture –
that it is able to harness the expertise of people from different
backgrounds in a productive way. There is a tendency for many
start-up companies to become captivated by the technological
brilliance of their products/services and not to pay sufficient
attention to bringing them to the marketplace. In my view, CSX has
done well to advance the marketing, financing and technological
aspects of its business. For those with an interest in following up
on this comment, I would suggest that they check regional newspapers
and trade publications – often a useful way to “take the pulse”
of business enterprises.
I was impressed by
the technological superiority of the CX SMART Seeder, Clean Seed's
flagship product:
- tailored to meet evolving agricultural techniques
- superior performance over competing seeders as measured in field tests
- measurable cost savings for farmers
- possible reduction in operating down time due to a modular system in which non-functioning parts can be replaced quickly in the field – this is especially important for farmers during time critical periods such as seeding
I contacted the
company for more details on the performance of the SMART seeder and
the CEO quickly provided me with additional documentation. It
presents a compelling case for the technology.
As it is a small
enterprise, I expect that CSX will experience more volatility in its
share price than larger, more stable companies.
A
Note About Small Technology Companies
I have a soft spot
for small technology companies, having worked with them in various
capacities: developing new capacities to assist with wildlife
research (rabies control, and the first GPS collar for tracking
wildlife) and funding innovative technologies to “de-risk” them
for the marketplace.
Over the years, a
few small technological innovators have been featured in The
Financial Passage Maker: Titan Logistics, Questor Technology Inc.
and Waterfurnace Renewable Energy. Clean Seed Capital is the most
recent crew member.
Technology start-ups
can be risky for a variety of reasons:
- They are cash hungry. The greatest need for cash typically occurs after most of the research has been done. The commercialization of a product/service so that it can be sold takes a lot of money: scaling up production, establishing effective marketing and distribution programs etc. In most instances, companies' earnings (if any) are insufficient to fund these critical activities. New companies “burn” through loans and other financings only to find that they need more funds just at the time when cash is hard to get, especially if sales are non-existent.
- Many find it difficult to raise capital during periods when financiers are risk averse. During such periods, the terms can be very onerous as financiers want to be compensated for risk. One need only look at what has happened with Polaris Materials (PLS) to see the impact of dilution on the value of share owners' holdings as the company has gone through subsequent rounds of financing.
- There is always the spectre of issues which may arise during the normal course of business: staff changes, technological problems, regulatory hurdles for product approval, marketing (product awareness, distribution channels), production issues, and the like.
- Matters beyond the control of a business can upset the best-laid plans: regulation/taxation; the emergence of competitors with deeper pockets, superior technology or better marketing infrastructure; changes in the marketplace e.g. reduced demand for the product or service during the recent dip in the oil and gas market.
Despite the
difficulties posed by this mine field, some companies are able to
bring products to market and reward share owners richly. Here a a
few of the characteristics I look for in my efforts to find potential
crew members for my portfolios:
- excellent management (the most important attribute): proven track record, ethical, willing to make changes and hire new expertise to fill skills gaps as the business develops, significant ownership stake and not overly greedy re compensation
- a business plan which is clear, focussed, purposeful and understandable: includes, staffing, product development, marketing, distribution, servicing, financing
- excellent financial condition: preferably with earnings which lessen the need for borrowed capital; also, the ability to tap new sources of funding at reasonable terms
- products/services which meet a real need and confer a measurable benefit to target markets;
- a substantial market for a superior product (here I'm focussing on a “real” market as opposed to “conjured markets” - those products of the imagination which have no barriers to entry, assumptions of unlimited capacity in terms of product refinement, marketing, distribution and service support
I stay clear if I
find any of the following things:
- unethical behaviour which violates regulations and generally accepted codes of behaviour (I ignored this when checking the pedigrees of the board of one mining company featured previously in The Financial Passage Maker – should have stayed clear of the beast as it said much about the attitude of management and the rest of the board in that they would accept a person who had been sanctioned by a regulatory agency – always Google the names of all people who are part of the company structure
- management which has an “unenviable” track record: there is a variety of things one can do to check track records of incumbent executives and I may write about it in a future edition
- a business plan which does not make sense, lacks direction or changes frivolously
- an unsustainable “burn rate” which forces companies to cut corners in the rush to get product to the market or dilutes the value of the share structure in subsequent rounds of financing
- management which is unresponsive or evasive
Once a new crew
member is brought aboard, I have patience. Nascent enterprises often
encounter rough seas but if the boat and crew are well prepared,
their odds of reaching the next port are excellent.
