The Koala ventures through the commodity space and Ivanhoe Electric $IE (podcast #137)

The "Koala", a buyside mining and commodity specialist, comes on to discuss the commodity and mining space in general and Ivanhoe Electric (IE) in particular.

---

A Word From Our Sponsor: Composer

This podcast is brought to you by composer.trade. With Composer dot trade you can invest in strategies that execute trades automatically, depending on market movements. Stop trading on impulse and start investing smarter today with composer.trade.

---

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!).

Disclaimer: Nothing on this podcast or on this blog is investing or financial advice; please see our full disclaimer here. The transcript below is from a third party transcription service; it’s entirely possible there are some errors in the transcript

Transcript begins below

Andrew: All right. Hello and welcome to the Yet Another Value podcast. I'm your host, Andrew Walker. If you like this podcast, it'd mean a lot if you could follow, rate, subscribe, and review it wherever you're watching or listening to it.

With me today, I'm happy to have on the Koala. The Koala is not only the first animal that we've had on the podcast, but he's a former buy-side mining analyst. He's one of the leaders of the mining and commodity finch wit. And I think people are gonna be impressed by the depth of knowledge in the sector. That's got a lot of play recently, but there aren't many people who remember how to look at mining and commodity players anymore. Anyway, Koala, how's it going?

Koala: It's going good, Andrew. Great to be here. It's a nice overcast day. It's still a little warm, which as a coal investor, I'm bittersweet about. Everyone seems a little down. It feels like mining before the last year or two in the city, right now.

Andrew: I've done a lot of work on energy recently, and it's been nice. It's a warm winter and everything, but I'm with you. I have been thinking like, damn, if we had hit been hitting 30s in October net gas, power price, everything would've been going parabolic and we just, we would've been celebrating.

Anyway, we'll get there in a second. Let me just start the podcast the way I do every podcast.

First and disclaimers should remind everyone. Nothing on this podcast is investing advice. That's always true. I'll just remind everyone today, Koala and I, we're probably gonna dance through a couple of names, a couple of different sectors, so please keep in mind. This isn't investing device. We're gonna be talking commodities mining.

Those do carry extra degrees of risk, so please do your work. Keep all of that in mind. Second, a pitch for you, my guest. You know, I only started following you over the past year because, everyone started finding mining commodities, and all that, and you've just been so spot-on with a lot of your calls.

Anyone who follows you for more than two weeks is gonna be able to sell that. You've done a ton of research and you know, these names and spaces well. So just excited to have you on, Really excited to dance. We'll talk, about Ivanhoe, and IE Electric at one point, but also I really wanna talk about all sorts of different things in commodities, mining in general. Where do you wanna start?

Koala: Let's lead off. I think just with, I think the general sector. It's been, it's been very interesting to me how the interest levels. Like obviously we can talk about coal extensively here, but I think just people are kind of waking up again to the reality of the world isn't just software and dating apps, or social media and these tech things that are zero marginal cost, that sit on our phones. It's the world's made of things.

We're gonna be talking about the Ivanhoe companies later, but Robert Freeland loves to say, you know, you either have to grow it or mine it to make it.

I think people are all now starting to wake up to this reality because things are noticeably more expensive now. And whether that's the EV trend or putting gas in your car today. I mean, what is there to say?

You thought, and you talk more about energy, but you've had a decade where the shale revolution gave us cheap natural gas and cheap energy, and the US went from something to a massive amount of the energy market, partially because of the growing numbers and the growth metrics and the growth multiples investors, just through good money after bad and didn't think about full cycle capital returns or the energy supply and demand. So the world got drunk on some cheap energy.

it's a little like being back in college at a fraternity house. What we've had for the last decade. And then I would say if we go back to mining if you think about 2014, 2015 when China kind of caught a cold right at the time that all of the mining industry, the big boys were all doing massive Capex levering up their balance sheet, because the Chinese miracle was gonna continue forever.

Metal demand was just one direction with no volatility. In that first derivative of demand. And it turns out China prints in the second half of 15, and the first half of 16, print a negative year-on-year steel production number. And that caught iron or completely offside. Copper was weak. We had that August 2015 shocking evaluation of the Yuan one Sunday night.

And I, I still remember, like everything was just down like five, 10% cuz no one realized China had to shock their FX market like that. And what happened then is you have Glencore in September 2015 go, Oh, we shouldn't run it three times levered. We each run it two times levered and we had to do a capital raise for the first time since the IPO because we need to run with less leverage in these volatile commodity markets.

You've had, let's just run through these. Anglo-Americans got smoked at the time. Ministry was a massive blowout capital project. Just in general. Like BHP Rio, they got, they had to, I mean if you think about their costs of producing Iron ore have gone a C1 in Australia went from starting with a four to start with a one.

As it was, we had to innovate, we have to take costs out, we got to maximize productivity. It's not just got these tons, and get it on a boat, and get it to China. It was, we need margin value over volume, which became a catchphrase for all the big miners. It's almost like they all said, That's a great line, I'm going to use it.

And capital allocation became a huge issue. Cause everyone said, You just lied a ton of money on fire. You're not building anything anymore. Ivan Glazer of Glenburn goes, we did this to ourselves. Why in God's name are we all building? We control that. We have the projects, we have the production. If we produce too much, we don't get a price, we destroy value.
Why are we doing this?

And so, You never really saw major M and A after 2016. Ironically, when everyone was distressed, the big minors like BHP or Rio who are more iron but would love more copper, they're like, Oh, you know, we have our list of eight to 10 mines in the world we would love to be a part of.

But they were also shell-shocked. They weren't willing to say, yeah, we'll pay a price. Looks a little expensive today because over the next 10 years it'll look brilliant. No one was willing to do that. And so you had then massive de-leveraging. I mean, Glencore went from 20 plus billion of net debt to now they're down to, what is it, 10 billion?

And here's an ironic thing about Glencore, which I've talked about immensely, but if you go back and look at the second half 15, first half 16, the trough EBITDA, if you just look at that annualized e DDA was like $7.5 Billion. And that's like the worst it ever got. I think all of us could agree that a seven-half billion EBITDA business in a worst-case scenario, could probably run with 15 to 20 billion of net debt if you termed it out properly.

So there you didn't have a lumpy maturity profile. But you know what Glencore now says, Nope, 10 billion. We learned our lesson. Rio Tinto, you know, they also, they're, they're running with less than 10 billion of net debt. Like the only one that's been a little more flexible among the big boys is Vale, which had a massive tragedy with the dam break that killed 300 people back and I believe it was January 2019.

Has massive legacy liabilities and reclamation. From that, they incorporated those, legal obligations in their adjusted net debt number. And now they've kind of recognized, okay, like. That's a billion to 2 billion a year of cash outflow over the next five or six years, but it's kind of just part of our business. They no longer include that in the net debt profile.

And they've said they're just a net debt. Target is around 20 billion versus, I recall a time it was 10 billion. They're the only ones who are kind of saying we have more flex in the balance sheet. Over the last couple of years, everyone else has realized, that since they've had to go on this journey, the mining industry now is much more equity versus debt.

And in part, that also means that if you try, you and I tried to start a mining company today with a world-class project, we would need more equity, which means our cost of capital is higher, which means it's so much harder. You need to have a project that's even that much better. You need to go find those rare few investors that actually would entertain it.

