Brian Laks from Old West on Tin's Alpha Potential $AFMJF (podcast #113)
Brian Laks, partner at Old West Invest Management, discusses the bull case for Tin and why he thinks the world's largest tin miner, Alphamin, could present an alpha opportunity.
Please follow the podcast on Spotify, iTunes, or most other podcast players, as well as on YouTube if you prefer video! And please be sure to rate / review the podcast if you enjoy it, or share it with someone else who would enjoy it (more listeners is a critical part of the flywheel that keeps this Substack and podcast going!).
This podcast is brought to you by Tegus. I use and love both Tegus and Bamsec (which Tegus recently bought); you can find some of my work with Tegus in my cable deep dive here.
Transcript begins below
Andrew Walker: All right. Hello, and welcome to Yet Another Value Podcast, I'm your host, Andrew Walker. If you liked this episode, it would mean a lot if you could rate, subscribe, review us wherever you're listening. With me today I'm happy to have on for the second time, Brian Laks, Brian is a portfolio manager at Old West. Brian, how's it going?
Brian Laks: Going well, thanks for having me again.
Andrew: Great. Well, we're talking June 14 and I was telling you before it feels like a trains hit me, but I'm glad you could hop on the podcast and we could commiserate here. Let me start the podcast the way I do every podcast. First a reminder for all of our listeners. Nothing on this podcast is investing advice, please do your homework. Do your own due diligence consult a financial advisor that applies to all of our podcasts. But I think we're going to be diving into the tin industry and some tin place here and the tin industry. You hear tin and you think oh that's got to be huge, but it's actually these are very small companies. The company we're going to be talking about is the largest tin player out there and I think they're market cap is under $500 million USD. I don't have my...
Brian: It's about $1 billion.
Andrew: It's about $1 billion USD. So still very small. So please keep in mind that comes with a lot of extra risk. It's a Canadian company. So it's international lots of extra risk. So please do your own diligence. Then second with the pitch for you my guest. This is your second time on the podcast, people can go listen to your first podcast on uranium and NXT, if they want to listen to it. And I was actually just re-listening to some of it to prep for this podcast and I mean, you want to talk about hitting the ball out of the park on a uranium call and stuff. It was crazy, it's crazy how well, the environments played into that, and I know you think tin is a similar situation here. So all that out the way. I'll just turn over you. I think we're going to start with tin and then dive into a specific company, but I'll flip it over to you. Why is tin so interesting to you these days?
Brian: Well, it is a real similar situation. I think a lot of these commodities that we've been looking at some of the more niche metals have a similar type of setup. I mean, it's years of under-investment supply shortages, forming demand, that's there because of a lot of long-term secular themes, clean energy. The energy transition, decarbonization a lot of these things are driving demand for these specialty metals. And the supply is just not there to catch up and so what you get is shortages, rising prices and the desire to bring on new sources of supply. And so, our job is to find, where are these sources of supply? What do the valuations look like? And how do we build positions in them?
Andrew: Perfect. Well, let me start just high level. So tin as you and I are speaking the price of tin, I know it's not a super liquid market, but the London spot price of tin is around $34,000, $35,000. I don't even know what that metric refers to is that what is the...
Brian: Per ton.
Andrew: It's per ton. Okay, so $34,000, $35,000 per ton. This is down from a peak late last year of $45,000, but if you kind of zoom out, this is still a really high price, right? I kind a use Pre-COVID as normalized numbers in Pre-COVID we were talking like $15,000 to $17,500 was about where it was trading when it hit $20,000 people would be like, "This is a high price." So I just want to talk about like the price dynamics of tin right now, what has driven tin kind of two times it's normal price, where it's sitting today and like why we can talk about, there's this great video, you sent me, I'll include it in the show notes with the International Tin Association, put out, so might be a biased source, but they're talking about how they think tin is structurally higher for longer. So I just when you to, what's driven the price here? Why do you think tin is structurally higher for longer?
Brian: Well, I think you mentioned COVID. I mean, that was a big part of it was, you had a lot of supply constraints that came out of that, the bottlenecks and the supply chain shortages were big news. And really, that was on the supply side, the demand side you also saw a huge boost because everyone was working from home and you really saw a lot more demand for electronic goods. So probably, just a little bit of background so people can understand, the main demand for tin is in solder, which is a conductive metal that's used in all electronics. And so, whenever there was a huge increase in demand for, you're working from home, you need a new laptop, you get a new cell phone, you can't travel anywhere and so everyone's super-sizing all their electronic goods, that really created brought forward a lot of demand.
At the same time, you had a lot of supply constraints that really led the price to go on a huge run that also occur during a time of very low inventories in the industry historically low. So you saw the price yeah, it more than doubled, it was one of the best-performing commodities of the last few years. And so naturally, people started to say, well, how do we get more of this? Anytime, they say the cure for low prices is low prices. I mean, the converse is also true. Usually, when there's high prices it invites new supply and the problem with the tin industry is there's just not a lot of new supply out there. There's very low-quality projects, there hasn't been a lot of money spent on exploration and so you just saw the price go higher and higher without much supply response.
It peaked out earlier this year. I mean, it really almost went parabolic after the Russian situation. So that was I think, probably, the most extreme in terms of sentiment and enthusiasm on the shortage side, and then obviously there's been some factors that have brought that back down in the last few months you've had, China going into lockdown, you've had fears of recession, you've had higher interest rates and so, it's a bit of a push and pull, but for the most part COVID really shook up the market, on both the supply and the demand side. And so that's why I think you see a lot of industry observers say, we might be in a new normal where prices you have reset. It doesn't mean they won't be volatile, but there may be a higher floor than there was a few years ago.
Andrew: Just on the demand side. So, I know again, what I know about the tin industry is mainly from you and there's a couple of other smart value investors who have been in tin and the videos you sent me But tin is used in a lot of electronics. I think a lot of people say, if we're going to an electric car future tin is used a lot in electric cars and stuff. But my first question is, tin is a relatively small commodity, like, is there a replacement for tin in these things where the price of tin goes from $35,000 per ton to $70,000. Can you replace it with some other metal some other thing or is it just that critical inside a thing that it's unreplaceable?
Brian: Well, I mean there are some substitutes but they're inferior in a lot of ways, and in some respects tin was the substitute. I mean, originally a lot of the solder was made of lead or a combination of lead and tin and so about 15 years ago, a number of countries, and regions decided, "well, can't use lead anymore for environmental reasons." And so that was really what led to a big step change in demand for tin originally and so they were using tin as the substitute, yes there are some other things I guess you could use, there may be other metals, you could use silver, you could use there are some sorts of polymer type conductive adhesives, but really, they're not as, the qualities is not there. And so they might be for niche applications or, yeah, I guess you could use silver, but I mean, the price it's in goes high enough that they're swapping out for precious metals. I mean, that means that we've done pretty well in our tin investments. So, yeah, I think there's a very low risk of substitutability unless prices get extremely high.
Brian: That's one of the reasons that we actually like the investment thesis and then the other kind of related part of that is, it's a very small component in the final cost of whatever it goes into. And so the buyers typically aren't that price sensitive so there might only be a few cents of it in your phone if the price were a double or triple and now there's ten cents worth in a thousand dollar phone, it doesn't really change the behavior of the manufacturer. So, we like that sort of insensitivity. It's similar to what we talked about with uranium last time. Any time you have that sort of an inelasticity, it really helps you because it allows the shortages to, if they have to persist longer, I mean, it just means, higher prices and there's really no offsetting effect on demand.