While Clean Seed
Capital is by no means a “sure thing” it has, in my opinion, all
of the attributes of a successful enterprise. The CEO responded to a
recent e-mail request about the performance of the Smart Seeder
within hours and with a level of detail which exceeded my highest
expectations. In the end, it's all about people: those with the
vision, tenacity and ability to realize a dream. It will be
interesting the chart the voyage of this company.
2.
View From the Masthead
Oil
and Gas – Has the Party Ended?
In
a few years will the refrain, been
down so long it likes like up to me,
be standard fare in western beer halls?
The
sector has been devastated in Canada. Falling demand, an
overabundance of supply from low cost producers and lower demand have
created a very bleak environment for investment in the sector at
present. Nevertheless, I think that the potential for geopolitical
surprises could change this situation. The Middle East is undergoing
a major upheaval and there appear to be some significant political
realignments in process there and elsewhere. I will comment on this
at some length in a future edition.
I was slow to recognize these developments and
held on to some positions, partly because I have distracted by other
things. It's been painful but the industry is cyclical. As always,
surprises cause resource markets to gyrate in heart-stopping motions.
I'm now undertaking a detailed assessment of these considerations in
order to arrive at my own conclusions. I will report on my findings
in future editions.
Here are a few of the ports I have visited on
the early legs of this voyage.
The following report issued by the HSBC in
April 2015 is compelling: Stranded Assets:What Next – how
investors can manage increasing fossil fuel risks
The opener:
Stranded
assets are those that lose value or turn into liabilities before the
end of their expected
economic
life. In the context of fossil fuels, this means those that will not
be burned – they
remain
stranded in the ground. We believe the risks of this occurring are
growing.
Here
is a list of the way points in the piece:
Stranded
assets: what next? 3
From
assets to liabilities 3
Stranded
by climate change regulation 3
Fossil
fuels and the carbon budget 4
Pollution
and safety regulation also pose stranding risks 7
Regulatory
drivers still in place 7
Stranded
by economics – the risk of today’s lower
energy
prices 8
Stranded
by energy innovation 9
Efficiency
drivers 9
Technology
drivers 10
Renewables:
cheaper as well as cleaner 10
Electricity
storage 11
Enhanced
oil recovery 11
Conclusions
12
Investors:
Divest or Hold and
engage?
13
Devising
an investment strategy around fossil fuels 13
Which
assets are unburnable? 13
Divestment
is one approach to managing the risk 15
100%
divestment 15
Partial
divestment (Tilting) 16
Value
chain analysis 16
Worst-in-class
analysis 17
Challenges
with a divestment strategy 18
Reinvestment
(or what to do with the freed up cash) 18
Performance
19
Does
divestment extend the carbon budget? 19
Hold
and engage 21
How
companies have responded 22
The
risks to remaining invested 23
Conclusions
24
A
rant. Canada recently had a federal election. The ruling
Conservative Party was rejected soundly by the electorate for a
variety of reasons. Some observations re the Harper energy policy:
- Shamefully, Canada does not have a national energy policy, nor has the federal government engaged the provinces which have constitutional responsibility for natural resources. Domestic policy for energy-related matters has been fragmented and reactionary.
- Former Prime Minister Harper hitched his political wagon to the fossil fuel industry, particularly the oil sands sector and was blind to developments which are transforming traditionally-held views e.g. fracking in the US, a dramatic drop in the cost of solar energy (note that I do not use the term “alternative energy” for non-fossil fuel energy sources).
- There has been a significant diplomatic failure to cultivate support for a transnational pipeline to the US with the result that bitumen cannot be transported cheaply to US refiners. Resources have essentially been stranded or sold at bargain prices.