And it's like the same thing I joke, which is if I could raise a hundred million dollars to do a mining Cross asset fund, I would do it in a heartbeat, but I haven't, for one simple reason, no one's thinking that way right now. So I joked about this, was having a drink with a buddy at a bar, and I think I come across our phones that, the shell CEO said that the energy industry should be taxed more to help deal with this energy crisis so people can afford their energy bills. And I laughed immensely, and I think I even tweeted this out, that, it's really fun to watch regulatory capture when you've had to go through these hard yards. Whether that's de-leveraging and, putting in all these rules, and many of them are to make for a safer work environment, a cleaner environment.

But it's so much harder today versus 30 years ago. Whether it was to be, to start a hedge. Or to start a mine that, it's kind of funny when someone, you can see someone burning the ladder as they're climbing up it so no one can follow them. And Coal is a great example there. No coal company is gonna have debt in the west. Whitehaven's, net cash y coal, I recall net cash Peabody's gonna be net cash even after the sureties in a quarter or two.

And what are all the coal companies now saying? you know what, all equity's the way to go. Coal, you know, we think it's gonna be longer, but we just don't wanna have to explain that to the banks every five years and then have distress in our business financially. So, you know what? We're just gonna go all equity.

So if you and I found the greatest coal mine in the world that's never been developed, we would have to go find equity. And the first question would be, how am I gonna look my kids or my grandkids in the eye, even as a billionaire? Because I financed a coal mine.

Andrew: Well, that'll be the first question, but then the second question would be, Hey, I'm not a hundred percent familiar with coalmine, time in, but it's probably gonna take, what, three to five years to come online. Maybe more. You can tell me if I'm wrong.

But the next question will be, Hey, in three to five years will there be any demand for coal? And you and I could go say, we could make all these arguments for it. Cole and the same thing would apply to a lot of energy projects and everything. We could make a lot of arguments, but ultimately everyone's gonna be like, I'm writing a billion-dollar check into something that's gonna go to zero terminally.

Like, I just can't take that risk. So yeah, you're just not gonna be able to fund it. These guys have created this really interesting note that nobody thinks anything can get built anymore about.

Koala: Nothing can get built anymore. And then to make it even more surreal, even if we talked about things we want to build, no one's been looking because if you think about it, everyone's woken up to what was Robert Friedland's lovely line on Ivanhoe mines. He goes, It was an overnight 25-year success.

In terms of when he first got to the Congo, started looking at Kamoa, found Kamoa, then they found Coco. And that was just, and I think it's an important thematic here. Coco was discovered in late 15, or early 16. Kamoa-Kakula is now in production.

But that's because that got accelerated. After all, when you find something so extraordinary, that it's self-evident to people, you find a way. Things that are worth the world-class projects somehow find a way. And it's an interesting thing I've noticed in that the buy side and the investors will look at companies and say we're the only game in town. The cost of the capital's so high, you need more money. I'm gonna drive a, I'm gonna demand an absurd deal from you.

And what they haven't actually, cuz we haven't had a lot of examples recently. I think Ivanhoe's probably the best one recently, is great projects don't just get financed by guys like you and me.

But those are rare because what is it? One, one in a thousand outcrops is a deposit and one in a thousand deposits become a mine. Like, but so let's say you found one of these things and you don't find a 99th percentile. You find a 95th percentile. What is your prize? If the binding companies are not doing M and A, there's permitting issue, there's permitting risk, and there's engineering risk. Everything costs a little more than the feasibility study says it's going to cost.

Just in general, you don't have the same incentive to go look for things. so, We'll, we'll talk about copper in a lot here, but like LME week, everyone's talking about, Yeah, the next two years there is copper supply coming on QB2, Quellaveco, Oyu Tolgoi underground, Kamoa-Kakula, Face, whichever that thing's gonna have phases until our kids graduate from college.

There's just so much copper there and higher IC opportunities. But, what's coming in 2025, or 2026? truth is, we don't have much. So that's where it gets interesting. Just like these timelines and these long leads, these long capital cycles, it's okay. No one's exploring, and no one's buying anything.

Like, you're not gonna have juniors go out looking for stuff, trying to find that next great mind. The miners are gonna buy back stock. They're gonna focus on, look, we're good stewards of capital. And this is a huge thing. I have a sub stack that's been 80% done for three weeks. About how capital allocations go from a headwind to the tailwind in the mining industry, because we've gone from, people have just dated the sector and said, Okay, I believe China's gonna be a little better than I think for the next six months.

That means dividends and buyback announcing be a little bit more. So I'm gonna, I'm gonna date the sector and then I want my money back. The industry has to regain the trust that it is a good steward of capital and that this industry needs more capital. Because when you have low multiples, basic and low multiples, and low leverage, You're the market's way of saying we should de-recapitalize this industry.

This industry has too much capital. It's x growth. It just destroys value. So what we need to do is we need to pull capital. All the free cash flow comes back to us, whether it's through buybacks or dividends, and we aren't necessarily putting it back in. So you need, the industry needs to regain, the market, and multiple investments.

But until that, until that happens, and then we see M and A, only then will you see the exploration dollars come back to refill the pipeline. And then we get back to an overnight 25-year success. What, when these, the straight the river sticks for the mining industry is brutal. 2011 to even if you caught the 2016 bottom, the 2010s were not very fun.

But when it's good, the party lasts for a long time, because It takes a little while for the cops to show up and say, There are too many people, you're all drunk, you're doing stupid things, it's time to go home. It takes a while to get out to where the mine site is and tell us we're doing that.

Andrew: Let me jump in with a few questions here. So the first would be, look, I think you described very rationally, right? Like if you've got a coal company, any company trading for two times free cash, right? That's an implied 50% cost of capital, right? Even if you've got a mining project, an expansion, or a drill, the returns on it are 30%, right?

Which is treasury yielding even today, 4% in a 4% world. Like if something will yield 30%, that's a great risk-adjusted, but if your stock is yielding 50%, you can't go do that. Right? So like the capital discipline's getting imposed. You saw it with BTU when they were saying, Oh, we might go buy something at four times EBITDA or we might do an expansion and the market was just melting down.

But I guess I do have a question on that as I hear you, and part of that is resulting in, everybody likes to talk about, Hey, I've had, I've done podcasts on the tin, I've done podcasts in uranium. Hey, The supply is not there. Right. Demand is steadily going up and the supply is dwindling cuz no one's drilling no one's.

And I hear that and it all makes sense to me and like I am a kind of a believer, but just as a generalist I can't help but think like, oh this is what people thought in 2007, 2008 with energy when we had the oil supercycle and oil hit one 50 and two years later it's 40. Cause what people thought in 2016 with energy, when oils were at a hundred and I knew people who were underwriting global supply curves and saying oil can never go under 75 again.

Guess what? Three years later it's negative. So I'm just, as a generalist, I'm trying to like put those frames in mind cuz I believe the supercycle, but it's a little scary to kind of think about that.

Koala: It is and it's I think in light of what's been happening in what I'll call, fun finance of crypto this week, we've all had jokes about margin. There's been a lot of margin call jokes to make, and rightfully so. But a line comes to mind. Let's invert, which is, it's not panicking if you're first. I think that's the thing the generalists have to wrap their heads around. It's, yes, in 2007 everyone's talking about how much money they've made in mining, how great these companies are great stewards of capital.

Where are those people in O2? Where are those people in 2016 when tech bonds traded at 60 to 70 cents a face, 20% plus yield to worst, and the stock was trading at two, three US, and all the stock was saying is these things are distressed? We're never gonna need commodities ever again.