Andrew: That's exactly what I say like the demand inelasticity it's similar to uranium in that uranium, yes, it matters if the price triples on you, but in the grand scheme of running a nuclear plant which is the main use for uranium these days, like that's a billion-dollar fixed cost with nuclear engineers who are making hundreds of thousands a year. The cost of the uranium is such a small component as you said with tin. If the price of the tin and the cell phone goes from 5 cents to 10 cents and it's pretty inelastic if you are Apple like, "Okay, cool, we'll pay an extra 5 cents, we're making it for $500, and iPhone.
Brian: It doesn't hurt the buyers that much, but you can imagine if you're a producer and all of a sudden, the price doubles if your profitability probably does goes up pretty well, higher as well. So that's what we like about it. I think all of these different metals that we look at there's a supply component, there's a demand component. Some thesis are based on one or the other. We like when there's positive characteristics of both and we think this is a perfect situation that does have both.
Andrew: Let's go over to... So we've covered demand, it's pretty inelastic, it's in a lot of really growing verticals. We mentioned cell phones which probably they're not a hyper-growth industry, but they're still growing. Electric vehicles will be huge. So we've covered the demand side. Let's talk supply side. What is the supply side of the tin industry look like and let's start with something to like, where is most of the tin in the world mine coming from these days?
Brian: Sure. Well, let me just one last thing on demand. I mean, I know we talked to just mention cell phones, but really, it feeds into all electronic devices and so I listen to the podcast, you just did with Doug on semiconductors. I highly recommend people listen to that as well...
Andrew: Thank you. Doug's Fantastic.
Brian: No, it was great, and look semiconductors is a real big driver of this because that's something related to electronics demand. And so it feeds into a lot of these types of areas that are secular growth areas. I mean, it's not it's semiconductors it's 5G automation, EVs, Internet of Things. I mean this the proliferation of electronic devices is only growing. Data centers you need a lot of more capacity to process when everything has a sensor in it and you're washing machine is talking to the street light that type of stuff you need to have a lot more processing power. You need to have a lot more capabilities, a lot more sensors, anything that's electronic like that is going to use tin. And so that's the fact that it feeds into those types of secular long-term growth thesis is really, what makes us prefer a commodity like that versus something that's more tied to just general economic activity, right?
Brian: I think that there's a little bit more resilience when you say, look, I mean, you look at where the end markets of these things, renewable energy, that's a long-term growth trend, even if there's short-term fluctuations, the trend is still up. So that's just what I would Lastly, add on-demand and then supply your question was.
Andrew: Oh, just on demand. I'm flipping through again the tin thing that you sent me and it's just crazy. Almost, every market that tin is kind of associated with they've got, "hey, this is another one of those like up into the right markets." Again, you mentioned data centers. They've got "hey, if you think EVs are the future tin, there's twice as much tin in the EV car as an ice car that just over and over again solar panels, all that sort of stuff so it's crazy. But yeah let's move to the supply side and we can go anywhere in the supply side. But, I guess the place to start is like, where is the supply of tin coming from these days?
Brian: Well, so it's a very concentrated industry. So I think, you look at the top two players are about half the market. You go to the top 5, it's probably closer to 80%. So it's extremely concentrated and it's not the easiest places to do business. I mean, the biggest producer is China for all the issues there, they've struggled to keep their production flat for a number of reasons. One is a lot of their production comes from the southwestern region of their country, Yunnan Province. They've had some issues with power consumption. There have been power cuts that was last year. That was one of the big reasons for some of the supply shocks. They also, import a lot of their concentrate to refine from Myanmar across the border. And so there's some issues there.
Myanmar is actually the third-largest producer, but so China is the big, 800-pound gorilla of the industry. That's one of the reasons that you've seen such fragility on the supply side is that they do have such concentration there in such a command of the industry. It's actually pretty similar to a lot of the other metals that we look at. And one of the reasons that you've seen the US, but other countries try to rebuild their domestic supply chains. It's just difficult to have a command economy like that in control of so much of these critical future metals. I think it's a strategic decision on their part to make the investments there and try to control these supply chains.
Now that the rest of the world is really trying to achieve these sorts of outcomes in terms of climate goals and whatnot. It's really becoming an issue that they control so much of it. And we saw it 10 years ago, 15 years ago with the rare earth industry when they cut off export. And so it really is something to keep an eye on. They are about 30% of the market. Then you have the Indonesians they are about 20% of the market. So those are the top two. They've struggled, they were mining it onshore on one of their islands and they've mostly mind that out. I mean, if you go online and you look at their onshore operations, I mean, it looks like a lunar landscape, they've completely just devastated the environment, digging up this island for all the tin.
They've been forced to move offshore to essentially dredging operations, and this is actually when I would encourage people to pull up a video of the Indonesian offshore tin mining. Because I mean, it's like out of a movie there in these, rickety fishing boats. They've got these kinds of makeshift vacuum pumps and there dredging it up off the bottom of the ocean. And everyone's upset with them, the environmentalist, the fishermen are mad. And it just really looks like kind of an amateur operation, and then you realize that it's 20% of world supply. So it just, these types of things really are striking in that so much of a critical component of our future economy, everything that's flowing into all these technical industries, technology industries is coming from such a fragile supply situation.
Then you have Myanmar is to round out the top three, these guys, I mean, you can't really even make this story up. They kind of came out of nowhere. Really, only started producing in a big way about 10 years ago, grew very rapidly to become one of the top three producers, but since then, they peaked about five years ago and their productions been essentially cut in half. I mean, this mine it's in a breakaway region of the country, it's controlled by a rebel army. I mean, they had a coup, it's really just kind of a crazy situation. They're also dealing with depletion issues. I think, obviously, the production has been cut in half a lot of the easily mined stuff, at surface has been mined out if they want to either maintain production or try to grow again they're going to have to go underground.
It's a much higher cost proposal and there's just a lot of difficult they are in a very difficult operating environment There was a huge explosion there, maybe a month or two ago. And so when you just, you go one by one across all these across all these areas and it's crazy that there's so much concentration and yet all of these places are really dealing with challenges. And so that's what we like to see. We like to see a demand picture that is resilient feeding into a lot of these long-term trends continuing to grow. You're seeing the growth rates increase from where they had been about 1% to 2% a year. You're seeing a lot of these new growth areas push it more to like 3% to 4% a year. And if you do the math on that you need kind of a big new mine every year.
We just don't really see it on the horizon and in fact mean the supply side is struggling to stay flat if not shrinking. So that's where the shortages develop that's what gets us very excited. Unlike the uranium situation where there was a lot of inventory and people were trying to get their hands around it how long they could essentially persist in the shortage state. The tin inventories are at rock bottom levels I think there's only a few days worth on the exchanges and so something's got to give there are a few bright spots. I'm sure we're going to talk about one of them, but these are the types of backdrops for the investments that we like to make. And we take a long-term time horizon. So we build stakes in these things and try to look at what is the supply demand balance look like, a few years into the future, is there a shortage who's going to try to fill that shortage and, we kind of go case by case to see if there's any attractive investment opportunities.
