My friend Ryan O’Connor of Aboveaverage Odds and managing partner and co-portfolio manager at Whetstone Capital Management, gave me permission to post his excellent write up on Energold. It is a very long (but easy to understand) write up (22 pages in word without using bigger fonts like I did in my HS days). enjoy!
Energold Drilling (EGD) is an obscure, under-appreciated micro-cap franchise that possesses both a large margin of safety and what we believe is an incredibly favorable, highly skewed risk/reward equation.
An investment in Energold at or around the current price possesses nearly all the qualities we look for in a great long-term investment. In particular (1) an unsustainably low valuation (both absolute and relative to peers) (2) a good, fully incentivized management team (3) near to medium-term operating momentum (4) a highly attractive long-term business model (5) multiple internal and external high probability catalysts (which we expect will drive substantial near to medium-term upside) and (6) a situation where a variety of temporary issues converge to mask a significant inflection point both in regards to the company’s corporate development and future prospects as well as in relation to its industry as a whole.
Other attractive attributes of Energold include…
- A dominant competitive position in a rapidly growing niche market
- An unlevered balance sheet
- Improving economics on an attractive and fast growing asset base
- A high likelihood of experiencing meaningful improvements in near-term profitability and cash flow
- Opportunity to invest capital at (1) a very high rate and (2) for a very long time
- Valuable hidden assets – their stake in Impact Silver could potentially be worth more than Energold’s entire current EV
- A natural inflation hedge/low risk way to participate in minerals/commodity bull market
Why is it Mis-Priced?:
It’s small, unknown/under-followed, illiquid, Canadian, and run by a non-promotional management team
The combination of conservative accounting and depressed operating results over the last two years – due to a once in a generation recession and the lingering effects of the credit crisis – make the company look expensive based on TTM math
Brief Business Description/Operational Overview:
Energold is an operator of environmentally friendly man-portable drilling rigs that service the mining industry. With its operations in over 20 under-served countries throughout the developing world, Energold emphasizes an environmentally and socially sensitive approach to contract drilling. The company’s primary competitive advantages are its permanently lower operating costs and its use of proprietary, highly portable rigs in serving frontier-drilling regions. Long-term, the company seeks to become the worlds leading specialty driller.
Unlike most of its competitors, Energold’s operations are managed in a way meant to consistently protect and grow shareholder value regardless of the environment or where the company is in the cycle. The companies operating principles reflect this, and are intended to both maximize flexibility and the ability to capitalize on opportunity over time.
Energold’s core business is offering drilling services in “frontier” markets by utilizing a proprietary fleet of “man-portable” rigs. “Man portable” rigs are high quality, low cost drills that Energold designs and manufactures in house which possess a variety of unique (and game changing) attributes – attributes that have been at the heart of why Energold has been able to rapidly penetrate over 20+ under-served markets in an impressively short period of time. What we mean by “under-served” in Energold’s sense is developing nations with high mineral drilling potential and minimal competition.
The company’s use of an innovative modular component technology allows them to create small, highly portable rigs that aren’t mounted on trucks and hence don’t require roads and/or trees to be cut down for access to drilling properties (notably, the vast majority of the ~7000 rigs in the world today are truck mounted). This not only saves a significant amount of time and money, it allows drilling to take place without leaving a large environmental impact in its wake. In other words, Energold’s mineral drills possess dramatically lower all in costs to build, transport, and/or operate, and equally as importantly, leave an essentially non-existent environmental footprint in an industry plagued by the secondary effects of its inability to operate in an environmentally friendly manner. Of course, Energold’s revolutionary rigs also provided the company with a high return business model and a tactical advantage in a rapidly growing market.
Framing The Opportunity:
There is couple of helpful ways to think about the unique attributes of Energold’s business model and long-term opportunity. The first relates to how when we think about this company’s prospects for sustainable value creation over time, we just can’t help but draw comparisons to both Geico and Walmart in certain respects. Like Walmart, you have a business that has grown over time by expanding into under-served markets with minimal competition, which in turn allows them to quickly entrench as the low cost producer based on economies of scale. Like GEICO, you have a business with very low market share, a tremendously long runway for growth, hard to replicate cost advantages, and compelling incremental economics. Hkup881 also compared Energold’s investment proposition to be akin to “betting on CSCO in 1995 knowing that the Internet thing would work, but refusing to buy pets.com or anything like that” which we believe to be an apt comparison as well. Feel free to take the above comparisons with a grain of salt, but we wanted to mention it here in brief because – like the excerpt below – we think it’s helpful as far as framing the opportunity and helping others “see what we see,” if you will.
The second is about how history has taught time and again that the low-risk way to make money in any gold rush is to sell the “picks and shovels,” and our how our expectation is that this time around should be more of the same. With that in mind, the gentleman over at Praetorian Capital who (1) notably did most of the heavy lifting here (2) also happen to be the purveyors of one of our absolute favorite blogs Adventures in Capitalism and (3) recently put how this historical reality relates to Energold in a recent Sum-Zero write-up better than we ever could.
That said, rather than try and regurgitate our own inferior articulation on the matter, we will just quote an excerpt from Mathew Goodman’s fantastically insightful take below….
“I’m an equities guy, but I want gold exposure
If you are still reading, you are aware that gold is in a multiyear bull market that is unlikely to let up anytime soon. Even if you are no gold bug, but are traditional value and subscribe to Jeremy Grantham’s ideas, particularly his recent piece “Time To Wake Up: Days of Abundant Resources and Falling Prices Are Over Forever”, this may work for you. If you are scared of the commodity sector because you don’t want to participate in putting a future price on something without financial statements, you might want to look elsewhere. While understanding gold’s bull market, I set out to find a way to get leverage to the price of gold. This would cause one to turn to the mining sector; the companies that actually set out to find and then produce the shiny metal. My conclusion upon studying the mining industry is that it fell in