And it's not that bad anymore. But you have these moments where you just got to take a step back. And one of the things is just being a free agent and thinking with a little more time horizon than a pod shop, taking a step back and saying, Okay, do I know the next $50 move in Newcastle one way or the other?

No, I don't have the resources to know the exact balance of energy units on every given day, like I'm Veta or Glencore. But what I can do is look out and say, Okay, roughly speaking, what is like the average coal price gonna be over the next few years or the next decade? And I think there's enough information out there given the lead times and lags for the major pieces to move that you can say, Okay, I see something here.

Is the multiple compelling for what I'm bringing coming into? Like as we joked about Peabody a little bit during that call, there are things you can say when you're trading at 2% free cashflow yields. And there are things you cannot say when you're trading at two times free cash flow.

Andrew: Just so everyone knows what we're referring to on Peabody. Peabody reported results last week and the results were strong commodity price strength, the stock was up 20% on the results. And then as management started talking on the call and saying, We're not gonna buy back stock. We might go do M and A, we might drill a new mine.

Koala: Andrew. Seaboard met coal is an incredibly misunderstood market. It has a lot of potentials, far more than everyone appreciates. And we view it as a strategic growth opportunity for this company. And you could just see everyone just having a, in their head guide, Anyone told this guy, where his stock is.

Andrew: And the stock went from plus 20 to flat on the day, literally as managers men are reading the call.

And you don't, you normally don't see that unless management comes out and says, Hey, the outlook is a disaster, inventory is rotting on the shelves. Like he wasn't saying any of that. He was just saying, Here's my cap allocation and investors sell, sell, sell, sell.

Koala: But, also I have no problem with them going and buying a Met Coal mine. I think there are things that Peabody should buy that they're a logical acquirer of.

And listen. But if he had just said, Guys, we look at everything similar to what Arch said when Coronado approached them a year ago, it would be rude not to take the call and hear it out. That doesn't mean we're going to do it. But with that said, guys, we hope to have a deal with the charities in one queue.

But until we have that deal and until we have paid down all of our debt, which we have classified as current with this quarter, we really wanna flash that to you. It's very important to recognize that we can't do buybacks in dividends. And if I can't buy back my stock at two times free cash flow, can you blame me for thinking three times free cash flow to grow this company might be a good use of capital until I have that option?

I think if he'd heard that and everyone said, Okay, he gets it. If he does something, he's gonna explain to us why it's compelling. And also he's acknowledged what we all are looking at and seeing in terms of the free cash flow yield, the buyback potential, and the dividends. It's kind of you to have to acknowledge.

If you're gonna keep the free cash flow that you're doing stuff with it, that investors feel like not only that it's gonna create value, but you have to message in a way that a lot of your marginal buyers and sellers, fast money hedge funds don't be like, Okay, my stocks, it's gonna go down 20% cuz you announced something.

I think a good example of this was everyone hated QB2 for tech. When they were gonna do it, they said they were gonna do it in 18, which they kind of had to do because QB1 was run out of ore. So they kind of had to touch the sulfide, depot 43 below the oxide. So this was gonna be like a $5 billion project.

The NPV at $3 copper, 8% was like a billion dollars. So you kind of could quickly just go, Okay, this thing blows out by 20% on the Capex and this is not, this is NPV break even at. $3 copper, which four years ago, $3 copper was the incentive price. Pretty marginal project. Everyone's like, Why are you guys doing this?

This is crazy. And then what they do is they go out and they got a Japanese trading house, I believe was Sumitomo to come into the project at the asset level by 30%, at much higher multiple kinds of lending out the lower wack of a Japanese trading house. and they brought in a project finance facility.

QB2 now, even though even with the pandemic, it's gonna cost 7 billion, not 5 billion. There's been a one-and-a-half, $2 billion Capex blowout, but it stayed on schedule. So if we look back, what do you know? There have been Capex issues. But QB two looks kind of brilliant now because if we tried to build QB two today, If we think about inflation labor, everyone's thinking about what could they build if they had something, there's less mining talent, whether that's engineers, project managers.

How many people have built a multi-billion dollar mining operation in the high ends before, who's still in the business? Cause we haven't built that much in the last half-decade. That project probably, I guess if we scoped it out today, would probably be not the 7 billion they're talking about.

It's probably gonna scope out around eight. Which means let's go back and run everything. What copper price do we need to make an $8 billion project work like QB2? start with the four. And so it kind of looks brilliant cause they have the sunk capital and $3 coppers. The new $2 copper and $4 is the new $3 and at $4 copper.

Yeah, the torque on QB two looks pretty damn compelling. But you have to go through this journey where like, you gotta sometimes be a contrarian, but then you have to de-risk things like when the tech came through New York with the, after the J Japan deal and said, Yeah, the IRR was 11% in the feasibility study.

But look what it looks like for us when we factor in the project. Finance, the asset level, sell down, and we're not gonna have to put another dollar into this thing until year three. You go, Oh, this is I see how you're going on this journey. Peabody didn't do that. Peabody thought they were Zuckerberg with the Metaverse.

Andrew: I hear you. But so like on the tech example, you gave, they did bring a partner in. That's nice. And look, I'm not an expert, so I, I'm just talking about what you said, but they brought in a project finance partner with, or sorry, a partner on the project with a lower cost capital then, which everyone should do. That's fantastic. Right.

But one of the key things you said in there is the costs were supposed to be 5 billion, they blew up to 7 billion. Guess what? I've never seen a mine or anything come in under budget or even close to budget for the most part. So the cost blew out and it sounds like they kind of got bailed out with copper prices running because no supply can come online.

And I realized that's a little bit of a chicken or a problem where nobody wants to fund a new mine. Every mine's over budget. So prices go up for some reasons, but at the same time, I hear a project that came in 30 to 40% over budget and it seems like it got bailed out a little bit by commodity prices.

And that does make me nervous. And I guess I'll let you comment there and then I do wanna talk a little bit more, Cole, and then we've got to talk IE. So we've just got something to talk about.

Koala: Well, I think it's interesting that you bring that up because before we liked Ivanhoe Mines building Kamoa-Kakula in the middle of the pandemic, they delivered that on time, on a budget in the DRC.

And Lord knows how many conversations I've had, with reverends like Koala, the DRC, like, are you crazy? But they delivered on that. And so I think it's the tricky issue here. Like how do you explain these things? How do you justify this growth? And I think it's getting investor buy-in that this is kind of how it goes.

And you'd rather be the first person to be building a project so you can get all the talent than be building a project when all of your competitors are building mega projects. And to get, whether it's from the engineering consultants or Bechtel, you're getting the A team, not the D Team.

Andrew: Let me switch over to something a little different. So we've talked coal a couple of times, we talked Peabody. You have been pounding the drum on White Castle, Australian Coal Company for about a year now. Maybe before a year, as far as I know. And people can go look at the stock price and see that has been a nice thing to pound, but I just wanna ask you, when people look at coal US focus investors think coal is dying today.

People look at coal and see high coal prices. They see most of the guys have gotten disciplined on just returning all that cash to shareholders. I think a lot of people look at coal and say, Oh, prices are high now. Run it back to before-pandemic prices, and run it back to year-go prices. They're worried about the sustainability of prices.

So I just wanna, when you look at Coal, and I know you're still bullish, Whitehaven, we have some discussion, we had a lot of questions. Why Whitehaven over YAO, But just overall, when you look at coal, what are you seeing that you think a lot of people are missing? I realize I threw a lot at you, but I know you'll ramble as long as I let you on Coal. So.