Andrew: Yep. Now you mentioned, so that's the current supply side, right? And it sounds like an extremely fragile supply-side 30%, from China, a lot from Indonesia and Myanmar very fragile supply chain. But if you were trying to solve that fragility, as you said earlier the cure for high prices is high prices, like, generally, prices go high so in oil people drill, drill and it takes six months, nine months, so prices can stay high in the short term, but in the medium to longer term, the high-prices result in a ton of drilling to bring everything down to the marginal cost, close to the marginal cost of production. So my two questions here would be like, if somebody wanted to bring a new tin mine on, how long would it take? Where would that supply come? All that sort of stuff? Because I know the US has tin deposits. I don't know if they're great or not but the US has tine deposits. If somebody said "hey, we're going to get we're going to get tin from the US." Like how long would it take to get online?
Brian: No, the US doesn't have any tin. That's the real interesting thing, where...
Andrew: Google and the US Department of Mineral Resources have lied to me.
Brian: Oh, what did they say? I mean, we don't mine it, we don't smelt it here. I mean, maybe they have some small ones, they've mined it in the past, but I think it's...
Andrew: Yeah, they say we don't mine it But they say we have occurrences mainly in the state of Alaska. But, yeah.
Brian: That's right. Okay. So it's a small amount, but I mean it's nothing that really is. Yeah, I guess if the prices go really high we might. I might start digging in my backyard. It's not...
Andrew: If somebody wanted to bring a new tin mine on right now, like where would the most likely source of supply be and kind of how long, what would the cost be to bring a tin mine on?
Brian: Well, usually I mean it's very similar for most mining projects. I mean, one you have to go through... One you have to find it. Okay.
Brian: You have to do the exploration, that takes awhile if you hit something then you got to prove it up and see how long you can go. That's usually a couple years then you got to go through permitting and that could take a couple of years and you got to build it that's another few years and so yeah, I mean you're usually looking at 5 to 10 years plus to bring on a new mine. There are projects that are out there that have already been defined. Those are the ones I referred to earlier. The interesting thing is, I mean they're very low quality, low grade. I think that's been the striking thing here is that the price of the commodity has gone up so high that all of a sudden, people are saying, "we'll, wait a minute, these things that we had previously written off is potentially junk, waste rock are now mineable and might actually make a good profit." And so we look at the slate of projects that are out there and that's mostly them. And yeah, it takes a few years.
If you get the green light, you get the higher price. That's why I think there is a bit of a higher floor price here is that you look at the marginal project that's needed to meet this additional demand that's coming on and there's not that really many good attributes about them. I mean, they're low grade, their high cost, a lot of them are small. There's a few that are nice and those are the ones that we are going to talk about one today, but really, if you have the tin and it's mining, it takes a few years to build these things and it's always over budget over time.
Brian: That's one of the things that we like about mining investments is that the supply and demand a lot of times works in your favor because current production is always depleting your reserve base. And so not only if you want to maintain your reserves you got to go out and find replacements for what you've produced, but if you're trying to have any growth, you have to find additional reserves on top of that. And so you're always on this treadmill. Meanwhile, the demand maybe there's short-term fluctuations, but if you're feeding into some of these long-term trends, the demand doesn't stop. And so I just think, looking over longer time horizons, 5, 10, 20 years the prices of a lot of commodities in our view are going to rise. Because of that phenomenon, it's a finite resource, but demand goes as long as people live. So that's the first part of it. And yeah, I mean how long does it take? I mean, it can take a few years. The company we're going to talk about today. They have a little bit more of an accelerated pathway because it's a fairly simple operation they're doing. They've already built one of the mines and the second one is kind of a look-alike. So they're able to do it actually pretty quickly.
Andrew: Yep. Hey, I want to go to Alphamin in a second. Let me just stick with the kind of global overall. What would the marginal, what do you think the marginal cost of tin production is right now? Generally, if things are in equilibrium, the price is going to equal the marginal cost of supply. So where do you think the marginal cost of supply for tin is right now?
Brian: Yeah. Well, so I mean, I can give you a short answer and then a longer answer. The short answer, I would say...
Andrew: Hour is a long podcast. So go for the longer one.
Brian: The short answer, I'd say probably around $35,000 right now is a good, is a good price for the marginal cost. But that's at today's level of demand, today's level of expenses. I think really what you have to look at is, remember if it takes a few years to build a mine you actually have to say, well, what is the demand going to be by the time this mine comes online. Because that's the demand level that you have to satisfy. And so your marginal cost, you might actually need a few other mines to start building today to satisfy that additional wedge of demand then. Like so for instance, if demand right now is call it 390,000 tons well if it grows, 3% or 4% a year, you're looking at an extra 15,000 or some tons that's needed.
Well, I mean one of the big mines that's proposed to be built in the next year or so is only about 7000 tons. You need two of those and then, it's going to be three years from now so that's another 30,000 tons. So that's the kind of math you have to do and why it's not so easy, just to say, well, what is the marginal cost because that's sort of at a point in time. That's the first thing I would say which is, what level of demand are you trying to balance? And the second thing is, inflation, I think these one of the things that's a big theme in the mining industry over the last year is CAPEX and OPEX inflation. So you've seen CAPEX estimates have gone up.
Operating costs have gone up. And so, whereas someone might have said, "hey, I think I can build this project for X and then my run-rate cost is Y? Well, now it's X plus this. And now it's Y plus this and we already saw just a few months ago, one of the tin projects, it was actually a tin by-product project in Europe. They paused development. They said "hey we've had a CAPEX overrun and we're going to kind of review our options here. I think we've seen it in a lot of other commodities as well and you see that shareholders bring the hammer down on these companies when they announce this thing but it's just, this is the result of the inflationary environment that we're in. And so any number I give you whether it's $35,000 or $30,000 or $40,000. I think that's just going to be a moving target and I think it's going to be moving to the upside because I think, demand is going to surprise people. And I also think that these things are going to just be more costly to build and they're going to take longer than people expect.
Andrew: Perfect. Well, I think we did a nice job covering the overall tin picture. Is there anything just on the overall before we dive into Alphamin, anything on the overall tin picture you don't think we've discussed that people should be thinking about, we should be kind of discussing?
Brian: No, I think we did a good job. I would just re-emphasize that the demand centers that are driving this are more resilient in my opinion to general economic levels and so that is what gives us comfort. I know a lot of people in the short-term will point to things like recession risk or COVID shutdowns or a lot of these things that are more temporary in nature. And we have a view that the long-term trends are such that even if they're short-term cyclicality around that long-term trend line we're still going to do well. And so I think when we're just from a more general level when we're looking at these types of areas, the long-term picture is what tells us what to invest in and the short term is what tells us when. And so I think if you have fundamentals that are improving or haven't changed but you have short-term price fluctuations, that are going against that we view those as opportunities because we're not necessarily playing the game where we're trying to predict next quarter's earnings and kind of get ahead and being nimble and trading in and out of these things. We're trying to build positions, these are multi-year type of investment horizons. And so we would look for that sort of cyclicality to either increase our positions or to increase our weightings if we want. If it looks like, the short-term movements are such, but the long-term movements haven't or long-term fundamentals, haven't really changed. I think that's a perfect example of the environment that were in today. I saw a lot of the questions that you had gotten from when you posted that thing earlier, were related to that.
I think people are concerned that, "hey how low can it go? What's the downside?" And I think our view is that, look these things tend to overshoot both directions, both in the upside. I think we saw that earlier this year and they might overshoot to the downside. We can't really make a call where sentiment is going to drive things in the short term. All we can really say is, what is our long-term outlook? And then, make investment decisions based on that and it's actually to our benefit when short-term movements go counter to what our long-term views are.
