Liberty Posted April 9, 2013 Share Posted April 9, 2013 We might has well have a dedicated thread for this company. They just announced 2012 Q4 results: http://www.canadianminingjournal.com/press-releases/story.aspx?id=1002209927 Conference call is tonight at 4:30 PM. People looking for an intro to the company can start here: http://classicvalueinvestors.com/i/2013/01/interview-with-fred-davidson-from-energold-drilling-and-impact-silver/ http://www.aboveaverageodds.com/2011/08/09/energold-drilling-egd-cn/ http://adventuresincapitalism.com/search.aspx?q=energold The VIC also has a couple, for members: http://www.valueinvestorsclub.com/value2/Idea/ViewIdea/17517 http://www.valueinvestorsclub.com/value2/Idea/ViewIdea/56340 And then there's a lot of insights in these: http://www.energold.com/s/ConferenceCalls.asp Link to comment Share on other sites More sharing options...
premfan Posted April 9, 2013 Share Posted April 9, 2013 I have a question for the experts in mining. Why arent the juniors getting financing when gold prices are not that depressed and above production costs. Its like not getting a loan on real estate where the property has a 10 plus percent cap rate. Its not like gold has been in a bear market for a decade. Usually if an asset is in a bull market banks lend out cause their models tell them to. I'm not getting the logic here where banks and financiers are not lending out to companies trying to extract an asset in the ground that has been appreciating for more than a decade ( except this year). Regarding energold the catalyst is in 2015. Until then anything can happen. Link to comment Share on other sites More sharing options...
Liberty Posted April 9, 2013 Author Share Posted April 9, 2013 I'm no expert, but this feels like a sentiment thing. The mining market went from 'greed' to 'fear' and now that's feeding on itself. The fundamentals did get worse, but right now some things are priced as if nobody is going to need minerals ever again. Meanwhile, all these depleting assets are being mined out at rates faster than new discoveries are made, and since the juniors are gone, the majors now have to fund more exploration, but that's not nearly enough. Something's got to give at some point. Link to comment Share on other sites More sharing options...
ItsAValueTrap Posted April 9, 2013 Share Posted April 9, 2013 The junior exploration market is a very odd beast. Almost all of the stocks are a combination of a real business and a pyramid scheme. The people running the juniors tend to be stock promoters and they often run more than one company. These guys tend to be overpaid and the industry as a whole loses money every year, even if commodity prices go up. A big reason for this is that they waste money on stock promotion and will chase projects with low or negative returns to keep the story going. The juniors tend to be financed from high net worth individuals and sometimes from institutional investors (very few of whom actually do due diligence; all the institutional guys missed out on red flags from Bre-X... see graham farquharson's comments). The banks do not finance juniors. They do sometimes lend to cash-flowing mines. 2- Juniors get financing if they are able to find suckers. Right now the junior sector has been getting crushed. If the junior sector picks up again then you'd see more exploration drilling, which should benefit Energold. A junior making a massive discovery (e.g. like Voisey's Bay) would be a catalyst to drive interest up... or a few juniors going up 40X+ (yes, it has happened in the past). That is the reason why people gamble... they are chasing that one rare stock that goes up 40 times or more. 3- Energold has diversified into non-metals drilling. 4- Drilling is arguably a commodity onto itself. It may not track underlying commodity prices. Supply responds faster than demand since you can manufacture a drill rig pretty quickly (you need to train a crew too though)... mines often take 7-10 years to come online. And obviously exploration spending doesn't track the commodity prices. Link to comment Share on other sites More sharing options...
