Sunday, October 23, 2016

Why I held on to Cloudpeak Energy

Please read the disclaimer here: Enjoy the article, bitches!

Whaddup guys, in this article I’ll be discussing an investment I made a long time ago but for some reason didn’t write about. Aight, I’ll be straight with you. The reason I didn’t write about it was because I was a procrastinating asshole at first, and depressed about the investment later when the stock plunged. The stock finally rebounded, and I recently sold about 40% of my investment in Cloudpeak Energy for an approximately 20% return on the dollar-cost averaged purchase price (this return excludes fees and forex gains/losses).

Update on the Greedy Dragon portfolio: Other than selling 300 shares in Cloudpeak Energy, I also bought 90 shares in Skechers after the stock plunged due to missing earnings estimates or something.

The main reasons I held on to Cloudpeak’s stock was because the company had liquidity AND its operations wasn’t hemorrhaging cash. We’ll take a look at the company’s financial position and performance during the 1st quarter of 2016, as that was when the effects of the warm winter could clearly be seen in terms of significantly reduced coal shipments. Cloudpeak had $79.39 million in cash and cash equivalents as at March 31, 2016. The company had a credit facility with a borrowing capacity of $457.1 million, and an accounts receivable securitization program which would have allowed for $21.2 million of borrowing capacity as at March 31, 2016. However, the borrowing capacity under the credit facility is at risk of being reduced if the company’s EBITDA continues to decline. There were no borrowings outstanding under the credit facility and the accounts receivable securitization program as at March 31, 2016.

More important than liquidity, though, is the motherfucking cash flow. I didn’t want my investment in Cloudpeak to do me the same way my horrendous investment in Alpha Natural Resources did me (Alpha declared fucking bankruptcy despite reporting over a billion dollars in cash and short-term investments in the quarter before it filed). For the first quarter of 2016, the company had an adjusted EBITDA of negative $1.3 million. The company’s interest expense was $11.05 million in the first quarter of 2016. There’s no 2 ways about it, the company had a really bad quarter. Management, however, expected coal shipments to increase significantly in the second half of the year. Cloudpeak would barely be out of cash flow positive territory at the low end of 2016 adjusted EBITDA guidance of $75 million, the high end of capex guidance of $35 million, and $41 million in estimated cash interest.

Of course there is a risk that things could be even worse than the guidance. But I don’t think that actual EBITDA will stray far from the guidance range as Cloudpeak has already committed to sell, at fixed prices, approximately 63 million tons of coal in 2016. The company’s guidance for 2016 coal shipments was between 60–65 million tons as at March 31, 2016. Even if customers wanted to reduce their contracted volume, the company would still get some compensation in the form of contract buyouts (as was the case in the second quarter of 2016). As at March 31, 2016, the company has committed to sell 42 million tons of coal in 2017, with 39 million tons being under fixed-price contracts.

So, why didn’t I buy more Cloudpeak when its stock got absolutely destroyed? I mean the fucking stock was trading at barely above a dollar for a bit. I could have set myself up for that illusive “fuck you money” that I’ve been chasing since the time I was watching Lizzie McGuire on the Disney channel way back when. Well, there was too much uncertainty for me at the time. The warm winter in combination with asinine regulations and cheap natural gas had significantly tanked coal demand. I was also overexposed to the natural resource sector. And I got to admit, the losses from my natural resource investments (some paper, some real)  had got me rattled. I had no idea how far coal consumption and the price of coal could fall. Then the hot summer came and the shares of coal companies experienced a nice rebound from their lows. Right now I'm still not sure if the coal industry is finally coming back to life. That’s why I decided to only sell some of my shares in Cloudpeak, and wait on more information before making any more moves.

Another thing I learned from my investment in Cloudpeak is to pay attention to any throughput or transportation agreements that a natural resource company might have. Cloudpeak has significant take-or-pay contracts for rail and terminal capacity which requires it to pay for a minimum quantity of coal to be transported regardless of whether it sells any coal. This could be a problem if the price of coal drops below the cost of producing and transporting the coal, which it did. Cloudpeak has amended its transportation and throughput agreements to mitigate the losses from its logistics segment. Investors analyzing coal companies should also look at whether the company engages in self-bonding. Self-bonding is where a mining company doesn’t need to have any collateral or surety bonds for its reclamation obligations. However, if the company’s self-bonding status is revoked, it may have to turn to the corporate surety market and may have to put up significant collateral to get the surety bonds. I think that Cloudpeak’s management acted prudently by trying to transition the company fully to  third-party surety bonds.

Despite a really shitty start, 2016 appears to be shaping up to be a pretty good year for me. I hope that your investments have been treating you right as well. Anyway, thank you for reading. Take care and stay rational.