Andrew: Just last question on, I guess this is more short-term price-driven normal. But why the price of tin was call it $17,500 back in 2019 and it's $35,000 today. And you talked about how there were short... Obviously, demand has grown since 2019 that's three years of lots of data centers cell phones and all that. And you talked about how some of this is short-term driven, but just like, why is the price today double from three years ago? And obviously, inflation and all this can't account for a double in three years. Why is the price now doubled and going higher? Why is that more right than 2019? A bear would look at this and say "hey you got a huge premium thanks to a bunch of different shortages and one-time issues. But why isn't it actually going back to the 2019 levels?"
Brian: Well, I think you're still at a shortage and so the price will go up until enough supply comes on to meet that.
Andrew: Let me try reframing that I may have framed that poorly. Why in 2019, because I don't think a lot of these trends have really changed, obviously demand has grown a decent bit since then but no new supply has come on or anything, why in 2019 weren't we seeing signs of this shortage?
Brian: Well, I mean look the tin price was volatile it was $20,000 and would bounce around. I just think you've had a decade of inventories being drawn down and drawn down and, maybe all it really took was the COVID shock to get the market to realize, hey let's pay attention to the future supply and demand picture. I mean look we saw the same thing in uranium. Why was uranium spot price $20 for so long? I think actually the inventory situation there probably played a bigger role, like we talked about in the last podcast. But yeah, I mean it's hard to say, I don't know. You never really know what wakes the market up to, let's pay attention to the future.
I mean, look, I could kind of pay at the counter, which is why were tech stocks being valued at crazy evaluations and then all of a sudden now, you don't know, right. I mean, there's these kinds of environments that people are in where they have the tunnel vision and everyone's kind of comfortable and, sometimes it takes a shock to realize that hey, maybe we should look towards the future. What do these imbalances look like coming out, maybe we, we need the price signals because like I said, if it takes three years or five years to build a mine, let's assume that, okay, we stay at $20,000 throughout this, there was no COVID shock we're still at $20,000. It just means that that adjustment becomes much more violent and over a shorter period of time. Because $20,000 is not going to fix the shortage. Okay. And so, that's why, hey, maybe $30,000 doesn't even fix it. I mean, you got guys that are well respected, talking about $50,000 plus is going to be needed if we roll out a few years. When those adjustments happen is hard to say but you know I think sometimes it takes a little bit of a shock like this to make people realize what's going on.
Look, we're talking about it right now. I mean there's probably a few people listening to this but it's still largely under the radar of most people. I would imagine that that's similar to a lot of the things that we look at. The fundamentals are there, a lot of time, the awareness is not there. The reason we get in these things and we sit there for a long time is because we believe that when people come, look at it and start to do the math, they will come to the same conclusions that those adjustments need to be made. A lot of times it's, it could be a step-change in the price level, or it could be more gradual.
That's the funny thing, is because of the lag time to bring on these mines, you'd think in a perfect world, you'd look out and see that coming and you'd gradually adjust the price level but a lot of times it's just kind of people are asleep at the switch and then all of a sudden there's a shock and then we reset a new level.
Brian: I think there's a little bit of that that happened here, but it's hard to say. I mean, all I can really say is let's look at how much demand do we forecast? What is a price that we need to give an incentive for enough production to meet that? What is that number? Then let's look at all the projects that can fill that gap and how do they do if we get to that number? Because all the short-term fluctuations, whether it overshoots, undershoots we can't really control that, it doesn't really, we can't really make
investment decisions based on that. We have to use these sort of theoretical price levels dictated by production economics to make our investment decisions. Then just expect that over the long term, the price will gravitate towards those levels.
Andrew: Perfect. Well, look, I think that was a great overview of the tin industry so let's turn to the specific way you're kind of playing this and that's, the company is Alphamin. The ticker there, non-domestic so I'll use the domestic ticker for people. It's AFMJF, for people who are domestic. Again, not financial advice. This is a Canadian stock that's trading on, I can't remember if it's OTC or the pink sheets here in US but that's our overview. But please, very small, very liquid, do your own work quite risky. But with all that out of the way Brian, we've already gone through the tin thesis overall and I know that's a large driver of Alphamin thesis but I'll just ask, what is it about Alphamin in particular? Because I know you guys try and concentrate on it. What is it about Alphamin, in particular, that made this the play you wanted to kind of express your bet on tin?
Brian: Well, we actually do have a number of different ways we are expressing the bet but I think that this is a good one to highlight on because it's a very unique asset. I mean it's the highest grade mine in the world. Not order of magnitude but leaps and bounds above the rest of the world average. I mean, it really is a freak of nature. Their reserve grade is around 4.5%. I think, 1% is considered a good number. I mean a lot of the projects that you're seeing out there are much lower than 1%. And so, high grade, great size, and remember, the higher, the grade typically means the lower the cost because you don't have to dig up as much dirt to get the same amount of tin out.
Really it's just a unique asset in that, they've really, it's only started producing in the last few years and the exploration results they've had are really just staggering. I mean you know the reserve grade is 4.5% but they're hitting regularly, you've only got to look through the last few news releases on the drill results. I mean, they're hitting 10%, 20% they had a hole that was 40% tin. I mean, that's just crazy. It's more valuable than pure copper.
Brian: I think that's really what gets us interested. I think just more kind of stepping back, when we look at all of these commodities, we really like to find these, so called tier 1 assets which are either the largest or highest grade because that typically translates into a lower cost structure. When you have a cyclical industry, where prices can fluctuate pretty dramatically, you want to have the lowest cost-standing right. That's the way to survive in Commodities because when all of the higher-cost operations go out of business during a short-term downswing, you're the, you can still make money there. I think that's a very interesting position to be in. They're extremely low cost and like we said if the marginal cost of meeting the total amount of demand is much higher they're going to earn, really substantial margins for the foreseeable future. Even if the price does pull back, they still make a good amount of money.
Andrew: Yeah, you mentioned that these guys are the low-cost producer which is great. Love investing in the low-cost producer in anything. Can you just give an example? Like, how much does it cost to deliver a ton of tin for them versus an average mine out there?
Brian: Yeah, so their cost is around $15,000 a ton. That's actually at, that's was at higher prices. Part of their cost structure is tied to the price of tin so I wouldn't be surprised to see their costs this quarter come down a bit. There's also a component in there that they pay for marketing. That's about 5% of the tin price. Yeah, I mean it's $15,000 is probably a
conservative estimate. It may actually be lower. There are some offsetting things, of course, with maybe inflation. Call it $15,000 and ton. Yeah, I mean, and like we talked about if the marginal cost is $35,000 I mean there's other producers that are $25,000, $30,000. You can see that, even at $30,000 or $35,000 a ton they still make a very good level of profit here.
Brian: It's not just about the profitability, it's the fact that no one cares about the sector at all or these companies. I mean, it trades at a very cheap valuation on the money that it makes and so you have really a great combination. I mean, I think a lot of people when we tell them that we're in these niche metal areas, they say, "Oh well you know you must be in lithium or you must be in this or that." Really it's not enough to have just a supply shortage forecast into the future. I mean, you have to have good valuations as well. Otherwise, it's kind of a non-starter from an investment approach.