premfan Posted April 9, 2013 Share Posted April 9, 2013 The junior exploration market is a very odd beast. Almost all of the stocks are a combination of a real business and a pyramid scheme. The people running the juniors tend to be stock promoters and they often run more than one company. These guys tend to be overpaid and the industry as a whole loses money every year, even if commodity prices go up. A big reason for this is that they waste money on stock promotion and will chase projects with low or negative returns to keep the story going. The juniors tend to be financed from high net worth individuals and sometimes from institutional investors (very few of whom actually do due diligence; all the institutional guys missed out on red flags from Bre-X... see graham farquharson's comments). The banks do not finance juniors. They do sometimes lend to cash-flowing mines. 2- Juniors get financing if they are able to find suckers. Right now the junior sector has been getting crushed. If the junior sector picks up again then you'd see more exploration drilling, which should benefit Energold. A junior making a massive discovery (e.g. like Voisey's Bay) would be a catalyst to drive interest up... or a few juniors going up 40X+ (yes, it has happened in the past). That is the reason why people gamble... they are chasing that one rare stock that goes up 40 times or more. 3- Energold has diversified into non-metals drilling. 4- Drilling is arguably a commodity onto itself. It may not track underlying commodity prices. Supply responds faster than demand since you can manufacture a drill rig pretty quickly (you need to train a crew too though)... mines often take 7-10 years to come online. And obviously exploration spending doesn't track the commodity prices. Great stuff! Thank you that explains alot! Link to comment Share on other sites More sharing options...
Liberty Posted April 9, 2013 Author Share Posted April 9, 2013 Yeah, the junior sector is mostly hot air. That's why it's much better to own the guy that sells them picks & shovels than own the juniors themselves. EGD can still make good money just from majors doing exploration and brownfield drilling (notice how the price per meter drilled in 2012 went up from 2011, at 188 vs 181 -- the softer results seem to have been in good part caused by rigs being shipped around and cancelled junior projects costing them meters, not by a collapse in pricing. I think that's a good sign), but when froth comes back in the junior market, they should profit handsomely. I think it's decently likely that in a few years the energy division will be bigger and more profitable than the mineral division, simply because of the scale of the industry. Peak mineral exploration expenditure worldwide was somewhere between 15-20 billion annually, while there are probably certain districts and projects on the energy side that get more than that by themselves. The only downside is that EGD doesn't seem to have quite the competitive advantage on the energy side that it has on the mineral side, but they can leverage the logistics of their worldwide mineral operations to help with expansion and find markets where margins are more attractive (they've already mentioned sending some of the geotechnical fleet outside of North-America, iirc), and even with full earnouts, Bertram will likely have been a superb bargain. Link to comment Share on other sites More sharing options...
ItsAValueTrap Posted April 9, 2013 Share Posted April 9, 2013 There have been publicly-listed energy drilling companies. Precision Drilling PD.UN is one of them. It looked like a commodity business where it'd be hard to general unusual profits. It looks like the only way to make a killing in energy drilling is to correctly predict the boom and bust cycles in the industry. That goes into the too hard pile for me. I'm no good at predicting commodity prices. None of the energy drillers have any type of competitive advantage as far as I can tell. There are also offshore drilling rig stocks out there. Pride, Seahawk, Dryships (not pure play), Atwood Oceanics, etc. The companies focused on shallow water drilling have been killed due to prices going down. Deepwater drilling has been profitable. So basically it's the same idea... you have to predict what drilling rig rates will be. None of them have a competitive advantage. 2- Energold originally focused on man-portable rigs. Anybody can buy the same rigs. So it looks like a commodity business to me. notice how the price per meter drilled in 2012 went up from 2011, at 188 vs 181 3- I'm not sure if price per meter drilled is a great metric. It's ok but not great. The deeper you drill, the higher the cost per meter. You also need to charge more per meter if the rig takes a long time to mobilize, or if it's expensive to get the rig into a country. A better metric would be rig utilization. How many of them are idle versus actively drilling or being mobilized. It tells you everything about supply/demand. At 100% utilization there is no more supply. If I cared more about this stock I would ask them why they don't report utilization rates. 4- Getting into the nitty gritty details, Energold's man-portable rigs won't drill very deep. It has a very specific niche application. I don't think that they will be used a lot for brownfield drilling. You use them for very early-stage exploration where it is difficult to drive a vehicle-mounted rig to your drill site. better to own the guy that sells them picks & shovels I remember reading harris kupperman's writeup on Aeroquest on VIC. That one didn't work out so well... Link to comment Share on other sites More sharing options...