Koala: Look, I think what I'm seeing is there's not, what is the seaborne thermal coal market? It's like a billion tons. I might be off by a few hundred here or there, but that's not the point. I think bulk commodities in general, and this applies to iron ore as well, there are commodities that, you know when you see it.

Copper metal in the LME is 99.9 copper. Like it's, it is what it is. But we would talk coal, Metco, Iron ore, Lithium, spa mean concentrate. There are these intermediate commodities that are not in their final horn, and we think about these markets as one massive market. Well, coal. Yeah. When everything's cheap.

Energy's abundant, coal's, abundant, there's not differentials there, but the New Castle, 6,000 high energy coal market, that's 200 tons of a billion tons seaborne market. And because we all want cleaner air, we want more efficiency. Most of the new coal power plants, these heles, H-E-L-E, have more efficiency, their design with a scope, and that scope is they need high energy coal.

You're not gonna take this high moisture, low energy stuff that maybe it's low ash, but are you gonna take some 4,000 kcal stuff out of Indonesia or somewhere else? Your boiler might not be on spec for that. And so in a world of abundance, and no cares about emissions and pollution. And I think there is something to be said about the fact that, we have effectively exported to China and frontier markets, emissions that otherwise would've had to be incurred in the first world over the last few decades under globalization.

And that's not tolerable anymore. What I look at with coal is high-energy coal is branded in the same way that terrible coal is lit at night or junky low-energy stuff. But it's needed and it's going to be needed for 20 to 30 years. Maybe we're gonna go all renewable in the US, but the US is 300 million people.

And if you go look at say, Kenya, Tanzania, Rwanda, Uganda, Ethiopia. If you just add up the population of those countries, you're pretty close to the US in and of itself. Those guys aren't going wind and solar, 24/7. So I look at the situation and I say, I have a high-energy coal product that is rare.

You wouldn't mind the crappy stuff if you had abundant high-energy coal that you can't build a new supply. I mean, Vicore, Whitehaven's been very honest at this multiple that's not being funded off of the Whitehaven balance sheet. Customers are gonna have to come in and support that project being built.

So I think that we're having a little bit of a realization in the slow education happen about high energy coal or slow energy coal and like yeah, the. If we can put on the wind, and solar use of Canadian redox batteries as a firming solution and turn off a dirty coal plant, I think we all agree that would be lovely.

But the role Newcastle's gonna play is the high energy Newcastle, that has a long runway.

Andrew: Can I just push back on one piece of that? So everything you said there, I don't disagree with any of it, but, you know, if I go back to 2019, I'm looking at Newcastle, which is the Australian High Energy coal we're talking about.

The price is 75 to a hundred, Right? If I'm looking today, the price is 300 to 350. And yes, we had, I didn't choose a year ago because there was a lot of covid funkiness last year [crosstalk] Go ahead.

Koala: But pull up JKM, LNG, pull up Japan, LNG.

Andrew: This is exactly what podcast listeners want to hear. They want to, they want to hear somebody, looking at things just in real-time on Bloomberg. Okay, I pulled that up. What am I looking for here?

Andrew: Where was it in 2019?

Andrew: All right, let's see. I must split up the wrong thing Bloomberg can tell me. So you can go ahead and tell me if you want.

Koala: But basically, one of the things Glen Cord used to talk about in 1718 when they bought Rio's coal mines was going look at the parody, the New Castle parody price.

Where in Japan LNG is like eight or 10 bucks or even six bucks. Well, it never traded there, because energy's abundant. And of course, you'd rather burn LNG than turn a ton of coal. All else equal. Well, in a world of energy scarcity, where you also have rules on the emissions and how you generate energy, but the actual molecules and units are scarce.

These are the things that start to kick in if you need more LNG but you can't get a cargo, that's why the new castle's there.

Andrew: I think this is a very smart way of addressing and also my worry of addressing my worry. And also part of my worry here, like, how much is coal right now?

A bank shot on, Hey, Europe lost all of their LNG because of Ukraine and Russia and LNG prices everywhere are going parabolic. And if for some reason Russian gas is allowed, again, you know, somebody drills LNG equipment takes a long time. But if for some reason Nat Gas normalizes from 200 in Europe to 20, let's call it 20, which is still, I think last year it was in the twenties, 30, whatever, if it normalizes the 30, does this whole cool story collapse?

We're not at 400 Newcastle or 300 Newcastle in that world. We're probably sitting, look as I would say, Before the Ukraine invasion, Newcastle was flirting with a two-handle. It's a function of then where inventories are, is it hot in the summer? Is it cold in the winter? It's a more functional market if Russia's back or the Russia equivalent is brought online.

And so yeah, you're not gonna get these prices, but I'm happy if Newcastle starts with a one in three years, and continues there, I'm totally fine

Andrew: For generalists, a lot of them look at, kind of similar to what I did, they look at Newcastle 300 right now and they say This is, a scarcity drove spike and nobody is willing to underwrite everybody's underwriting New Castle back to 75 next year, let's call it. Right? Yeah. And what you're saying is, it can't sustain 300 forever, you know?

But what you're saying is similar to some of the stuff a lot of other people have pointed out. I think this on refining, Yes, this current spike can't last forever, but it's not going back to where it was previously. For all sorts of reasons, for all sorts of reasons. And nobody's willing to underwrite even slight premiums to kind of the old cycle margins.

Koala: If we have two or three years of 300 average new capsules, all this talk about why aren't the energy companies drilling, why aren't you investing? The conversation will turn to, Paul, Mr. Flynn, and Vicore, Yeah let's go. Let's go. Weirdly, high prices are the solution for high prices. It's cliche to say but [crosstalk]

Andrew: And that's what generalists worry about, right? Like, when does it supply Glocom[?]?

Koala: But these companies aren't trading at eight times Ebitda and people go, Oh, you take the coal price, cut it in half. And there, these things aren't trading on 50% free cash, or they're trading on 15.

Cool. if that happens tomorrow like if that happens tomorrow, that's a valid point. But if you give me a year at 50 and just to make the math simple, cause buybacks are circular, you just give that back to me as a dividend. Well that 15 by simple math, if the stock price just went from a dollar to 50 cents, 15 cents divided by 50, that's a 30% free cash flow yield.

Okay, what's your alternative investment idea?

Andrew: And I've built out models and it's so crazy because it, they're so cheap that, you know, I'll estimate this is so stupid. I'll estimate monthly cash flow and literally every week or every month, I'll build out the model and be like, Shit the stock, the stocks only move 2% and they just build up another 8% of their market cap in cash on the balance sheet. And it's still going like every day. You're getting so much. It's wild. It's just wild.

Koala: Well, let's use, let's use Whitehaven as an example and buy, It's gonna be so fun when we go from free cash flow cap allocation to the total another end of the spectrum on I electric in like five minutes.

Just gonna be absolutely a great flip, flipping the page for the viewers. But I think you look at Whitehaven, they, they put some [inaudible], they one and half billion of free cash flow generated in the first quarter. Now that's a pre-tax number. They're gonna go quarterly.

But you sit there, you say okay to the point I kind of made like, if it ends tomorrow, Yeah. Okay. If it all ends tomorrow, I get why you're short. I get why you're short. If it ends tomorrow and we never have another spike ever again, we're gonna be wearing shorts and golf polos in February and Manhattan. It's gonna be Mild, Climate Change is gonna take away the heating season.

