Event Driven investing in practice

An event-driven bet on copper

A good enough analysis with adequate timing and sizing always beats a brilliant analysis with poor timing and sizing.

Timing and position sizing distinguish between winner and loser in the markets in the long term.

It is impossible to time the market precisely, but picking a good enough time (or less wrong) is achievable. Technical Analysis is an excellent tool for market timing, but it is not the only one.

And here comes event-driven investing. A complete investing thesis must have three components: macro tailwinds, robust company fundamentals, and the catalyst.

A powerful analogy is the Triangle of Fire. To start a combustion, we need oxygen, fuel, and spark. The macro tailwinds are the oxygen, the company fundamentals are the fuel, and the catalyst is the spark that ignites the fire (or the stock price, in our case).

So, a highly anticipated event is our spark. It tells us two things. First, we know that there is a spark, i.e., there is an event that will lead to stock revaluation. Second, it tells us when that will happen. This is the proverbial timing.

Of course, not all sparks are the same. There are two major types:

·       Fixed event: events with a known exact date, such as elections, court decisions, or corporate actions.

·       Broad event: events with a known time frame, i.e., months or weeks, such as demand/supply shifts in commodities, anticipated political decisions, or military conflict.

Event-driven investing is the foundation of my investing process. With that primer, I just scratched the surface. Now, let’s show you how it works in real life.

Event-driven idea in practice

First, I would like to give credit to

Swen Lorenz

(his blog undervaluedshares.com is a must read) for pointing the light to the Northern Dynasty, NAK. The company fits perfectly in an event-driven investing category.

NAK owns Alaska's largest undeveloped copper-gold deposit, Pebble. This deposit is on par with Freeport McMoran's Grasberg mine.

The following chart from Mining Intelligence compares the most significant underdeveloped copper projects. Pebble, with 37 million tonnes of resources, is the first-place winner.

The company is in the process of obtaining permits to build a mine. However, over the past 20 years, it has encountered constant setbacks.

The reason is that the state administration opposed the project for two-thirds of that period. Over the same period, the Democrats were the ruling party. The latter are the custodians of all the insane reforms, starting with gender ideology, going through race theory, and ending with ecology. The absurdities in all three areas have reached epic proportions, a real setback for the US economy and society.

NAK is a victim of the greenwashed bureaucrats. The EPA has halted the development of the Pebble Mine, although, at the state level, the project has the full support of the local government.

In 2015, Trump's election gave investors hope that Pebble would get the necessary permits. However, there was no progress. The current Biden administration has made matters worse by following the Green Deal and making the US dependent on critical metals imports from its archrivals, China and Russia.

The copper deficit is growing, ignited by constrained supply and rising demand. The former is caused by the scarcity of capital, declining ore grades, and shortage of skilled personnel. Demand is set to rise due to factors like energy transition, infrastructure renewal, and  AI energy/hardware needs. NAK is an event-driven bet on the copper deficit with x10 potential.

Investment thesis in 165 words

NAK idea combines three catalyst events, closely related to each other:

·       Growing copper deficit

·       The next US President most probably will not be a Democrat

·       Supreme/District Court decision invalidating the veto of the U.S. Environmental Protection Agency (EPA).

This year, the price of copper grew steadily, and the election of a Republican president is becoming increasingly likely. Those factors combined make the third one plausible—a Supreme Court/District Court decision to overturn the EPA's veto, making the Pebble Project possible.

In 2016, we had a similar scenario with Trump's election, when NAK's stock price rose from $0.44 to $3.0 in months, based on the expectation that the new administration would give Pebble the green light. During 2016-2017, the copper price doubled, adding more fuel to the fire.

Unlike 2016, the copper deficit is now structural, and we live in an increasingly fragmented world. The U.S. is being pushed to develop its own critical metals supply chains ASAP, and projects like Pebble will be a priority for development.

How much does NAK cost?

I use NAV to estimate NAK value. I like to be conservative, so I select only gold resources.

Inferred is ounces that are possibly there, i.e., there is less than a 10% chance that they will convert into reserves and, hence, be mined. Measured and Indicated, on the other hand, have a 50% chance of transforming into reserves. Based on those values to establish Plausible Reserves (in this case, gold only), I use the following formula:

Plausible Reserves = 100%*Reserves + 50%*Measured and Indicated + 10%*Inferred

Pebble does not yet have a completed report showing project ore reserves. NAK has Measured Indicated and Inferred resources. Therefore, for Plausible Reserves (gold only), I get 30.0 million ounces of gold.

Finding one ounce of gold and proving it as reserves costs about $110. Pebble is at the reserve definition stage, meaning the company has not yet spent that $110. However, finding and defining resources also costs money. Depending on the type of deposit, between $50 and $70.

I am assuming a more conservative scenario—a resource definition cost of $50 per ounce of gold. Therefore, the gold found at Pebble alone is worth $1.50 billion at this stage.

NAK has $12.7 million in current assets and $16.2 million in total liabilities (as per the 2023 annual report). NAV based on gold resources alone is USD 1.496 billion. NAK's market capitalization is USD 150 million. The company's NAV, measured in gold resources, trades for $0.10 to the dollar.

Let’s not forget that this number excludes copper, silver, and molybdenum reserves. NAK is an absolute steal at that price, given its reserves and relatively high odds of Pebble moving ahead.

I'm not chasing the final court decision (overriding the EPA veto) but the mere expectation that the project will get the green light. Remember that expectations drive markets in the short term (6-12 months), not facts. NAK is a bet on rising confidence that Pebble will be developed, motivated by higher copper prices and a US power shift.

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Knowing when to strike is at least as important as knowing where to strike. This makes the event-driven approach the first pillar of my process.

The second one is to seek asymmetric ideas in obscure places. Simply, there is more Alpha to extract per market participant.

If you don’t want to miss such opportunities, look at TheOldEconomy paid subscriptions. If I got your attention, peek into the ”Test Drive” Section.

Everything described in this report has been created for educational purposes only. It does not constitute advice, recommendation, or counsel for investing in securities.

The opinions expressed in such publications are those of the author and are subject to change without notice. You are advised to do your own research and discuss your investments with financial advisers to understand whether any investment suits your needs and goals.

Full disclosure: I hold a position in Northern Dynasty when publishing this article. Note that this is a disclosure, not a recommendation to buy or sell.