Liberty Posted April 9, 2013 Author Share Posted April 9, 2013 With Energold you have to understand: - The supply/demand situation for portable rigs for metals drilling. This is mostly tied to juniors who go exploring in crazy countries with little infrastructure. Everybody's exploring in "frontier" markets now, including majors and intermediates, because they need big discoveries to replace their depleting mines, and they aren't finding them in the mature districts. That's where the big margins are, and that's what EGD's model is best at. - Why they diworseified out of their core competency. I don't think they have. Bertram is within their core, which is drilling logistics (not building special rigs or whatever, it's a people and logistics business), and Dando (which they bought for like 100k + topping up their working capital) helps because they can do more R&D and produce more rigs in-house, and the model should be quite lucrative once they've sold enough rigs and the orders for aftermarket supplies start rolling in (it's like the car business -- much bigger margins on parts & services). - Outlook for energy drilling I don't think Alberta will stop drilling even if oil prices go down, and it's probably the same in other places like North-Dakota and such. They are all looking at the very long term and even if some projects don't get built, the exploration is likely to continue. - Economics of manufacturing drilling equipment (for various uses, some of Dando's stuff isn't for metals or energy drilling). As I said above, the economics look pretty good, and at the price that they paid for the company, any profit at all is gravy. - Is Fred Davidson a good CEO? He originally ran a junior exploration stock... he is one of those part-time CEOs that I dislike (there was a time when he was running two companies). IMO he's an excellent CEO. The main thing that people seem to dislike is that he does some bought deals. Not ideal, I agree, but he's defended his actions pretty rationally, I think (it's in some conference calls), and so far history has shown that he's gotten good prices and that what he's done with the money raised has been very accretive. By not raising debt and keeping a lot of cash, he makes sure the company can get through tough times, make acquisitions or investments when others are desperate, and come out on the other side stronger, as he did during 2008-2009. He runs Impact silver too, which is a spin-off of EGD. Impact has built many silver mines in mexico all with internally generate cash, minimal dilution. Excellent cost controls and operations afaik, and a very large mining district where they've started to find gold-copper on top of the expected silver-lead-zinc. EGD owns almost 7 million shares of impact, which could someday be worth quite a lot (right now IMPACT is transitioning to new mines, but their long-term growth is impressive). Link to comment Share on other sites More sharing options...
ItsAValueTrap Posted April 9, 2013 Share Posted April 9, 2013 You seem so confident that everything Energold touches will turn to gold. That rarely happens in real life. Energold is in commodity markets and at the mercy of commodity prices. You have to look at the good and the bad (or as Munger says, invert). I'm not saying that Energold is a terrible business. I'm just not excited about it and I don't have deep knowledge of the drilling industries and its various niches. Link to comment Share on other sites More sharing options...
Liberty Posted April 9, 2013 Author Share Posted April 9, 2013 Well, it certainly isn't turning to gold right now :P I'm not saying it's a magical company that is worth it at any price. But at the kinds of prices we've seen lately, I think it's a solid long-term investment that could earn quite a bit in any environment other than the junior depression we're seeing right now (and once they're done paying their earnouts to Bertram). One thing that gives me some confidence on the energy side is that they've recently signed very large multi-year contracts, and are bidding on more, and have said they're planning to start operating during times of the year when the company has not operated in the past. Bertram was already making good money before that, but this should help make things more predictable. On the mineral side, a lot of the secret sauce is like with soft drinks: branding/reputation and distribution. That's what is hard to replicate. At this point, Energold has spent years building relationships with a lot of the players and is synonymous with frontier drilling to them, and has a worldwide network of local drillers and helpers (that can't really be poached because they aren't trained on the more complex big rigs, but Energold can poach from other companies because its rigs are simpler to operate). Other companies usually fly the drillers in and then screw up the landscape by getting the big rig to where they need it. They could decide to get their own modular rigs and try to do environmentally friendly frontier drilling, but it would take years to build out the "distribution" network of local drillers and helpers, they'd need to