Andrew: I can see you. We're gonna blow you off our lists, but both you and I are wearing polos in November in Manhattan, so we're close.

Koala: So who knows, Turns out, climate change is gonna solve the energy crisis for us. But in that world, that one and a half billion, obviously we're halfway through the second quarter for them.

The fiscal year end is June. They're gonna generate more free cash flow because Okay. Newcastle starts with two. Cool. Tell me what the last six weeks were. Tell me what their production and volumes were. They generated more money, so let's just assume two QS cover the tax bill.

One and a half billion of free cash flow is on 900 shares outstanding. Cause the milestone shares are not economic and except in takeout, we're talking about what a buck 50 plus. Like, we're just starting to get to a world where the buyback is at. I think I did the math at 625 or 650. That quarter of the free cash flow loan covers the buyback of 240 million shares.

So in that world, it's, what are you gonna do with this cash flow? Like, it's just funny to me that there's a point now where you almost have a put on some of these names because they're not lighting the cash on fire. That, I mean, just, I mean I heard, I heard a major fund shortening Whitehaven now because they think, the energy crisis is solved in Europe, Gas is full, everything, it's winter's gonna be warmer.

And I kind of look and I go. You're gonna like, these guys can buy back 10, 20% of average daily traded value all year. And it's, it's on the books already and you don't think we're gonna have a crisis ever again?

Andrew: You talked a lot about Whitehaven there and the most popular question I think we got when I said you were coming on is why Whitehaven over YAL, which I believe trades for two or three turns cheaper than Whitehaven, which obviously when you're talking these very low, like if something's trading at 20 times EBITDA and the competitors' at 23, they're even, But if something's at five and the competitor's at two like that's a big difference, you know? So a lot of people just wondering why is Whitehaven still the horse that you're kind of sticking at.

Koala: So I need to go back and update all my Yancoal work. I used to own it, and wish I still did. But I think there are a few factors there. One, most of Yancoal's production is API five. Which is not New Castle, 6,000, let's call it New Castle, 5,500.

It's lower-energy coal. It is not the creme du loch crop. API five prices are like 165, not this 400 or 300 we've been talking about. Yeah, if you think the energy crisis is solved, Newcastle 6,000 is not gonna trade at this massive premium to API five. So I understand if you think that this thing is solved, the same way when iron ore demand is not the best 58% iron ore, and 65% iron ore don't trade at a massive spread.

Cause you're not trying to optimize the furnace to maximize output. You just wanna keep the furnace warm. You don't need as much, you just don't have as much tension in a call on molecules where that premium product will get the premium it merits. The abundance solves that. But so API five. Which fine, I'd rather just have the higher-quality coal.

You have a major Chinese shareholder, who it'll be dividends. It won't be buybacks, which sure, if you're an Australian investor or I don't know if you can do Frankie there because it's a Yeah, I think you can, They have fully frank dividends. So if you're an Australian investor and you have the tax and you don't have tax leakage on the dividends, fine, you can buy it back yourself.

But it's low float. like Glencore sold their 5% stake in overnight like block earlier this year. So I look at a situation where I have a major shareholder, they're gonna pay dividends, but they can do what Peabody alluded to. They can grow for the sake of growth.

And I don't know, there is a valuation multiple where you just say, Look, I'm just under the existing dividend policy. I can't lose, I'm not in a position today to answer that question if it's that cheap. But I do know that Whitehaven has a premium product. I don't think Vicore's valued in it.

And I think I have a good capital allocation strategy. And a big thing is capital allocation goes from a headwind to a tailwind in this industry. And we realize that this industry can create value through investing more capital in those who can create more value because they have good projects, and have ways to, like debottleneck existing operations.

They're gonna get a higher multiple. Simple as that. And so Yancoal, I mean, how many institutions in the limited number of institutions actually can own coal? Low float capital allocation. The audience for yank coal was smaller. Now that could completely change, and I've not done the big deep dive there.

I think like looks new and frankly, I probably should do the same thing on New Hope, but Whitehaven until very recently was the only Australian name that if you were an offshore investor, had liquidity that you had to pay attention to in Australia. So there's also a familiarity there for me.

I'm not saying, Oh, I've done all the work deep as I have on Whitehaven on those two names, and I'm telling you, this is the. There's a price for everything. It merits the work.

Andrew: That makes total sense. I do want to be cognizant of time, so if it works for you, I could ask about Tin Coal, all these all day.

But let's switch over to, you know when we first reach out, you said, the company I wanna talk about is Ivanhoe Electric, the ticker there is, IE it IPOed over the summer. I believe the market cap is a little bit over a billion dollars in trades US and Canadian, but I just want to go over there and we can run through that thesis in the next 15 or 20 minutes if that works out. So I'll just tell it over to you. What's IE, and why is it so interesting to you?

Well, I think it's funny because we were talking, like you, you said, Andrew, we got a lot of questions about Ivanhoe. I'd like and I think, not to tease you as a generalist, but anyone who pulls up Ivanhoe on cnbc.com, whatever the US listed one's, Ivanhoe Electric, but there's also Ivanhoe Mines.

Andrew: Well, we were gonna talk about it I made this mistake last week when we were originally gonna have the conversation, so yeah.

Koala: And then if you get even more historical, Turquoise Sill, which Rio Tinto's trying to buy out right now used to be called Ivanhoe when Robert Friedland ran that company.

So I think it's actually, it was a good laugh because first of all, all the same founder, a major shareholder. I think it's a fun conversation. Cause I think to understand Ivanhoe Electric, which again, exploration, pre-revenue, and everything we talked about, these things take forever to build 25, years of overnight success without understanding Ivanhoe mines.

You're not gonna appreciate Ivanhoe electric. So I'll just very briefly live and home mines. What is it trading at? Like, what's its Canadian ticker, right? I think the US is like six, or seven bucks right now. Okay. Seven, like 1.4, 1.5. It's a $10 billion company. Off the top of my head. There you have in Kamoa-Kakula, which the Kamoa-Kakula land is 50% joint venture was the gin mining.

The Western four lands area around it is a hundred percent, Ivanhoe Mines. There you have what will be in a few years, the second or third-largest copper mine in the world. And because there's a whole basin, it's an ocean of copper effectively that they have found west of Cole easily in due time, that will be the largest, mining operation in a copper mine in the world.

As they mine the various trends underground and they build more concentrators, they get more hydropower, because they upgrade more turbines on the Congo River and they get the transmission lines and then they get a road to Angola. They maybe get a railroad so they don't have to truck to Dar es Salam.

The Concentrate. So there's a multi-decade story there, but Kamoa-Kakula has 50-plus percent IRR on conservative copper prices. So we found it in 16 and it's already in production and it got commissioned during the pandemic. That's fast from a guy, we found another thing here, and it's better than anything else we found five years later, if it's good enough people get moving.

And now we've talked about the capital occasion, we've talked about dividends, we've talked about buybacks. Ivanhoe slid a comment about one day of dividends in one of their presentations earlier this year. But the reality is they can keep reinvesting in growth at 30-plus percent IRRs in copper. I think, and the markets kind of understood that the investors are conditioned to it.

They understand, Yeah, go do that. You like, No, please go do that. You have that bespoke opportunity like you have these properties, you found them, you have the skill sets. If someone else wants it, they have to buy you. So go do that. Like you have the pipeline of projects and we have confidence you can execute them.

