Value Investing Warren Buffett’s Berkshire Hathaway buys stakes in Japan’s five leading trading companies |
| Warren Buffett’s Berkshire Hathaway buys stakes in Japan’s five leading trading companies Posted: 30 Aug 2020 05:36 PM PDT | ||||||||||||||||||||
| Posted: 30 Aug 2020 05:19 PM PDT Let's have a gold talk. In these dire times in which the market gets weirder everyday, commodities seem to be a place to find solace. Gold has been doing good lately and considering the last bullish run it had, it could go on for 3 years. I did a bit a research and tumbled upon GoldSpot Discoveries Corp. (TSXV:SPOT) What Are They Doing?GoldSpot is a small Canadian company that was created not so long ago on the premise that the use of unutilized geological, geophysical and satellite imagery big data combined with machine learning/artificial intelligence can change the way exploration on a property is done. The goal is to drive down prices of exploration and offer a simpler way to identify where to mine, but also to elevate the accuracy of metals locations in the ground.You get the idea...I won't get into much details, but if you want more information on the company, go ahead! Oh and by the way, don't be fool by the name, the company is also engaged in other metals too (Silver, Nickel, Copper, etc...). tl;drSPOT is trading at $0.03 over its cash per share metric of $0.10 which is ridiculous considering the ways the company can generate income. With its advances in technology, multiple income stream and its promising portfolio of investments, I believe the company is undervalued by a factor of at least 3. My current estimation of share price is at $0.43 although current market value is $0.14. Why the price has gone down and Escrow SharesIf you take a look at SPOT's chart there is a descending trend although it seems somewhat correlated to the fact that the stock took a couple hits...A look up at trading volumes shines a light on 6 different periods. 4 of them are related to the release of escrow shares to the investors under the following schedule: Total of common shares:
Release:
At those times there is usually an important volume of shares being liquidated... The fifth peak in volume is in October 2019 and it can be attributed to investor Sheldon Inwentash liquidating a couple millions of shares. Last but not least, last peak that happened about a week ago on August 13th...I am not sure why this happened. Maybe a change in escrow shares release schedule or not, it is yet to be determined. RoyaltiesFrom what I understood, GoldSpot is primarily doing consulting, but they still seem to make moves on mining projects that look promising. They have royalties portfolios on these 4 properties:
New Found Gold is by far the most valuable asset in the portfolio. While digging in the news release I found that GoldSpot previously owned 1% royalty in Queensway, so they probably sold 0.5% along the way and with NFG IPO they probably sold it at a good price. It is hard to price the royalty portfolio because there is no working mine or good resource estimation for there junior miners but with the recent Gold rally they didn't go down in value. InvestmentsThe bulk of this thesis come from SPOT's investments in some key junior miners. The whole portfolio is not available but from what was publicly disclose, it is possible to assume that these undisclosed assets (investments) are related to mining (why invest elsewhere when you are expert in the industry). With the price of gold going up, these anonymous investments probably surfed the wave along with it. But we can still look at what we know for certain:
Considering only these two investments from their $10M in assets (non-public probably rose as well), their portfolio rose by ~22% since last available financial information. Over the same period, GoldSpot lost ~40% (0.25 to 0.14) taking the capitalization to just under $14M when they have at least $13.35M in assets (adjusting for the gains in NVX and NFG). InsidersOne of the reason why the stock is so low can be attributed to a change in management. Frank Holmes (U.S. Global), Donovan Pollitt (Pollitt Mining) and Ramon Barua (Hochschild Mining) left the company. This would suggest something bad was about to happen for GoldSpot or maybe a divergence of views within the board committee. Since the announcement none of them withdrew ownership in SPOT suggesting it might be more the latter reason. Though, a flow of new deals for GoldSpot indicate they can do it without the three board members NV Gold, Yamana, AEX Gold, Margaux, Tembo Gold. Discounted Cash FlowWhat is knownConsulting IncomeOne relation that caught my eye is the one between the Consulting Income and the Operating, G&A expenses, that for the moment, are pretty much on par. Looking at the company's past 9 quarters, the consulting income grew somewhat in a straight line at 15% QoQ and looking at the same metric year over year we saw in 2019 a growth rate of 78% YoY. When looking at the Operating and G&A costs, it grew at around 17% QoQ. The operating costs are slightly greater then the consulting incomes, but it could easily be explained by the surprise cost of inclusion on the Canadian exchange of about $2M in Q1 of 2019. This is a one time fee that can be ignored for estimating future cash flows. Since their ideal long term goal is that with the continuous effort put in by the employees, the cost for providing these consulting services will diminish drastically in the future. The assumption goes towards decreasing Operating and G&A expenses and increasing Consulting Incomes. Investment GainsBased on the limited information online about their private portfolio of assets, the two known recent investments made in NFG and NVG, initially valued at $1.25M are now estimated at $3.5M as of FY 2020. AssumptionsGrowth RatesUsing the data gathered from the company's historical information the following table was made to estimate the future growth of the incomes and costs of the company. Based on the the fact that the company leverages technology, that they've been working at this for 2 and a half years, that they have many projects in their pipeline, and promising Q1 2020 results, the same 80% growth rate between 2018-2019 was used for estimating 2020's results. The rate was subsequently cut in half each year. Terminal perpetual growth rate is set to 3%. Operating G&A costs modeled at a more modest rate to support the main thesis. Projected IncomeThe investment gains were modeled based on the known information for the year 2020 and used that number for the following years. Assuming there is little known about GoldSpot's portfolio, the fact that royalties will pay for a long time, and their many projects, netting $3.5M over the next 3 years is reasonable. The average gold run also last 3 years. After the investment gains was divided by 2. ResultsTo discount the future cashflow at the present value the following parameters were used. GoldSpot doesn't have much debt and they finance most of the company through equity. Estimating the cost of equity with warrants is tricky and I decided to use a strong 10% to penalize the valuation. Tax rate is given by the government of Canada's website.
Using the cashflow generated in the last table, we added back the small D&A of 21,555 yearly back in the FCFF. Nothing else was added to the FCFF due to the limited amount of information on the financials reports. The terminal value of the company was calculated and brought back to the present value. The yearly estimated cashflow were also brought back to present value. The company's share count grows by around 7% yearly. 101M shares was used to calculate the final expected share price of $0.43.
Sitting with a big pile of cash I was curious to see how it reflected per share. It comes out near $0.11/share which is pretty high considering the fact that the company trades at $0.14. The market is basically valuing this company at $0.03/share translating to not even $3M. A company value is reflected the future cashflow and outcome of the company, and I find it interesting that the company is valued at $3M while they will generate at least $3M this year with their investments. Adding the present value per share of the cashflow and the current cash per share the final estimated share prices comes at around $0.43 which I believe is a much fairer estimated value. So...The earnings should be out any days now between 8/27 and 9/2 if we believe yahoo and we'll know the fair value of SPOT's investments. [link] [comments]  |
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