For us, that's the interesting thing, is that it's very low cost. It's an extremely high grade. It appears the grades getting better. I mean, this deposit they've started to drill deeper into it to see what's below it, and the grades are getting better and better. Even though it has a mine life of 10 or 15 years, whatever they've booked in their reserves, if you listen to the to the management the old CEO, they're talking about this thing's going to be probably producing for decades because they still continue to find new, additional resource adjacent to their mine, below the mine. Remember, I mean, they own about a 13 km Ridge here. The two mines that they have, or the one that they have now and the one that they are building, is only about a one to two-kilometer stretch of that.
There's a lot of exploration upside here. I mean, I think this thing's going to be producing for a very long time. The fact that you have that sort of scale, combined with the fact that it's extremely high-grade, just makes it really a peerless asset out there and that's why we think it's so intriguing.
Andrew: You mentioned, they're bringing a new mine on. I believe this is a, Mpama?
Brian: Mpama, yeah.
Andrew: For listeners, it's Mpama which, my domestic bias that is a difficult word to pronounce and sound out. But I believe that's Mpama South that they're bringing online.
Andrew: Average costs, I'm just kind of looking at the press release which they put out, actually earlier this year. $15,100 per ton. That's pretty nice versus a $35,000 dollar all-in cost. How are you thinking about the expansion project that they are working on?
Brian: Yeah, so they are currently operating from Mpama North which was the original mine. They were producing about 12,000 tons a year there and it's at roughly the same cost so around $15,000 a ton. This Mpama South, which is really right next door to it.
Brian: In fact, they now think... They just released a technical report on it a couple of months ago, and they now believe it was actually one large deposit that was separated by a fault. It's really just a huge freakish deposit of tin that they're kind of developing in two parts. The good thing is, there's a lot of the metallurgy, the same, I mean, really, it is the same deposit, so they're building a look-alike plant right next door to it, to process the ore from Mpama South.
Brian: There's just a lot of synergies that can use. I mean, they've already built this thing so there's a lot of learnings they have. It's incredibly cheap to build. I I think their estimate is only about $100 million or $120 million to build it. If you do the math on 7,000 tons at $15,000 a ton cost and call it $35,000, I mean you're looking at a $140 million of evada per year coming out of this thing at current prices versus $120... I mean, the payback period is less than a year, right. Incredibly high return project. I think they're being conservative in the ultimate grades they're going to get out of the thing. I think they're being conservative, in terms of the recoveries they are going to get. They put in a fine tin recovery plant at their first one that was able to increase recovery. Yeah, I mean, they're going to go from call it $12,000 tons a year to 20,000 tons a year with this new adjacent mine. I mean run the math on this thing. If your margins are $20,000 a time, you're doing 20,000 tons you're looking at $400 million. The market cap of this thing is less than a $1 billion.
It really is incredible what's happening there and it's just a matter of, I guess we can go into that, but it's a matter of, what does it take for the market to realize this what does it take for the value to actually be realized. The company initiated a strategic review about six to eight months ago with that in mind. I mean, we talk to management periodically, they're kind of scratching their heads of why this thing doesn't get any love. But, hey, we're happy to kind of sit on these things at very cheap valuations. They started paying a dividend this year. Given the cash generation I mean, it seems like they can raise that pretty substantially and still be able to self-fund the mine. It's just a, it's a really unique situation. We don't come across this stuff very often. Yeah, we think it's an interesting part of the portfolio.
Andrew: Well, you beat me to my next question, so Alphamin in November says, "Hey we're looking for strategic alternatives." I think they specifically mentioned that this stock was undervalued and that's one of the reasons they were initiating I can't remember for sure. But in November, they alongside Q3 earnings, they come out with, "Hey, we're doing a strategic review. Anyone who has invested for long enough knows strategic review generally means, "Hey, we're looking to sell ourselves." They have a major private equity group in here, I believe. But, you and I are talking June 14th. It's been seven months since the strategic review launch. I guess my questions are, why is it taking so long, and is this really an attractive asset for an acquire?
Brian: Yeah, so we'll take it in two parts. One, I think we have to remember that when they announced the strategic review, it wasn't just a sale. I mean, they were looking at all different ways to unlock value here. Whether that was, increasing the dividend, and this was before they had announced the dividend. But paying a dividend, what level of dividend should they be doing, shared buy back, balance sheet restructuring, revenue prepayments, I mean, basically, all different ways to unlock the value here. Because, this thing started flowing cash faster than they knew what to do with it. A sale obviously was one was part of that and there was a bit of a leak, a few months ago, that there was a sale process under way. I think a lot of people got excited about that, that was one of the avenues of the strategic review and it sounded like they were pursuing it.
There were, of course, a lot of people that were unhappy with that because they think that the company is so undervalued that selling it now is essentially giving away a lot of the upside.
Brian: Even if a buyer were to come in and pay a nice premium, you're probably not going to get a high enough premium to really compensate for the new mine that's coming on next year...
Brian: ...the he rest of the exploration upside. That's sort of, you had a little bit of a debate going on whether that's really the best way for them to do it. Because yeah I would agree. I mean, even if they were to pay double what it's trading at today, I still think a buyer would be stealing it given all that, all the potential upside there. Then who would be a potential buyer? Well, a lot of people point to the Chinese. They've stayed on there, they're short of tin and they need more tin. They were actually looking at tin assets a few years ago. There was a deal that fell apart for a tin consolidation. A lot of people will say, "Well, the strategic buyer like, that is less concerned about valuation. Maybe they can pay a little bit more.
Brian: I think the Chinese have shown that they're willing to be smart about locking up these types of assets. I think it would be a perfect deal with them. I saw that, in that Bloomberg article that leaked the sale a couple months ago, they mentioned they were working with a bank that specialized, or not specialized, but had experience in selling these types of African assets to the Chinese. The Chinese are very comfortable operating in these areas so that's a natural fit. It's probably too small for a major miner to take a stake. I mean, the market caps only $1 billion it's even like if it goes for $2 billion or even $2 billion, it's still kind of a drop in the bucket for most major miners. I think it might be interesting for some mid-tier miners. I mean, I think really the one that a lot of people point to is Ivanhoe which has a big copper mine in the same country, they're comfortable operating there. They ramped it up and it's I think the head of that company is a well-known well-respected mining executive. He has a penchant for these types of tier 1 really story type assets. They wrote a book about him. That would be an interesting one. Potentially they may be able to even do it with stock.
Andrew: What book was it?
Brian: What's that?
Andrew: What was the book that they wrote that you mentioned?
Brian: It's called The Big Score, it's kind of, it's very popular in the tin circles.
Andrew: I'm joining the tin community. I'm going to buy that book. All right, I like it.
Brian: What's funny is there's kind of a number of these books that float around and people are very... Some of them are hard to get they are out of print. It's kind of a unique thing to the people that follow the sector. But the chief of that company's name is Robert Friedland. He's well known for a big nickel discovery back in the 90s. This is his next big project. I mean, and it's a big copper mine it's going to be probably one of the biggest copper mines in the world. It's incredibly high grade. It's very similar in kind of characteristics to what Alphamin is doing with their tin mine, which is why it might make sense for them to tie up. I think the only issue there might be that if the private equity company that owns about 60% of Alphamin, they may not want to take shares so there may need to be some sort of cash component there and the copper mine is still wrapping up.