Monday, October 3, 2016

Semi-annual (give or take a couple of weeks) performance report for the year ended September 30, 2016

Disclaimer: There may be errors in my calculations. The purpose of this article is to present the performance of my portfolio. This article does not represent advice to buy or sell any stocks. I may, at any time, sell some or all of the stocks that were presented or appeared in this article.

Aight my value investing gangstas, it’s time for the semi-annual performance report for the Greedy Dragon portfolio. Yay! The last time I reported on the performance of the portfolio, I was mired in shit. But most of the shit has been shoveled now. All this time I’ve been hustlin trying to position myself to make that paper, and I hope that it’s finally the time to rake in the fucking money.      

Since the last performance report in April this year, the portfolio increased from Ringgit Malaysia (RM/MYR) 146,468.09 to RM179,518.94, a gain of 22.65%. The portfolio generated a total return of 12.28% since inception about 3 years ago. While the return might appear to be pretty weak, the markets have been terrible the past 3 years. From August 29, 2013 to September 30, 2016, the FTSE Bursa Malaysia KLCI index was negative 3% (this excludes dividends). I bought the first stock for this portfolio on August 29, 2013. I know that a weak market is awesome for value investors to pick up quality stocks on the cheap and set themselves up for a payday down the road. However, the markets weren’t awesome for me as I fucked up quite a bit, and I experienced a significant amount of permanent losses. Also, if you guys remember, I took out some money from the portfolio at the end of the first year. So, the 12.28% return is based on the capital after the RM40,000 withdrawal. The following table presents the current holdings of the Greedy Dragon portfolio as at September 30, 2016:

Purchase price
 Current price
Capital gains
 Cumulative dividends per share*
Total return
Current value of holdings in RM
National Resource Partners*
Average US$41.1 (250 shares)
 $              1.58
Alpha Natural Resources
Average US$1.90  (2,100 shares)
Fuck me
Fuck me
Fuck me
Northern Oil & Gas
Average US$5.09(2,150 shares)

Cloudpeak Energy
Average US$5.08 (700 shares)

Average MYR8.46 (2,500 shares)
MYR 7.50
 MYR       0.24
Oasis petroleum
Average US$7.86 (600 shares)

Average US$4.45 (700 shares)
 $           0.094
US$ 24.93 (60 shares)

Hua Yang
MYR 1.87 (3,000 shares)
 MYR       0.05
Average US$8.5 (450 shares)

Kerry Properties
HKD 21.7 (500 shares)
HKD 25.40
 HKD        0.55


Net portfolio value

Notes to the table

Total return excludes transaction cost & forex gains/losses

The USD/Ringgit exchange rate is taken from Bloomberg (4.1385) as at September 30, 2016.

The HKD/Ringgit exchange rate used was 0.52 which is slightly less than the exchange rate of around 0.53 that I got from Bloomberg today (October 3). Unfortunately I didn’t look up the rate on Bloomberg on September 30 because I was a moron.

The cumulative dividends per share are after taxes and fees
For certain stocks presented in the table, the cumulative dividends per share underestimate the actual cumulative dividends per share I would have received if I bought my entire position from the start instead of building the position over time. This is the case as I calculate cumulative dividends per share by dividing total dividends received by current number of shares.

Banco Santander’s total return is actually a little higher as I opted for shares when they last had a SCRIP dividend.

Natural Resource Partners underwent a 1:10 reverse stock split. The average purchase price and the cumulative dividend per share are adjusted to reflect the reverse stock split. All purchases were made before the reverse split.

My exposure to the natural resource sector is pretty high at around 54%. So, I might trim some of my natural resource positions soon. I know that I’ve been saying it like forever, but I really did reduce some of my natural resource positions. It’s just that I also added back to a position in an ass backwards move.   You might also realize that my table depicting my current holdings no longer looks like a fucking disaster that stretches way out of the page. That’s because I removed all the transactions and only displayed the total number of shares in the brackets next to the purchase price of my holdings. If you want to know the transactions related to each holding please send me an e-mail (I don’t know why you would want to know that, but I suppose that different people have different fetishes). The following table presents the stocks that I sold in the period: 

Purchase price
Price sold
Dividends per share (after taxes)
Total return
First Republic Bank
US$ 46.19 (80 shares)
US$ 0.18
Northern Oil & Gas (only sold 300 shares
Average US$5.72
US$ 5.6
Natural Resource Partners (only sold 175 shares)
Average US$41.1
Average US$20.3

Notes to the table

 Total return excludes transaction cost & forex gains/losses

For certain stocks presented in the table, the dividends per share underestimate the actual dividends per share I would have received if I bought my entire position from the start instead of building the position over time. This is the case as I calculate dividends per share by dividing total dividends received by current number of shares.

This does it for this semi-annual report. May y’all keep stepping to adversity and get closer to the goal of “fuck you money.” Take care and stay rational.