So no one's harping on Ivanhoe to take free cash flow and buy back stock
or this or that.

Andrew: It's the old earning the right to invest. Right. And I do think like, nobody wants people to invest in coal, but a lot of them don't have the credibility to invest because historically they've just, you know, it's the old oil, oil wildcat or oils at a hundred, and he says it's going to 200.

Let's go drill, drill, drill. And then he is bankrupt at 70. Yeah. This is the guy, they found it. They found a great project. They successfully executed, and they got running. So the shareholders who backed him, don't want the dividend jet. They say you've got the right to, we believe in you. Go do it.

Koala: Yeah. And someone can say, Oh, The multiple, Isn't that, is it trades at a premium? Like of course, it should. It a hundred percent should. World-class projects deserve world-class multiples and you have to earn the right to invest. The whole sector probably needs two x and multiple, frankly just, just from a broader level. But I look at that, the order to invest and not to go back to coal, but you heard why even talk a little about, you know, Vicore, maybe we can a million tons here or there.

We can maybe pull some stuff forward. Small capital though. It's interesting because there's a point where you can say, guys, we're buying back 25% of our stock every year. Like, I could go to 30, but can't I just go do this? Like there's a point where balance is called for, and that's a key line I heard at LME week from all the big mining companies.

And they're going, Where are you gonna get the battery metals? How are you gonna grow? Well, we really wanna have a balanced approach to returns to shareholders and growth. We don't wanna, and basically like, it, it's the new value over volume. No one has a project. The people who have projects, well if they weren't built yet, are they world-class incredible projects or tier twos?

Well, if we all build at the same time, we're all gonna have Capex blowouts cuz there's a limited amount of talent. So let's just have a balance, sensible approach. It's, it's a self-regulating mechanism that it's kinda like guys until we're at 15, 20 times EBITDA, cause everyone wakes up to what we've created and how long it's gonna take to solve it and how much capital it's gonna take.

We're not gonna act like drunken sailors. When you permit us to do that, we will do that. But that is the longer cycle. So I go back to Ivanhoe and you go, Well where's the copper growth gonna come from? Well, you know, Ivanhoe mines, the moment they finish phase three, they're all gonna be talking about phase four.

That's, And so that's a unique thing because let now goes, it's the DRC. People have gotten comfortable now to some degree with the DRC cause they've seen a success story. But if we also think about you have to go where the geology is. So, where are the great copper minds? Well, Ivanhoe is an incredible discovery in the DRC.

Glencore is in the DRC. But Glencore also just went through mostly in oil, not in the Congo. A massive bribery scandal, that they paid a 1.5 billion fine. You go to these frontier jurisdictions, western investors for all the reasons of you've destroyed capital. It, it's also like how do you do business in some of these places when like, I think a lot of people, there's a lot of people in the west who first of all couldn't point out Washington DC on a map, but they also couldn't point out.

Like they couldn't go. Okay. I have a rough idea of where countries are in Africa or the nuances of the continent. But you got to go where the geology is. and to quote a comment from a now retired co, it's like we kind of know where the copper is. It's in Africa, in the copper belt.

And it's in like Siberia. Well, Siberia is completely off the reservation now. To quote, to quote the founder of Ivanhoe at the FT Mining Summit rushes the new ESG. It's just, No, but we're not going there. And so you have to go find these projects and, but also we have this reshoring and kind of recycling[?] of the world.

So like Senator Mansion, he wants more battery metals domestically. He wants to manufacture. Well, let's go back to the West and what I know electric is, is over. Over the last few decades. I mean, a guy who loves, who's found glossy Bay Oya Tolgoi and Kamoa-Kakula probably wanted just an absurd track record of exploration success.

He had Ivanhoe mines working in Africa, but he had, looked at everything. I mean, the famous thing I love about Robert is I've been told this by multiple of his employees. He'll call you 24/7 and jump right into what's on his mind. But the only thing he'll get mad at you for in [inaudible] you won't get mad if you have a barren hole drill duster.

But if you finish a hole still in mineralization and didn't keep going, he will lose it because why would you stop? This business is hard enough as it is. Why would you stop when you're on-site and you go, We're still finding copper here. Let's stop the hole cuz we hit our depth. It's like, nope, keep going. keep going.

And so he's looked around, and he's found these things and he's just, first of all, he's just, they joke that he explained to Steve Job, the reality distortion field way of dealing with people. Like general rule I've always had is you meet with Robert, whether it's in a group meeting or one on one, you kinda have to give yourself two days to like

Andrew: If you don't, you'll yolo everything you have into the stock. And Yeah. I've known some managers who can do that.

Koala: It's hypnotizing. Even if you've heard the 80%. It's like going to like a Rolling Stones concert. You've heard all of the songs before, but it's still incredible.

But here I have an electric, Let me tunnel this down in, I'd love to, I'm not concise, but it's a great story to tell. Like, here's a guy who has resources has an incredible way with people and understands exploration. So what he's able to do that if you or I went around with a BHP business card is he can spend years talking to landowners and putting together very promising packages of where they just haven't been drilled for 30 years cuz no one was ever able to put the land package together, link up all the rights, get the terms right, and then also bring in the exploration skills to do seismic or geophysics or electro mech or whatever it requires.

Which typhoon is his magical way of looking deeper into the ground, over long areas to figure out where to drill blind? But he's able to do this and like Ivan Electric has two main projects. And for full disclosure, I invested in Ivan Electric privately in 2021 at an average cost basis of five AB[?].

So I'm in this, probably a little more egregiously, sizing-wise, but be the jockey. And a couple of things about this. So there are multiple projects. There's of Avenedi Redox, battery business in there, which if you look at the convert they did like a few years ago, it's probably a hun it could be worth a hundred, 200 million bucks.

But let's just leave that to the side. And Robert will be furious when I say, let's all set aside the optionality of typhoons because mining investors are technology investors.

Andrew: You know, I was just gonna ask cuz their, their investor deck, there is one leads off with the two projects that we're gonna discuss, but their investor deck leads off with Typhoon.

And I was like, is this it? It seems like a mining play to me, but if you're leading off with typhoon, you're, you're kind of making a signal, Hey, this is where we think the secret sauce, the real value. I wasn't sure if I was reading too much into that.

Koala: Well, I think it's something that we are also focused on the free cash flow. What's the project? What's it gonna be worth? But the reality I think as a human species walked every square meter of this planet at this point probably, or we've satellite imaged it. We have a very robust, science and geology. I think anything that's kind of at the surface, for the most part, we've kind of looked at it, maybe something got overlooked or there was a fault that we didn't pick up on.

But a lot of the near-surface stuff where you're walking in the Andes of Peru, Chile, and you go, Oh, I see that. And then you drill a 300-meter hole in the boom, and you hit 1% copper. Like that stuff's kind of like the copper grades for open pits that get people excited today are like a fraction of what they were 20, 30 years ago.

And so we've needed more technology, we've needed more innovation to make those projects economic and get built. QB2 is a 0.4 copper, but it's a low strip ratio. You don't have to move as much waste. Whereas Ivanhoe mines, it's underground, but we're talking six, 7% copper, multiple tens of meters.

So it's like, okay, I can understand multiple meters. We've got to get underground and dig a tunnel. And it's a high enough grade, It's 10 x the grade. So the thing is, what's left is what can we not see? Cuz you're not gonna punch holes blindly. Drilling's expensive. But we have the technology now to kind of go look and say, Okay, well, and I'll bring it to Oyu Tolgoi is a great example of this in Mongolia.

