The Commodity Investor Q&A
With Matt Badiali
May 27, 2009
Q: Last year, you recommended Teck Cominco. Everyone knows what happened to Teck over the last few months. Why did you not get your readers to buy in during the "less than $8" days? Those of us who bought in have made substantial gains. – G.H.
A: Back in April 2008, I told S&A Oil Report readers to buy mining giant Teck Cominco (now known as Teck Resources). At the time, I liked the company's diverse commodity portfolio. The company's problems weren't yet apparent.
It was like watching a bay full of bathers: You don't know who's swimming naked until the tide goes out. The tide fell with a flush in the second half of 2008 – and Teck was exposed.
S&A Oil Report readers bought the stock around $40 per share. We got out with just a 4% loss thanks to our trailing stop. By December 2008, the stock had dropped 92% to $3.
At that point, value investors were getting interested. But I told Growth Stock readers, Teck isn't a good risk.
In October 2008 – near the top of the market for coal – Teck borrowed nearly $10 billion to buy a coal trust. After the collapse in commodities, that debt looked like cement boots, and Teck was inches from the water.
As of April 20, the company still owes $9.2 billion from that deal: $4.2 in long-term bonds paying more than 10% interest and the rest due next year. Management says it will pay all but the long-term bonds off this year. That's a huge hole to fill, and the company is chucking in all its cash and its best assets...
Teck recently agreed to sell its Hemlo gold mine to major gold producer Barrick. Teck received 130,000 ounces of gold from its Hemlo mine in 2008. At $900 per ounce of gold, that's worth $48 million net. The company sold it for just $65 million. That's absurdly cheap.
And Teck sold its prolific Pogo gold mine to its partner Sumitomo Metals for just $245 million. At $900 per ounce, Teck's share of Pogo would have netted the company $56 million in cash from the mine this year. It was a better deal than Hemlo, but it's still insanely cheap.
Counting a massive royalty it sold to Royal Gold for another $200 million, management all but gave away three fantastic gold investments in the face of rising gold prices. That's unfathomable... unless you're fighting for your company's life.
If you're looking for safe commodity plays, avoid Teck.
Q: What has been keeping BPT's stock at $66-$67 since the April dividend? Is Canada going to do away with the Trust concept by 2011? – J.D.
A: BP Prudhoe Bay Royalty Trust (BPT) isn't a Canadian trust at all... It's actually one of a few U.S.-based royalty trusts. Canadian royalty trusts act like oil companies but must pay out nearly all their profits to shareholders. U.S. royalty trusts, on the other hand, are actually income streams from a certain set of wells.
Essentially, this stock is a cash flow and a call option on the price of oil.
BPT's cash flow comes from oil wells in Alaska's Prudhoe Bay field. The trust can only pay dividends from the cash it generates on the oil it sells. So when the price of oil got chopped at the knees, BPT's dividend fell from $3.05 per share in the second quarter of 2008 to $0.99 per share today. That's an 82% decline in a year, and it took the share price right along with it.
At its current market value of $1.49 billion, the trust trades at 11 times future earnings, which is a little above average. The company also pays a 5.7% dividend, which is historically low.
BPT receives 16.42% of the first 90,000 barrels produced per day – about 15,000 barrels per day, or 1.35 million barrels per quarter. Over the long term, as the price of oil increases, so will BPT's earnings. As its earnings increase, its dividends will grow. And as its dividends grow, your shares will, too.
Good investing,
Matt
P.S. If you've got a question about commodities or commodity producers, drop me a note. I answer reader questions every Wednesday in Growth Stock Wire. Keep in mind, I can't provide individual investment advice |
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| • |
Regional banks continue recovery... Bridge, Citizens, Great Southern, and Home Bancorp hit 52-week highs. |
| • |
Small soft-drink companies National Beverage and Cott make new 52-week highs... Cott up 700% since March. |
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Earnings today... American Eagle, AutoZone, Chico's, Polo Ralph Lauren, Staples. |
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Last |
Change |
52-Wk |
| S&P 500 |
909.84 |
+2.57% |
-33.87% |
| Oil (USO) |
33.93 |
+0.68% |
-68.27% |
| Gold (GLD) |
93.74 |
-0.44% |
+2.75% |
| Silver (SLV) |
14.40 |
-0.69% |
-20.09% |
| U.S. Dollar |
87.95 |
+0.16% |
+19.30% |
| Euro |
1.40 |
-0.17% |
-11.32% |
| VIX |
30.75 |
-5.76% |
+57.29% |
| HUI |
375.21 |
-1.04% |
-14.96% |
| 10-Year Yield |
3.49% |
0.04 |
-0.31 |
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| Company |
Sym |
Industry |
Broadpoint |
BPSG |
brokerage |
Entremed |
ENMD |
biotech |
Lincoln Edu |
LINC |
for-profit ed |
Spectrum Pharma |
SPPI |
pharma |
Webzen |
WZEN |
software |
Bridge Bancorp |
BDGE |
bank |
Diedrich Coffee |
DDRX |
coffee |
Kopin |
KOPN |
electronics |
Smith Micro |
SMSI |
software |
Vanda Pharma |
VNDA |
biotech |
Advanced Tech |
AXC |
acquisitions |
Cott Corp |
COT |
soft drinks |
KongZhong |
KONG |
media |
Star Gas |
SGU |
heating oil |
Virgin Mobile |
VM |
cell phones |
Aruba Networks |
ARUN |
networks |
Citizens Holdings |
CIZN |
bank |
Home Bancorp |
HBCP |
bank |
Riverbed Tech |
RVBD |
networks |
Symmetricom |
SYMM |
telecom |
AsiaInfo Holdings |
ASIA |
software |
3Com |
COMS |
networks |
Kirkland's |
KIRK |
furniture |
Sciclone |
SCLN |
pharma |
Tasty Baking |
TSTY |
food products |
Allied Nevada |
ANV |
mining |
Catapult |
CATT |
software |
Great Southern |
GSBC |
bank |
Openwave |
OPWV |
software |
SXC Health |
SXCI |
software |
Biovail |
BVF |
pharma |
National Beverage |
FIZZ |
soft drinks |
National Presto |
NPK |
appliances |
STEC |
STEC |
data storage |
|
| Company |
Sym |
Industry |
Triplecrown |
TCW |
acquisitions |
MDS |
MDZ |
health care |
Sapphire |
FYR |
acquisitions |
Laclede Group |
LG |
natural gas |
Cephalon |
CEPH |
pharma |
Hicks |
TOH |
acquisitions |
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