- Harper was singularly unable to recognize Canadians' reservations about trans-mountain pipeline proposals to export oil and gas to the west coast. The ecological implications in the event of a spill in one of our most productive and sensitive marine areas are unfathomable. When one considers the cost/benefit equation, it is clear the the rewards will go to the few while the risks will be borne by the many – math which is certainly not in the national interest. There has been no reluctance on the part of the Conservative government to vilify opponents to the pipelines: http://www.theglobeandmail.com/news/politics/ottawas-new-anti-terrorism-strategy-lists-eco-extremists-as-threats/article533522/
- Further, the former Conservative government had a ideologically-driven inability to recognize the implications of climate change with the result that Canada has become an “international outlier” in the court of public opinion. The reputational risk to Canada through this and other policies was such that Canadians think twice about affixing small Canadian emblems to their back packs – perhaps the best barometer of the way we believe that our national image is perceived by others when we are abroad (only in the Netherlands will I openly advertise that I am Canadian)
- One of the boys in short pants in the Harper PMO advocated the abolition of the mandatory long form census ... unbelievably the idea was implemented! This, coupled with the gutting of Statistics Canada, perhaps the best national statistics department in the world, has greatly compromised social and economic planning in Canada in the public and private sectors. Fortunately, the new government plans to restore the long form census. Take time to read this:
- An ideologically-driven foreign policy has compromised Canada's reputation to the disadvantage of our national interests e.g. the flip flop on China: at first it was viewed as a pariah state and now Canada has bent over backward in an effort to curry favour with a nation it once slighted (a poor negotiating position which may be appreciated by any husband who has “wronged” his wife)
- This and many other bone-headed policies from a person who hid in a closet when threatened by an armed intruder to the House of Commons, all the while leaving his fellow caucus members to barricade the doors and arm themselves with flag standards. He had a choice. http://news.nationalpost.com/news/canada/canadian-politics/as-ottawa-shooting-broke-out-stephen-harper-hid-in-a-closet-unknown-to-his-own-caucus-in-the-same-room
...
I feel better now ...
Those
wishing to acquire a better understanding of some of the history
behind the quagmire which characterizes the Middle East could do no
better than to read, Lawrence
in Arabia: War, Deceit, Imperial Folly and the Making of the Modern
Middle East
by Scott Anderson
(McClelland & Stewart 2013). It is written from a western
viewpoint. Anderson's research is exhaustive and the narrative is
presented adroitly. There is a nice selection of books which present
viewpoints of people native to the regions which are well worth
reading – also reports from organizations such as Chatham House.
Here are some selected readings which present a
few views on the oil and gas industry in North America.
The Shale Delusion: Why the Party is Over
for US Tight Oil
The article describes the dire situation faced
by US producers. However, things change. In my view, geopolitical
risk in the Middle East is a major factor which cannot be discounted.
Further, the US government is not about to ignore the tremendous
boost to its energy security provided by tight oil and gas plays in
North America.
New Marecellus Pipelines from the
Northeastern US Squeezing Out Canadian Natural Gas
Much has been made about
changes in the distribution pattern of oil and gas in North America.
It is well worth reading this interesting article. Fundamental
change is underway.
The
following link leads to a very insightful article by Deborah Yedlin,
one of my favourite observers of the oil patch. If you are
considering investing in the sector, you would be well advised to
read this first.
3.
View
From the Gun Port
Precious
Metals
I have started to
speculate. When placing my bets, I look at companies with the
following characteristics:
- seasoned management with proven track records
- good balance sheets (reasonable amounts of cash on hand and minimal debt loads) and a demonstrated ability to secure financing
- production underway or to begin shortly
- low costs of production and profitable operations in the face of low metals prices
- mines in geopolitically stable jurisdictions and good relationships with local residents
- mines within established mining camps (benefits of infrastructure, established labour pool etc.)
- a “good story” which is understandable
I do not involve
myself with major companies at this stage in the mining cycle as the
upside is generally not as great as more junior members of the
community when gold prices increase notably. I ignore exploration
companies and other ventures which have yet to reach production
status as the risks are too high. Many of them are finding it very
difficult to obtain financing. Later on in the mining cycle, I may
look at such beasts, but not now. A textbook case of the
difficulties faced by cash-strapped mining companies is presented in
the following link. Testosterone-fuelled decisions on the part of
management in many of the major mining companies have placed existing
share owners in an unenviable position ... the buzzards are circling:
I have placed bets
on the following companies:
OceanaGold (OGC)
Integra Gold (ICG)
St. Andrew Gold
Fields (SAS)
There a few
streaming companies in my portfolios as conditions for acquiring
streams with cash-strapped miners are excellent.