BHP saw some expression at the surface and there was a nice little open pit, not enough to build something in the Gobi Desert. But there was a nice little open pit. But what, when Robert got his hands on that, it was, where's the rest of the system? And they punched 90 holes into that. And Typhoon did not find this, but they punched 90 holes into the Gobi Desert and they had to go down, it must have been like 500 meters.

It was like two to 500 meters down before they hit the Hugo Deposit that's now becoming a block cave. Like you just think, like the idea of how crazy you have to think to go blindly look and say, we're gonna drill half a kilometer before we're even gonna hit something. It's rare. And it's the same way still then like you look at fill in Argentina. You have an oxide cap, which was one way of looking at it, but then you have this mediocre Sufide port fury that kind of doesn't merit itself.

It was very QB2-esque. But then they go and they drill deep because they're trying to think through the geology and they hit this whole 41 with massive grade and it's game on. And the Phil stock price shows that. So what I know electric is kind of doing is they've come back to the west with a guy who goes, loves exploration, and has built his fortune off of it.

And let's start with Utah Tintic, which took seven years for him to put this package together. Freeport has the land next door, but you have this package where you've had mining historically, like high-grade precious metals here, and there. And with the geologic theories, analysis, and using typhoons, there's a belief that there's potentially a massive port fury at depth.

Now you're gonna have to drill deep. What are the potential issues here? You're below the water table. It could be very hot down there, so you'd need massive ventilation. You'd need, you wanna have as few people down there as possible. But if you found a massive high-grade port fury system in Utah, 60 miles from Bingham Canyon, which is the biggest hole band made hole in the world.

In a world where we wanna have more mining and security of supply, that becomes a very strategic asset. Now the question is, there are three-port fury targets they wanna drill. Do they hit, do they hit on the first go around or do they have to drill this for like a year to understand more controls?

Because typhoon doesn't tell you everything, like the drill informs you and it's very much kind of like, I imagine a drug trial would be like, We'll see. But I think a guy like this who spent seven years putting this land package together, I am really curious to see what he finds there. And then worst case, you have a pile of land outside Provo, Utah, which, thanks to how the Mormons, believe in having large families. It's a very fast-growing place. So worst case, it's a real estate play.

Andrew: No comment, Koala. I think if it goes to real estate play, you might be, But let me ask, and this question is gonna apply to both Santa Cruz, which we haven't talked about. That's the Arizona and Tintic, right?

Like it may be a little more Santa Cruz, but Tintic, as you said, it's 60 miles south of, a big Rio mine. Santa Cruz is in Arizona and I looked within about 150 miles, and there are like 20 other copper projects within 150 miles if I remember correctly.

Koala: 10% of Copper mine in the world, I believe has come from Arizona.

Andrew: So I believe just the first thing as a, you know, generalist who hasn't spent tons of time on mining, I hear, Hey, this guy's got a fantastic background, I get that. But he's going to places in the US like it seems like we would be pretty picked over and think and just going and saying, Hey, this one little spot of land where, you know, a hundred other mines are, I found something that's gonna be revolutionary.

Like not revolutionary, but it's gonna be a great project. And it almost strikes me as I'm just a little incredulous that he could find this kind of diamond in the rough when, you know, 30 other people are looking in the rough right around him or something.

Koala: I think. So Santa Cruz was a very pleasant surprise. It wasn't in the portfolio. In the summer of 21 when I invested. It came in the fall and I think it's a really interesting story because the project was discovered by David Lowell, a legendary geologist, probably 50 years ago. But the surface rights and the subsurface mineral rights got disconnected.

And I think it's a case of really just showing how this guy knows how to do deals and work through the business. Was able to kind of sit through and say, put the package together in a way that, I don't know, like how often does the head of the exploration or the head of copper change at these major mining companies?

It's a nuance to put it all together and say, okay, like this is, this will probably be an underground mine. And also what's very unique here is you look at, there's Santa Cruz, there's the Texaco target and there's a few other blind targets that haven't been drilled because this land hasn't really, it's kind of just been there for 40 years.

And with Typhoon it's like, okay, well we kind of see what the signature of the Santa Cruz deposit is and the Texaco deposit looks similar. And there are a few others on there, like, Arizona Sonora to the north and their park sailor continues to the Santa Cruz property. But if you go and drill out, and there's two or three times more copper there than originally thought, Well, economies of scale just show.

Okay, now we have something that could just be much more interesting. But it's one of those things where you're like, I just can't believe he's the guy who put this all together. And you sit there and you go, Well, also, I kind of get it because it's, it was in a private, it was in his private company.

He's able to fly in and see the real estate guy who has the surface rights, he can talk to the mineral rights guys and talk about it through. And it's just a way that you can, you can move fast, make decisions, and build the relationships, to make things work. And I think it's a huge endorsement, frankly, that Taylor Melvin, who had a long successful career at Freeport has chosen to come work with Robert on this. That is a talented executive and a huge endorsement.

Andrew: That's the new CEO?

Koala: Yep.

Andrew: One of the questions, but we're starting shortly in time, so I'll just lob it up. If you look at his equity package, and you can say it if you know, but I just looked this morning, so I know a 500,000 base salary fine.

Maybe he hits all his bonus targets of 1.5 million, so he's getting about 2 million annually if he's hitting his bonus. But guess what, it's all about the stock. 500,000 options struck at 1175, 700 50,000 RSU like this. A man who is betting on this stock working and working in a big, big way.

And it's mining. So yes, you probably wanna take all the al to the upside because if it doesn't go, like yeah, you'll lose the job. But he's equity incentive and I thought that was, just really interesting. I don't know if you wanna comment on anything else there.

Koala: Look, I think Freeport has the land, adjacent to the Ivanhoe Electric Tintic package.

I think Santa Cruz is right in Free Port's backyard as a Phoenix headquartered company with several mines in Arizona. I think I chose that this guy understands that Santa Cruz is logically a mine and the true potential of Tintic. Yeah, you would want all the optionality in the world.

And I frankly prefer when my CEOs, our incentivized. And in that context, Robert Friedland owns, I don't know if you have it on Bloomberg, Was it 15 to 19.9% of this company?

Andrew: Yeah. It's big.

Koala: And also what you won't see on there, but it was reported by the Financial Times. BHP owns four and a half percent of this company.

Koala: That's a natural acquire if I've ever heard one right there. Just on Friedman. So you mentioned, again, as somebody who's just generalized skeptically, he's got a great background, but you know, generalist in just looking, Oh, you found this needle in the haystack. I hear you on This is a man, he knows how to get deals done.

He's got great relations and stuff, but most of his recent stuff, not all, but most of his stuff has come internationally. And again, I just wonder as a skeptical guy, like, Hey, is this Warren Buffet going into airlines, Right? Everybody goes into, goes into one thing once and they think they found and they, they get crushed.

And did he come into the US yes, he's great internationally, but he came to the US and thought, Oh, I can pick these great spots even though these giant companies have looked all around it? And kind, you know, gonna, end up eating it. If that makes sense.

Koala: You know, it's, it's a risk with exploration. This is, again, the opposite end of the spectrum of the Whitehaven trade or the Glencore trade. It is, where do we fill the pipeline back up? I think my view on this is that I think Santa Cruz, I have not bothered to try to build a preliminary economic assessment if Santa Cruz will get one in the first half of next year.

