Investment-Grade Findings, From Toronto
I’ve been busy. Last week, I was in Toronto attending the annual convention of the Prospectors & Developers Association of Canada (PDAC).
It’s the world’s largest mining conference, or so they tell me. I heard that there were about 40,000 attendees and exhibitors (no, I didn’t count heads). There were way over a thousand mining and service companies with booths, which I figured out by walking the aisles. From what I could see, it was just massive.
Suffice to say, I caught up on developments with many companies. I met with management teams and heard plenty of fine investment-grade stories. Where’s the industry headed? Let’s discuss…
In these pages, we usually deal with large resource companies — oil, mining and/or service plays. In general, we follow established companies with extensive assets, operations, production, sales and revenue. It’s the deep pockets and revenue stream that stabilize the shares, and allow dividend payouts in many cases.
For example, look at oil companies like Statoil (STO) or Total (TOT). They have a global presence, with significant oil concessions and operations, as well as a deep technology base and great employees. They’re moneymakers, of course, and pay nice dividends — Statoil pays out at 3.7%, while Total yields a whopping 5.5%. You won’t get that down at your local bank, that’s for sure.
It’s the same with the hard-rock mining guys. Look at some of the companies we’ve covered in Daily Resource Hunter before, like Barrick Gold (ABX) or Freeport McMoRan Copper & Gold (FCX.) Both are mining titans with global reach and both pay a modest dividend.
Freeport and Its “Very High Grade” Discovery
I’ll use Freeport to illustrate the point a bit more. Freeport has global operations, with large cash flows and profits flowing to the bottom line. In 2012, Freeport booked revenues over $18 billion. Its “cost of revenue” — the expense side of the ledger — totaled about $11.5 billion. So its gross profit was around $6.5 billion.
Subtract all manner of other charges, taxes and payouts, and the net revenue for Freeport was over $3 billion. (That’s down from Freeport’s $4.5 billion in 2011.) That’s the kind of income statement that makes for a solid, long-term investment idea.
Assets, income and management place a cushion beneath the down-side of things, even in tough times. But is there still an upside?
Consider this. All that cash flow lets Freeport do some pretty aggressive things. Specifically, Freeport has been bragging, recently, about its success with a “major new project” in Serbia. I’ve mentioned this Serbian play before, but Freeport hasn’t been too public about it until recently.
Now, however, the Freeport news is starting to flow through the industrial conference network. Last week, at PDAC, Freeport offered more detail about the Serbian play. The news is trickling out. Here’s the description of Freeport’s new Serbia play:
Very high-grade Copper-Gold Discovery in a prolific belt. The Timok Project comprises the Jasikovo-Durlan Potok, Brestovac-Metovnica and Leskovo Exploration Permits that are held by a Serbian subsidiary, in which Freeport-McMoran Exploration Corp. (FMEC) has earned a 55% ownership interest.
First, note that somebody is calling this a “very high grade copper gold discovery.” In and of itself, that matters. When a large, closely-watched, public company like Freeport attaches a “very high grade” label, that means something. This is not vaporware.
Plus, Freeport has earned into a 55% ownership share of the Serbian play. Who owns the other 45% share? Well, that would be a small, “Canadian junior” company that I’ve been tracking in my newsletter, Energy & Scarcity Investor. This Canadian junior was among the best performing stocks on the Toronto exchanges in 2012.
It’s certainly nice when a large, established, cash-rich company teams up with a smaller guy who has generated an excellent new prospect. Indeed, it’s a win/win scenario that pays out for investors in both companies.
If only there were more of these, right? On my end, I’ve always got my eye out for this kind of opportunity. Stay tuned.
Best wishes. Thanks for reading.
Byron W. King
Original article posted on Daily Resource Hunter