change their model (Energold created that model and used it from the start, but others are used to the traditional way of doing things, and that kind of change is hard, especially as long as their traditional businesses make money), and would need to get the trust of mining companies that they can do this type of frontier drilling properly (that takes time too). It can be done, but there is definitely a barrier to entry, and so far it doesn't look like anyone is successfully even trying on any scale. It's probably easier for a startup to do something completely different than for a company that has been doing things based on one model for decades to change, and startups aren't much of a threat to EGD at this point. Their modular S-Style rigs started out not being able to drill very deep, but after many upgrades (another benefit of the modular model), they are now pretty competitive with most other standard rigs, afaik (don't remember max depth number off the top of my head). And many are being used for brownfield work by majors; in fact, EGD has trouble getting their rigs out of there because the customers want them to stay, so they usually end up building new more traditional rigs and swapping them over time to redeploy the S-styles to frontier work. I also like the discipline that they've shown so far, going after profitable business, not growth for growth's sake. Most other drillers have tons of rigs in Canada and Australia, but EGD stays out of these markets entirely on the mineral side because there's too much competition. The CEO is a large shareholder, so I think he's well aligned. You probably won't like that, but they also plan to start a water drilling division, mostly in Africa for municipal and UN contracts iirc. There too the main thing is their existing 'distribution' network and expertise working on those areas. Dando has like a 100 years of expertise in that market too. We'll see how it turns out, but Davidson so far seems to only go into places that meet his pretty high margin and ROIC requirement, so hopefully that's more of the same. A 4-division company could provide nice opportunities to allocate capital and resources across countries and divisions to where the highest returns are found. Link to comment Share on other sites More sharing options...
ItsAValueTrap Posted April 10, 2013 Share Posted April 10, 2013 On the mineral side, a lot of the secret sauce is like with soft drinks: branding/reputation and distribution. That's what is hard to replicate. Um... I don't think the drilling industry works that way. Link to comment Share on other sites More sharing options...
craigatk Posted April 10, 2013 Share Posted April 10, 2013 Thanks for starting the thread and summarizing all the relevant links. I find the numbers coming out of Bertram to be quite interesting. Especially this press release: August 21, 2012 Energold Drilling Announces Multi-Year Energy Drilling Contracts Energold .... is pleased to announce that it has recently been awarded several long term service contracts (up to five years) for the Company's energy drilling division, Bertram Drilling Corp.... Management estimates the combined value of these contracts alone to be worth at least $45 million annually, starting in 2013 and anticipates substantial growth as the Company is actively pursuing work with potential and existing customers heading into the upcoming winter drilling season. Management further expects the energy drilling division to reach $45-55 million in 2012, a significant portion of Energold's consolidated revenue for the year. Management's energy division growth target for 2013 is 25-50% over 2012. With respect to Bertram, you can see mgmt's rosy outlook published Aug 2012 and now compared with the full year results of $47.1m for the Energy Division. They hit their target on the low-end. Intriguing that 2012 FY revenues came in around the level they announced would start from 2013. It's becoming clear that the Bertram brothers will likely receive the max cap $10.5m retention bonus ending with a final payment in 3Q 2014. This payment will continue to be a major cost drag on for 2 more years. Stock price will receive a major catalyst when the payment concludes. Also thanks to the analyst on the conference call last night who asked about the failing covenant on their convertible debenture. That was quite alarming to me when I read it yesterday, but seems a minor issue now. It seemed like the covenant was broken when they did their last bought deal but that they've been in communication with their CB holders and it is going to be waived. Will this help now prevent yet another bought deal in the future? We can only hope. Link to comment Share on other sites More sharing options...
Liberty Posted April 10, 2013 Author Share Posted April 10, 2013 On the mineral side, a lot of the secret sauce is like with soft drinks: branding/reputation and distribution. That's what is hard to replicate. Um... I don't think the drilling industry works that way. No, but environmentally friendly frontier drilling in remote locations seems to. Link to comment Share on other sites More sharing options...
