Have you considered investing in the gold theme through picks and shovels?
I’m especially focused on these ones: Perenti (the largest pure-play contractor in mining), Emeco (the largest rental equipment company for mining in Australia), and Major Drilling (the largest specialized drilling services).
If the gold price does well, they’re going to do well since a big chunk of their services go to gold mining companies, and you also get the copper upside with them at ridiculous multiples of 2.5-5x EV/EBITDA. If you look at past cycles, they are all correlated to miners with a lag, just like oilfield service companies run with a lag to the oil producers. But you can play the gold/copper theme without the inherent risk of mining, they just dig holes and make money regardless if they find something or not.
With mining capex being a fraction of the last maximum in the previous cycle. There's room for multiple and earnings to increase.
I agree with the advantages of using "picks and shovels" companies. It makes sense in a depressed market with almost zero CAPEX. Sooner rather than later, the miners will start spending again on CAPEX so that those companies will do exceptionally well.
As you said, the mining risk is (almost) nonexistent. This is a huge advantage because we can play gold (or other metals) without knowing much about geology. The lag between producers and services is an opportunity to take time to build a position.
The only drawback is the lack of attractive options. The more time I spend in the markets, the more I realize the importance of time, volatility, and path dependency, hence the strength of the options in managing risk and leveraging our bets.
Great article Mihail!
Have you considered investing in the gold theme through picks and shovels?
I’m especially focused on these ones: Perenti (the largest pure-play contractor in mining), Emeco (the largest rental equipment company for mining in Australia), and Major Drilling (the largest specialized drilling services).
If the gold price does well, they’re going to do well since a big chunk of their services go to gold mining companies, and you also get the copper upside with them at ridiculous multiples of 2.5-5x EV/EBITDA. If you look at past cycles, they are all correlated to miners with a lag, just like oilfield service companies run with a lag to the oil producers. But you can play the gold/copper theme without the inherent risk of mining, they just dig holes and make money regardless if they find something or not.
With mining capex being a fraction of the last maximum in the previous cycle. There's room for multiple and earnings to increase.
Excellent comment.
I agree with the advantages of using "picks and shovels" companies. It makes sense in a depressed market with almost zero CAPEX. Sooner rather than later, the miners will start spending again on CAPEX so that those companies will do exceptionally well.
As you said, the mining risk is (almost) nonexistent. This is a huge advantage because we can play gold (or other metals) without knowing much about geology. The lag between producers and services is an opportunity to take time to build a position.
The only drawback is the lack of attractive options. The more time I spend in the markets, the more I realize the importance of time, volatility, and path dependency, hence the strength of the options in managing risk and leveraging our bets.
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