Anyways, that would be sort of an ideal tie-up in my opinion. But yeah, I think one of those ways to go either the Chinese or some mid-tier miner. But again, I think, I'm kind of in the same boat. I actually would hate to see them sell for such a low valuation. Just run it. I mean, the cash generation is incredible there either increase the dividend or, I mean, I'd love to see a buyback given how high the returns are. But I don't know if the majority owner would want to see the float shrink. I mean, I think the company has made a big effort over the last six to 12 months to really get out there do more presentations, do more webinars, I mean, they're trying to increase the liquidity of the stock. Crazy thing is, like, you mentioned it's kind of a big gorilla in terms of western listed producer and yet the market cap is only $1 billion and only trades a couple of million dollars a day. So there are some liquidity issues. That's probably one of the reasons that there is such a big discount as most institutions can't really touch it.
We are small enough where this thing's not really a problem. But, I think it's just difficult. Also that, if you have an interest, one there's not a lot of interest in commodities, or at least, there wasn't up until the last few years and now you're starting to see generalist, maybe come over, given that tech has started to crumble a little bit. But when you see that move start to happen, I mean a lot of times it's, they'll maybe do some oil and gas or maybe they'll look at some copper. We're really down the rabbit hole here looking at some of these niche metals and I think it takes a little bit longer to get the
the general investment community on board and then you have all those other issues that we talked about that you know potentially make it more difficult to invest in.
Andrew: You mentioned Alphamin has started paying a dividend. That lets me ask my favorite question on this podcast. Look, I know there's the liquidity concerns in terms of share liquidity with a major private equity owner owning half plus of the company. But the company it doesn't take much to look at them, look at the price of tin and say, oh, this company is really, really cheap right here. They do have uses for the capital both in terms of developing their second mine and they could buy back shares and instead they pay a dividend. I just ask like, why is this a dividend-paying company?
Brian: Well, a couple of reasons. One, I think they are a bit constrained and how much they can spend on exploration.
Brian: They did increase their exploration budget to about $20 million this year. But they are in the middle of the jungle it's on a very steep mountain, they've got to helicopter in a lot of stuff to the exploration areas. It's not easy to allocate a lot of additional dollars to that sort of internal growth by the drill bit.
Brian: They will sell-fund the mine and so that's a nice thing. I mean, they made a $100 million last quarter. It's going to be less this quarter because the price has pulled back. But even at current prices, like I said, I mean payback period is less than a year and they have plenty of cash. They're going to allocate capital there, they're going to pay kind of ramp the exploration as much as they can. Then, look, I think the dividend part of it is that the private equity company has been in there for, I think, close to 10 years now and they'd like to see a little bit of a return. That's probably one of the reasons that initiated the strategic review is these guys have been in there for a long time. I guess they're not forever, and they'd like to see some return on their money. I think a dividend is one good way to do it and the fact that they're making money, they have too much. I mean, they went from, they had some debt, they paid it all off, and now that the coffers are burgeoning, essentially faster than they can spend it.
Andrew: Every time I look at a cyclical or commodity company and I talk to someone they are like, "Oh well the time to buy them isn't when the multiple is low, the time to buy them is when the multiple is high and everyone knows that's because multiple is high earnings are depressed blah, blah, blah." But as I look, similar situation with Alphamin, the multiples are low but they've been low for six months and this is kind of a unique situation where because they've been so low for six months, cash flow is just gushing in. These guys, a lot of them had leverage. I don't think Alphamin ever had its own leverage, but a lot of them had leverage six months ago and they made so much money, they've paid down all the debt.
Andrew: So, even if the cycle turns, like, 10 years ago, cycle turned when you had bankruptcy risk. Now, you don't have any debt, so you really don't have any bankruptcy risk, and like, for Alphamin, it just strikes me as, they do strategical, they announce strategic also November, yes we're fast forward to June and we haven't gotten anything, but guess what, prices went parabolic from November to today, they came out with a lot of cash like this is a much different company than it was even six months ago.
Brian: Yes, I would agree with that and I would say that that's not unique to, the tin companies. I mean, I think we've seen it in a lot of commodity areas where the prices have run up because of these structural imbalances that have developed. Look at the coal companies. These guys are trading like one times earnings or something crazy like that.
Brian: They're doing all these buybacks. Yeah, I agree that's sort of the general truism is don't buy these things at cheap multiples because that's implying that they're going to fall. I would argue that that is the case in a lot of commodities where it's much easier to bring on supply. Historically, oil had been that way right.
Andrew: Assuming that, I never want to bring politics in it but I do think one of the craziest things is right now, were not just encouraging oil and gas people to go like drill as much as they can in a geopolitical crisis. But, assuming there's no political interference, six to nine months to bring oil and gas online, to bring tin online as you said, five years to bring uranium online?
Andrew: Long time.
Brian: That's why when we were talking earlier, yeah, I think the point to really think about is, how long does it take to bring on new supply, in response to high prices? If it's a short amount of time then that rule of thumb might hold true. Because when cash generation gets high, and multiples get low it invites a lot of new entrants into the market and they turn on the supply spigot, and then the price crashes out and that's why that, that truism is there. But so we look for areas where it's much more difficult to bring on supply because that just means that these low multiples can persist for longer. Yeah, you're seeing a real extreme case of that and a lot of the anti-ESG areas, whether it's coal, whether it's natural gas, oil where the low valuations are there and they're continuing. Because, there's no, the supply and demand is broken and you've just, for various reasons, are not able to balance that market there. You see these returns persist for much longer and hey, at some of these really cheap valuations, you don't need them to last that long to actually do extremely well in your investments. Yeah, I think that that heuristic breaks down a little bit if the supply is less elastic and so, I think that's what you see here in tin.
That's one of the reasons that, yeah, I think that the valuations can get even cheaper. Look the price has, does fluctuate on a short-term basis, the price has come down now so if you want to extrapolate that, whatever the current price out into the future is, then, yeah, maybe the multiple goes from three times to five times. Okay, so, that's expensive now I guess. That's the interesting thing to us is, we're kind of operating in a bubble here, where we think that's extremely expensive and then we look at other areas of the market like, where tech was trading or some of these things. I mean, a lot of those companies don't even make money. I think we're already a leg ahead that we have profitability here whether it's two times, three times, five times, I think it's still going to be a very good investment. Yeah, that's why we're just focused on what is the long-term outlook. Because if we're going to be in shortage for the next few years, I think multiples can stay low because you're going to just see continued upward pressure on prices and the companies that are able to really produce at a low cost or going to see high margins persist.
Andrew: And not to wax too much but, one of the things I like about like Alphamin at three times earnings five times or something and you mentioned coal which I think you can make a lot of money in coal to be honest with you. But with coal, you're really taking a terminal value that like right now, you got that, this year because of some really crazy stuff that happens,
you've got the super normal profit cycle. But I don't think there are a lot of people outside of metallurgical coal, which goes into steel. I don't think there are a lot of people out there saying like thermal coal is going to be fueling a lot of energy in at least developed markets, five years from now or something. But with tin, you kind of have that tailwind behind your back where everything you said at the beginning applies. Everything goes into they're just making more of them, they're going to need tin more as the world kind of gets more and more 5G. You've got that nice tailwind so, yeah, you're paying three or four times earnings versus one times earnings then you've got a handicap of odds and everything, but it's really nice to have that tailwind at your back is kind of what I'm saying about it.
