This is my first post. I am a buy-side research analyst looking for a place to hang my hat. I've worked for successful, value-oriented portfolio managers in the past and hopefully this blog will allow me to share my investment thoughts with a wider audience. After recently leaving a start-up hedge fund, I'm optimistic that my research will enable me to find a role as an analyst at a different shop. Consequently, this blog will largely reflect the work I've done on various stocks that I find intriguing.
Here's my first idea -- Sherritt. Trades in Canada under the Bloomberg ticker "S CN". Stock has gotten killed over the past two months and currently trades at C$6.50. Sherritt is a diversified natural resources company that operates in Canada, Cuba and Madagascar. The company has four principal businesses: thermal coal, a vertically integrated nickel/cobalt metals operation, upsteam oil and gas operations, and power generation. This stock is extremely cheap on a sum of the parts basis.
As the mining industry continues to consolidate, Sherritt's assets are very difficult to replicate and will most likely be attractive to a foreign buyer. Sherritt will spend the majority of their ample free cash flow on expanding the Moa mine in Cuba and building out the Ambatovy mine in Madagascar. The stock market is failing to realize that Sherritt will soon transform from a "value" story to a "growth" story. Their metals operation will increase by 230% over the next three years. This type of growth profile does not exist in the mid-cap mining universe. When these projects are complete, Sherritt will emerge as one of the world's premier low-cost nickel and cobalt producers.
When the Moa expansion and Ambatovy projects are finished, Sherritt will produce 110 million pounds of nickel per year. If one were to assume a $6/pound price and a cash cost of $1.50/pound, Sherritt would net a spread of $4.50/pound. Multiplying this spread by 110 million pounds yields roughly $500 million of cash flow per year.
Besides supplying thermal coal to major investment grade utilities in western Canada, Sherritt is also in a position to export this coal to other parts of the world. In addition, Sherritt possesses 12 billion tons of near-surface coal reserves underneath the Canadian oil sands and substantial oil reserves along the Cuban coastline. Yet, the ability of the assets to produce cash flow is being singificantly undervalued by the stock market. The stock is currently trading around 2.5x '09 ev/ebitda and 5x '09 eps! Surely, a discount should be given to stocks with exposure to Cuba but I truly believe the assets alone more than justify the current enterprise value.
Sherritt has obtained financing from Sumitomo and Korea Resources so that is not an issue. Besides the general panic in the stock market, some are concerned that one of the directors recently sold stock. Clearly, nobody likes insider selling but I have a high degree of confidence in Sherritt CEO Jowdat Waheed. He is a disciplined allocator of capital and would not undertake some of these expansion projects unless the return on capital was significantly greater than the cost of capital. If it wasn't for the capital requirements needed to complete some of their expansion projects, I'm sure Sherritt would aggressively buy back their own stock. Until then, investors get a chance to own a company with world-class assets trading below liquidation value.