Yep. but I think it would probably gimme a false sense of confidence because like what, how, what exactly is the underground mining method and how did they design it? But look, I think what's gonna happen there is Santa Cruz. If you use a three 70 copper price, $4 price, I think you're gonna see a NAV, an 8% NAV on that thing that is probably north of $1.5 billion.

Thus, if you can add in, some a resource at Texaco and show scale, I think that's probably where this all shakes out. But the prize is, does he hit on Tintic, because again, 25 to overnight success. But if he proves out Santa Cruz is a mine that should be built, and he shows that Tintic is kind of the missing part of Bingham Canyon.

Then we're just in a world where the questions are gonna be okay. A major mining company will say, I think comes along and says, Okay, we'll take on Tinctic and we'll pay for the privilege of doing it. Because in a world where the pipeline is bare and the cupboard is empty, great projects, we'll get premiums.

And then guess what? I think because he's so incented, he owns so much of this. I don't think these are not the only two projects in the portfolio, and I think there's a world where we'll probably see another project here or there. and that could be a very volatile thing.

If Santa Cruz doesn't work or Tintic comes up dry, that can be volatile. But this is a guy who will continue to go looking for projects and as the fact that he got these two projects. I think he has a very unique deal flow.

Andrew: Just, on financing. Right? So the company has no revenue. They are going to develop mines, right? Guess what? Anybody's followed. Developing mines are expensive and developing mines, particularly in the US is gonna be expensive. 200 plus million on the balance sheet in cash. That's a Q2 balance sheet. We'll see what Q3 looks like. I believe Q2 is at the IP in June. So that has all the IPO proceeds if I'm remembering correctly. Yeah.

So 200 million in the balance sheet, that's not gonna be enough to develop these mines, everything they're talking about. What do you think the financing path looks like here? Because this does become a little bit path dependent, where if they announce good results, the stock goes to 30 and they raise, it's gonna be a lot different than if we're in a little bit global recession, mining comes down, the stock's at six, they haven't announced great results and they have to. So what do you think might the financing path look like here?

Koala: So I think, look, it's obvious. I think if you hit it Tintic, it's lights out in the way we go. So let's set that one to the side like that's a high-quality problem.

I think the reality is, let's say it's we're gonna develop and build Santa Cruz. I think you then have to, get the PEA out. I think we're probably having a conversation in the second half of 23, and the first half of 24, about the development path. Do you let someone buy into the project at a higher valuation because they want the offtake of the cons of the copper path load themselves?

I think you just have, you then work through it, then you do a project Finance. But the reality is, I think, Yeah. Look, I think you get the stock to 18 or 20 bucks, you're in a world where you will see another, you will see equity raise. But the whole thing is you do create value with every, with every passing raise.

And how you use the proceeds. So like I think it's a question of whether it would suck if things don't go great, or if you have to raise money at eight bucks. But Robert has a very good approach to always thinking about not the next raise, but the raise after that when he needs money.

And I'll tell a story from the Ivanhoe mines days because, in 2018 and January, the DRC tried to re-change their mining code, change royalties on cobalt and copper and change all the rules.

And, it really kind of put a damper on the interest in the DRC, particularly for Ivanhoe mines, which at the time was trying to finance building Kamoa-Kakula. It was like, great job guys. I'm trying to build a mine. And you just told everyone you're gonna change the code that's not helping me.

But you then saw him go, Okay, well, like, what's he gonna do like at, at the end of the day, like, it was like, Okay, is he gonna sell the company? Like you've already done a 50% joint venture with a gin on that part of the project. Like, what's the pathway here? And behold[?] like, you wake up in June and he had Seeduc[?] come in for, I believe it was 20% of the company at a premium.

And it's like, all right, like probably didn't wanna do that at 368, if I remember the share price correctly. Probably didn't wanna do it at that price, but he got a premium he got on with it. Here's a guy who looks, it sucks on the day to have like a five, 10% punch from a raise, but here's a guy who's gonna focus on the long term and say, Okay, we just got to get on with it.

Very much if we're not moving, we're dying. So.

Andrew: Everything plays out here? There's gonna be dilution along the way, but you know, right now this isn't investing advice, but the stocks trading at 12. We're not talking about the greatest home run case of all time, but you get kind of like a recently bullish upside case. What is, what are you playing for with IE?

Koala: Look, I really wanna see the Tintic drill results. I see a good result out of TinTic. What's fellows[?] market cap today? $2 billion. I mean it's apples and oranges in some respects, but you kind of can see if you have something compelling, this can be worth I think a couple billion to maybe even 3 billion cause it's the US.

Andrew: And that's just that line?

Koala: Yeah. So I look at the situation like, I think if I got 25, 30 bucks here, I'm not in the size I am today. A high-quality problem, of course. But I look at this and Santa Cruz kind of backstops me here. That gets de-risked, and we learn more about it.

Copper has a positive sentiment again, versus, oh, China's not gonna reopen, short copper. We're in a recession. I think you have a couple of tailwinds there, but I really wanna see, really wanna see Tintic. And I think if I recall correctly, the IPO lockup, I think is like December 24th.

I think just though in general, the folks who invested in this company really wanna see the end of that story in Utah.

Andrew: Makes sense. Cool. Well, Koala, this has been great. We've been running almost an hour and a half and unfortunately, I have lunch plans that I need to go put on some real big boy pants for and get ready to go.

But this has been fantastic. I've learned so much from you over the past couple of years, especially on Coal. I wish I had followed you into the Whitehaven trade, but this has been great. I'm gonna include a link to his Twitter handle, so anybody who wants to follow him and reach out to him on mining Coal, any of these guys can do it, but it's been fantastic and we'll have to do it again shortly hopefully.

Koala: Yeah, if I could just leave everyone with one last thought here. This is a long-duration trade. I know the multiples on these companies don't suggest long durations, but it's not about what the commodity price is tomorrow. I know a few of my peers at Millennium and Citadel follow me, always nice at a dinner to be addressed by your Twitter handle after a few balls of wine.

But the reality is that 99% of us who are not Millennium and Citadel portfolio managers. It's not about tomorrow. It's about what this look like over the next few years. The free cash flow that's generated, the value that can be created, whether that's through buybacks, decapitalizing, maybe you get multiple rewrites, but it's about saying they're knowing that you have these companies and thinking about the next few years, not the next few days.

Andrew: It's always funny when you've got somebody who says, Oh, I see this huge super-cycle coming. Right? And I think oils go to 200 and oil goes from 80 to 79 and they say, "Oh, I need to sell all my energy stocks because the market hasn't priced in this $1 move in energy."

And you're like, did you think, you think oil's going to 200? Do you think you found this super-undervalued company? Like yeah, if oil went from 80 to 20, maybe you need to readjust. I'm going to be late for lunch, go.

Koala: I'll give you the exact one. The exact one for that is, everyone knows I've been long [inaudible] because I think iron ore is a hundred to one 20 for this decade.

I've watched that thing go from 12 to 24, 2 times in the last two years. And people go, "Oh, China Koala, what are you doing?" I'm like, relax. I'm willing to be patient and let the noise be the noise on that one. Like, let it all play out. They're doing the right things. It's one less thing that I don't have to think about or stress about.

Andrew: I respect your diamond hands, Sir. But I'm gonna be late if I don't go, so we're gonna wrap it up here and we'll chat soon. Thanks, buddy. We'll talk soon.

[END]