Brian: I agree and we don't own any coal. I watch it. I watch the discussions on it. I just think it's kind of fascinating that all of these areas that are, the exact opposite of what the ESG movement is pushing, are doing so well. I think a lot of it's, that's part of the reason is that everyone has said, "Hey we don't, stop drilling for oil, stop producing coal, you can't do this stuff anymore we're going to this green future," and yet, you can't just move to one new, regime without turning off the old one. The demand is still there. I think that was a big problem. The supply was constrained and that's why you're seeing these really high prices here. I think a lot of it's just a policy error. We watch it, but yeah, I agree I think that's a little bit a trickier nuance to investing in those sectors as when do you hit peak demand? I mean, look, if Peak demand doesn't come for 10 or 20 years, then that's one of the reasons that you can actually do very well there.
Because yeah, I guess, we're going to stop using these things eventually. But in the meantime, you're going to make a ton of money while you're sitting there investing in them and they are essentially paying back their market cap every year. But so yeah, we kind of pick our spots. I like the fact that there are some of these circular demands trends behind this and the supply is just as fragile as any of the other areas.
Andrew: Two last questions before we kind of wrap this up because I'm cognizant of time here. First, you mentioned when we were talking about the strategic review, which I think is what gets a lot of investors excited and I think you look at this and say, "Hey it would be great if they announced they were selling the company for 100% premium tomorrow absolutely." But you're here for the cheap multiple in the long-term challenge and stuff. But one thing you mentioned in the strategic review was, a natural buyer would be China. Are there national security concerns like this is a Canadian company, obviously, I think the US would have some things. If I was Canada or the US, I wouldn't love China buying the world's kind of largest best tin mine a critical resource. Obviously, it's in Congo but do you think China could be a buyer, or do you think there would be national security issues there?
Brian: Possibly, but I mean it's listed in Canada but the asset itself is in Africa the company is based in Mauritius, and so I'm not sure how the structure would take.
Brian: I'm sure they would try to do it whatever way would appease the regulators. Look, China has a long history of going into Africa and buying up resource assets. I don't, actually think there would be that big of an issue. There might be. I mean, I don't know why the us would have any say in it. Maybe Canadians might, but it's not in Canada. I mean it's listed there. We'll see. That's an interesting question. Like I said, I would prefer at this price that they just don't sell and continue to operate it because I'm hard-pressed to find, I mean, they'd have to pay such a high premium to really make it worthwhile to compensate you for the potential upside. Remember, they've only really just hit the tip of the iceberg in terms of the ridge here. There was a really good presentation that came out in the last week or so, with the former CEO who actually built the mine talking about that. He thinks, actually, this is as high grade and large as this deposit is, he actually thinks there's probably something better on the rest of the ridge and, you're going to have decades and decades of production out of this. We've spoken to the private equity firm, their thoughts are that their exit strategy really depends if it's a tin mine, or if it's a tin province, meaning, multiple mines along this ridge. It seems like at least with Mpama South coming on, I mean, that latter is actually really coming into play. They're just starting now to do some exploration on some of the other targets.
We actually wouldn't really mind if they didn't sell and they looked at other ways to do either capital return or to get the value up. Like I said, at the outset, I mean, a lot of these things, the fundamentals are never really the problem. It's just a lack of awareness. I mean, maybe it's good that we're doing something like this to get people looking at, to look at the situation. I mean I'm like, I said, I'm confident that when other people do this type of math, they'll come to similar conclusions that we have. But again it's still really off the radar, under the radar for most people. I mean, just look at the average volume I think over the last year, it's less than $2 million a day, it's really quite absurd. So it's any type of investment I think that comes into this area and you could see a pretty nice valuation, I reiterate there. I think liquidity begets liquidity, you get it a little bit bigger, they grow production, a little bit more funds come in, and now you know it starts to hit these thresholds.
We've actually talk to the company about potentially trying to do a listing in the US. We think giving access to more US institutions. Their problem is, you can't, I don't think you can just, have a listing. I think you actually have to raise some money, do an offering to do that and they don't need the money so it would be almost unnecessary dilution there. We said well, I don't know, maybe you can pair it with some sort of buyback of other shares. I don't know. I'm not really big financial engineer but getting that sort of exposure to the US group, there is really no US-listed way to play tin. There's an ETF I think that allows you to, that trades physical or at least it's a, represents a sub-index of a commodity futures. But really there's no US, no way to play. I mean, you mentioned, at the outside, the US OTC listing, but we think that would really help. The other thing is, I mean, it's only $1, a share so, I think there's been talk of them potentially consolidating that doing like a reverse split to get it more in the five to ten dollar range. I mean, a lot of times we talk about this idea to people, they say, "Oh it's a penny stock or what is it, I don't know? It's a $1 billion company, but they just got a lot, the pie is chopped in a lot of pieces.
I think there's some optics that can be done to make it a little bit more palatable. But really, look, the cash generation is there, the valuation is there. That's what gets us interested. A lot of this other cosmetic stuff might help. But really I think if they just continue to operate, continue to grow production and really show the quality of this asset. I think if you build it, they will come. I think it's just a matter of time until more people realize what they're sitting on.
Andrew: Quick question I should have addressed earlier, I think I got a few questions from people that said, "Hey if they don't sell, are they going to need to a capital raise or something?" At current prices, at current both tin and stock prices, I think the answer is absolutely not. But I just want to confirm with you I'm not mistaken?
Brian: No, they don't. Like I said, they're making more money than they know what to do with. That's one of the reasons they're paying the dividend. I actually think they can raise the dividend pretty substantially and still be able to fund exploration and still be able to internally fund their second mine. In fact there's some people that think they should actually take on debt strategically and just do like a dividend recap because they can support it. They have such a low cost, that even even if prices were to go down, why are they running debt-free? I mean, maybe do a little bit of gearing on it. You could pay a huge special dividend, the fact that even at these lower prices, I mean, margins today are probably around $20,000 a ton, so you're talking about $240 million a year, evada growing to, call it $400 million next year, you know, they don't have any debt now. Why are they running at such a low leverage level, especially since their cost structure is so low. I mean, yeah, they don't really have a hedging strategy. I don't feel they need to because I think that, the price can come down a long way before they hit break even. They're willing to just essentially, take that risk and capture more of the upside.
Andrew: And paying out a big special dividend like if their private equity firm who's been in here for a long time, if they get some bids that they think really undervalue the company or something, gearing up a little bit and paying a special dividend is a nice way to get all their cost bases out or get a bunch of cash out the company so that they can sit and wait and not have to take a bid at, 33% of fair value or something. I know, I've spent a lot of time in oil and gas recently, I talked to a lot of companies about this like, yes, I'd love to see you sell an asset for 2 times the market cap, but if you think it's worth 5 times, it might just be better to hold it on the books, take out some hedges, take out some debt and just pay it all to your shareholders, like, they don't have to sell then.
Brian: I completely agree and we actually have asked the company, why not use internal cash flow to buy out the private equity stake? I mean, I think that's been the big concern among investors is that they've been in, the private equity company has been in for a long time, they probably want some extra liquidity here, a dividend is one way to appease that. But, is there any way to say, hey, if their stake is worth, I don't know, call it, let's see what it would probably be worth about now, $600 million right now. That's only really a few years worth of cash flow. Why not Whittle it down that way? I think it's a little bit challenging to do a essentially a buy back of one portion of your shares outstanding, but I think there may be some ways to do that. But, yeah... What?
Andrew: It's just so funny because when you talk to investors, and I've had this, if there is a 60% private equity firm and they are going to be like "Oh what happens? I don't know the 60% private equity firm like they're such a big shareholder it's such an issue. Blah, blah blah." Then if they ever sold, they'd come and they'd say, "The 60% shareholder sold, man, that's a huge issue. What can I do it's like..."