ItsAValueTrap Posted April 10, 2013 Share Posted April 10, 2013 Anybody can buy the same rigs. http://www.hydracore.com/history2.html Kluane originally ordered rigs from Hydracore. Kluane and Energold are a single company now. Link to comment Share on other sites More sharing options...
premfan Posted April 10, 2013 Share Posted April 10, 2013 Anybody can buy the same rigs. http://www.hydracore.com/history2.html Kluane originally ordered rigs from Hydracore. Kluane and Energold are a single company now. The simplest explanation i have is look at the price its trading. Bertrams earnings will go to the bottom line in 2015. Assume mineral division will stay the same. Look at the guaranteed contracts for bertram. You will get a range what the earnings will be in 2015. Variables are share count and if any acquisitions. Sentiment is horrible and it was until recently trading around working capital so downside established. Link to comment Share on other sites More sharing options...
Liberty Posted April 10, 2013 Author Share Posted April 10, 2013 Anybody can buy the same rigs. http://www.hydracore.com/history2.html Kluane originally ordered rigs from Hydracore. Kluane and Energold are a single company now. Isn't it what i said? It's not about tjust the rigs, it'a abouts the model. Though i'm not quite sure it's accurate to say that anyone can buy exactly the same rigs. There's a lot of in house r&d and manufacturing. Link to comment Share on other sites More sharing options...
craigatk Posted April 10, 2013 Share Posted April 10, 2013 Actually the same Hydracore history page you linked says that Kluane and Energold split up. They used to have a 50-50 JV. Energold was a junior mining/exploration company back then. A lot has changed. Edit: I just looked through past annual reports and found it was Q4 2007 when Energold announced that they took 100% ownership over the Kluane International JV. Kluane Drilling is still alive and a private company, see: http://www.kluanedrilling.ca Link to comment Share on other sites More sharing options...
craigatk Posted April 10, 2013 Share Posted April 10, 2013 Here's another blog worth checking. Has a negative opinion on EGD: http://glennchan.wordpress.com/2012/08/22/energold-drilling-corporation-cveegd-revisited/ Link to comment Share on other sites More sharing options...
ItsAValueTrap Posted April 10, 2013 Share Posted April 10, 2013 Yeah that's my blog. :P I'm not really negative about Energold. I'm just not excited about it. I look at other drilling companies and see that: A- They are very cyclical. They make a killing during the boom times... if you are good at timing that, then maybe you should do that. B- Nobody has a competitive advantage, other than having low costs. C- I would invest based on the liquidation/market value of their assets. Unfortunately I'm not good at calculating that. D- Sometimes Mr. Market misprices these companies. Link to comment Share on other sites More sharing options...
craigatk Posted April 10, 2013 Share Posted April 10, 2013 Thank you for being a part of the thread then! I am enjoying thinking about some of your thoughts on Energold. Link to comment Share on other sites More sharing options...
premfan Posted April 10, 2013 Share Posted April 10, 2013 Thank you for being a part of the thread then! I am enjoying thinking about some of your thoughts on Energold. + 1 Link to comment Share on other sites More sharing options...
Aberhound Posted May 7, 2013 Share Posted May 7, 2013 Good write up on Energold by a friend of Calonego (the board member seen eating dinner with Buffett). http://adventuresincapitalism.com/post/2010/03/16/Mining-Services-Part-II.aspx Link to comment Share on other sites More sharing options...
Liberty Posted May 7, 2013 Author Share Posted May 7, 2013 CEO and CFO recently bought some shares: http://canadianinsider.com/node/7?menu_tickersearch=EGD Not huge amounts, but AFAIK pretty much all of the CEO's net worth is already in the company and he's not super wealthy.. Don't know about the CFO's circumstances, but it was a bigger buy. Link to comment Share on other sites More sharing options...
muscleman Posted May 7, 2013 Share Posted May 7, 2013 What is the barrier of entry for this business? Could big drilling companies easily create a similar team with man-held rigs? Link to comment Share on other sites More sharing options...
crackspread Posted June 23, 2013 Share Posted June 23, 2013 this company recently had a decent run up that was quickly battered down back to 1.79. As others pointed out, insiders bought 40,000 worth a few months ago. Anyone have any thoughts? Link to comment Share on other sites More sharing options...
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