Good afternoon
yet another strong day for equities. IF investors are right, and interest rates will stay low for years ( or better: IF central banks / governments can keep interest rates low ), then equities are still very cheap…BUT IF inflation is coming - or worse, stagflation - and they cannot keep interest rates at current levels, the long-awaited second leg will come!
Even though I am running a slightly more defensive strategy than usual in my fund - I am never using options/futures, having an unsually high cash position of 11% currently, I tend to believe in the first scenario. At least that´s what the market is telling me! Amazing!
Gold is heaving a volatile day, within a relatively small range today…so far….at about 5 pm European time, it´s trading at 1745 US$ and basically unchanged…but it has problems to go higher in A$ in the moment.
Base metals are slightly up, the oil price continues to run - just below 36 US$ for Brent in the moment.
Strike Energy and the potential takeover target, Warrego Energy have a bit of a fight on in the moment about the size of what they have found in Western Australia….Strike´s estimate of the resource is higher than Warrego´s - but I am not exactly sure, what Warrego wants to achieve here. Strike are the operator, and so far, their modeling of everything surrounding the West Errgulla fas field has been exemplary - I have no reason to question their resource estimate. But as always: The proof is in the pudding - in this case, the next appraisal well. I hope, that the JV will announce the start of drilling soon.
West African - I have done a few numbers on the most aquisitive Western African producer, that´s Endeavour, and West African Resources. I have used yesterday´s closing price of EDV, 32 Can$, and arrive at following numbers: ( for ease, I have not used EV/EBIDA, but market cap / EBITDA. That´s favouring WAF in the moment - but in 6 month time, WAF will be net cash positive, while EDV will probably have a little bit of debt left ):
EDV is trading at market cap / EBITDA multiples of 5,4x / 6.1x / 7.9x for the next three years. If they were to aquire WAF at a premium of 50% ( using paper ), their ratios would fall to 4.3x / 5x / and 6x for the next three years. Very compelling, isn´t it?!! Larger, cheaper, more exploration upside, lower costs….I am not sure, though, wheather 1,20 A$ in paper would be enough to get them - but not completely unrealistic, given the markets aversity to single-mine stocks! Today, EDV are up another 3%, making the numbers even more compelling
The gold market is very very active, money is being raised, and cash flow is strong for most producers - so I think the undervalued mining services sector is worth revisiting. Stocks like Perenti ( the old Ausdrill ) and Swick ( the drilling company ) are still substantially below their pre-corona prices - and I think there is very little reasong for it. No doubt, that earnings will suffer a little in the current Quarter ( more so for the driller, I guess, as some exploration had to stop temporarely ) - but the market in their underlying commodities is so strong, that activity in 2020/21 will be very strong for the service companies.Stocks like Perenti/Macmahon/Swick ( all of which I own in my fund ) are trading at 3x EV/EBITDA or even lower - I think that´s very good value.
Most will be having a long weekend in Europe - enjoy it!
WS
WS
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