Franco-Nevada
Corporation (FNV)
Silver Wheaton (SLW)
I've also placed a
bet with Asanko Gold. Ghana is one of the most stable countries in
Africa but still not without a variety of risks. However, the
estimated cost of production and the size of the resource makes this
an attractive proposition. Further, I've read a variety of articles
which suggest that mining operations often continue even when rebel
forces displace government troops from mining sites. The reason? A
desire to profit from mining taxes. The more things change, the more
I am a bit of a
contrarian. Metals prices have tanked and pessimism is rife in the
mining sector. I've experienced this situation before. By waiting
patiently, I have made a lot of money in the sector. As always, I
limit my stakes to what I am prepared to lose if everything goes
south. However, my selection criteria are intended to minimize that
possibility. With luck, the profits will help
finance a new
German-made grand piano. I'm now so captivated by Bach that I spend
about two hours a day at the keyboard.
I am starting to
investigate a few sectors in my search for new investments. There
are a few companies in the pet industry that warrant further
research. The growth in pet ownership in our neighbourhood has been
phenomenal and owners are not reluctant to empty their wallets on
high end (read high margin) products and services for their pooches.
I will report on my findings in the next edition.
Agriculture continues to
interest me, especially now that prices in the sector are depressed.
Originally, I had thought that water conservation might be a
promising theme. However, with further thought, I thought of another
approach which combines conservation with more effective resource
use, especially in resource-stressed environments. I will report on
that theme of the “new agriculture” in a future edition.
4. Readings
for the Moorings
Nothing of note to report for this edition.
5. In the Wake
We spend a lot of time on
our boat in the summer months. We are based in northern Georgian
Bay, one of the best cruising areas in the world – the other is the
west coast of British Columbia.
As opposed to making great
distances on the day, we prefer to select interesting and remote
locations and stay there for prolonged periods. Only then can one
get a sense of the “rhythm of place” - the change of the light,
the daily routines of animal life, the diurnal breath of lake and
shore. We have learned to live in concert with the rhythm of the day
– to rise with the sun and sleep when it dips below the horizon.
As part of the routine, I
usually take the kayak out just as the promise of a sunrise starts to
express itself. It is then that I stop “thinking” and start to
“settle in” - to listen, or rather, feel the sounds around me and
to see without looking. I know when I reach this state when I forget
that I'm paddling.
Here are a few shots to give
you an idea of this world:
While watching a beaver from the kayak I looked over my
shoulder ...
Purpose
of the Newsletter
The
Financial Passage Maker provides ideas for people interested in
building wealth. It is aimed at thinking people who have decided to
take on personal responsibility for their financial well-being.
The
newsletter is issued more or less quarterly, a reflection of the fact
that good investment ideas are not all that plentiful ... certainly
not sufficient to justify a monthly or bi-weekly report. All ideas
presented in this newsletter are ones that I have invested in
personally. I am not interested in filling space with observations
on stocks I do not own. I eat my own cooking.
The
Financial Passage Maker chronicles the messy process of building
a financial portfolio. I hope that it will provide some useful
insights and enable readers to think critically for themselves. As
in all things, however, the path to financial well-being takes
consistent effort coupled with humility and a knowledge of self.
This can only be developed through practice over many years. My
personal voyage to financial well-being has had unanticipated
benefits that are worth far more than my balance sheets: new found
friends, new perspectives on the world, and a greater knowledge of
self. Further, I am now more able to help others.
The
Financial Passage Maker chronicles my voyage in the investment
world. For the most part, it addresses investments which are in the
“growth” part of the portfolios I manage. In no way do I
recommend that you base your personal investment decisions on the
contents of the newsletter unless you are prepared either to consult
a financial adviser qualified in your area of interest or undertake
due diligence on the basis of your own research - or both. Remember,
in the final analysis, you are responsible for your own financial
well-being. Would you have it any other way?
The
Financial Passage Maker is issued more or less quarterly;
however, I make more frequent postings on a blog by the same name.
It can be accessed here: http://finanacialpassagemaker.blogspot.ca/
Some
of those postings are included in the e-mail version while others are
not.
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