Brian: Yeah. Well yeah you can't really mind. Yeah, we talked to the private equity company. I think that was because the concern we had to is, is this an overhang are you guys, obviously, they can't really dump it in the open market I mean it would be a couple of years it would take them. But how eager are you to exit? People are worried they're going to fire sale it and in this process. But what they told us was that even though it's a big portion of the company's market cap, for them, it's actually a fairly small investment in the funds that it's in. It's not really, there's no real urgency for them to have to get their money back on it. They like the dividend, and in fact, they said, "If it is a tin province, I mean, they're happy to continue to ride it and watch this asset develop." That does give me a little bit more comfort. Everyone's kind of worried that, "Hey, the clock is running up and they're going to fire sale this thing to the Chinese and everyone's going to get robbed and be sad about it." I don't think that's necessarily the case. Look, I do think just given how cheap the valuation is, any sort of sale that takes place, in the near term, is probably going to be giving away some upside. So I'd much rather see other forms of capital return.
Really, I'd just like to see other investors come in and say, "Hey this thing probably shouldn't be trading at this extremely cheap valuation, especially given the quality of the asset, the growth profile." It really is a unique asset in mining and it plays into a lot of these Trends. We actually, people talk about, "Oh, you invested in this sector that sector." We see parts of the tech sector crashing right now. We actually think this is one of the best ways to play tech because it feeds into all of those long-term demand themes that people get excited about. You hear, Art go on and talk about all the crazy things that they're the other future and what they're going to make all this money on and the company has invested in...
Andrew: It's all going to be built on tin.
Brian: Well yeah, so I... Hey, here's a way to play into those same themes but these companies actually make money. So I think that's really what interests us here. Yeah, I think we'll see how it plays out short-term volatility notwithstanding. I think the long-term picture looks extremely strong and we're long-term investors. We just, we sit and wait.
Andrew: I think we alluded to it earlier but just to make sure we hit it. Strategic review announced in November, here we are in mid June, that is a long strategic review. I don't think we've really heard anything on it. What do you think is taking so long with the strategic review this long?
Brian: Well, so, I, again, I would make the distinction that strategic review doesn't necessarily only equal sale. I think that's what a lot of people are saying, "Hey, where's the sale? Where's the sale?" Look, if you actually go read through this, the release when they announced it, it was all these different options. I would argue that the dividend itself was one of the outcomes of that. They're probably going to announce the next dividend I think next month. Well, they'll usually do it around when they report their kind of preliminary Q2 report. so we should get an update there. I think they do have the ability to pay. They're paying I think it's like a 3% yield now. I mean I'm sure it can be probably 5% to 10% and still be comfortable. But, yeah, look I think they're evaluating a lot of these things. The CEO has done a number of presentations and he said, "Look, it's ongoing. There's no real timeline to it. We're just trying to find ways to unlock the value here." To be honest, there's a lot of people that are probably happy that the strategic review is taking longer because they don't want to see it sold. They just think that they're going to get robbed of it. So, I don't know when it happens. But we talk to the company periodically. So we get our updates and it sounds like
they are running this thing like it's not going to be sold. They're just running it like it's a company that is going to continue to generate cash and they're going to try to grow and do all the things that a company does.
I'm happy and that's sort of a back pocket option. If someone wants to come in and make a swing at this. I think one of the reasons that it's taken, so long if it was a sale, I think that was a lot of people were upset, "Hey, Alphamin leaked in April that they were selling themselves. You know what happened, they were looking for bids." Well, one of the things that happened is, trying to lockdown for COVID, the tin price, a lot of commodity prices came down. When you're already cheap, and then the commodity price starts to go against you and the stock goes down even more. I mean if you're a buyer you're like, "Oh, this is great. I'm going to throw some low balls out there and see if we can steal this thing." I think that's one that shows that the companies and their financial backers are not necessarily looking just to fire sale this. I think they want to get full value for it. It may actually be a good sign that they haven't sold yet because I mean, why would you sell when a bunch of commodity prices have have pulled back over the last few months. There's all these fears when the long-term outlook is so good. So I don't know. I think yeah, maybe if you were itching for a sale, I think there are a lot of people that, on the news in April, kind of jumped in, merger or other type of guys that were just looking for a quick flip and maybe they were disappointed because they didn't get it. But if you really look at the long game on this thing they have a chance to create a ton of value over the next I mean years maybe decades.
Brian: Look if they don't sell it, if they continue to run it I think that's going to be just as good of an outcome. And I would actually hope that if they do sell it, they take advantage of a better price environment because like I said, I think anybody coming in buying it today is probably stealing it.
Andrew: And just we got a lot of questions just I think we're going to have to wrap this up in a second. But their average price, just to give people an idea. It costs them call it $15,000 per ton to attain is their cost. Right now as we talked about the cost the price of tin is $35,000 if it goes to $30,000, if it goes to $45,000 like these guys are profitable this is a low-cost mine. The price would really have to get hammered for you to be even talking about, "Hey they're not just like minting money at cash levels." But, Brian, we've talked about
a ton, talked about a ton with Alphamin. We talked about a ton with tin, I think it's about time to wrap this up, but I always want to give you the last thought. Anything we didn't hit on tin or Alphamin that you wish we had hit or anything we kind of glossed over you wish we had hit a little harder?
Brian: No I mean I think we did a good job covering both of those areas. I just, last thing I would say is, there's a lot of similarities between these types of areas that we look at.
Andrew: I mean, I think you've really seen with this ESG, climate, green energy energy transition push over the last several years, just a step change increase in demand for a lot of these metals. Some of them more specialty than others. There is a lot of concern about where the supply is going to come from for them. And so I think you could probably have the same conversation, pull up the periodic table and throw a dart at it I think we could really have the same conversation in a lot of different areas. And so, we still do have a big position in uranium, we own tin, we have other things, we like copper. I mean there's a lot of these other metals that we like and they all have a very similar sort of investment thesis. And so that's just something I would keep in mind is that, we listen to people talk about all these different commodities and it's almost interchangeable these supply-demand stories. And so, we think they're long-term themes and we continue to find the ones that we think are the best and build positions in them over time and then we sit and wait. Like I said. I think the fundamentals of a lot of these areas are not really the challenge. The challenge is having more of the investment community become aware of these situations. And I think that's how we really get paid for this is by sitting in waiting and then whenever it all starts to come along, that's the valuations get to the levels we think are more appropriate.
Andrew: Well hopefully you're doing a good job of helping to get this story out and hopefully this podcast is a small part of that. But, Brian, I appreciate it. I'm telling you, you did the pre-call. We did a pre-call on tin last week and I was like this sounds exactly like uranium it's such an interesting story. I think people should go check it out. And you know what, for a company, $1 billion is not crazy small but I think their investor deck. If people want to go flip onto their website and flip through their investor deck, I think it does a really nice job of laying out the story, laying out, "Hey here's why tin is growing." I'll include a link to the video that you sent me that I think does a nice job of laying out the tin story overall. But Alphamin's investor deck is really nice and has a lot of like the basic stats that you're going to want to Look if you're looking to look at this company. All right, every one, one last time. It is risky though. Please do your own diligence, consult a financial advisor, but Brian Laks, from Old West thank you so much for coming on and looking forward to having you on for the third time.
Brian: All right, thanks, Andrew.