Saturday, November 26, 2011


During the past week I added Orion to our porfolio. It's a Finnish pharmaceuticals and diagnostics company that derives most of its sales from Europe. Orion pays out most of its profits as dividends. From 2011 it is expected to pay dividend which gives approximately 8,5% yield at current stock price (14,27 euros). I continuously screen Finnish companies and currently Orion is top on that list. The reasons for that are:
  • Good past growth
  • Good margins
  • Excellent ROA, ROI and ROE
  • High dividend yield
  • Moderate valuation (currently P/E 2011 below 10)

Orion has demonstrated steady growth during last years and had net sales of 849,9 EUR million in 2010. Orions return on equity is excellent. It has been over 30% between 2006 and 2010 reaching 40,7% in 2010 after taxes. Most of company´s net sales comes from two segments
  • Patent protected "proprietary products" 44%
  • Specialty products 35%
As with all other companies in the pharmaceuticals sector expiry of patents is topical for Orion too. The most important Parkinson's drug patents and product protections will expire in 2012-2013. These drugs contributed 252,7 EUR million to the top line in 2010. I believe patent expirations are already discounted in the stock price and explain the low valuations.

Sunday, November 20, 2011

Updated Analysis on Talvivaara

Talvivaara Mining Company Plc. (LSE: TALV; Nasdaq OMX Helsinki: TLV1V) has an open-pit Nickel mine in Sotkamo, Finland. The project leverages one of the largest known sulphide nickel resources in Europe. Talvivaara has 1121 million tonnes of mineral resources in ”measured” and ”indicated” categories and additional 429 tonnes in category ”inferred” (no reserves). Mine life is expected to be close to 50 years. Talvivaara uses a process called "bioheapleaching" to extract the metals from ore.

Production at the mine started in October 2008 and production ramp up is still ongoing. The annual production target for 2011 has been cut multiple times and is now iterated to be minimum 16,000 tonnes of Nickel (it was supposed to be 30,000 tonnes). In the Talvivaara capital markets day 2011 (17th of November) the company estimated the 2012 production to be between 25,000 and 30,000 tonnes of Nickel.

At full planned capacity (50,000 tpa of Nickel) the mine will also produce approximately 90,000 tpa of zinc, 15,000 tpa of copper and 1,800 tpa of cobalt. According to Talvivaara CMD 2011 presentation: "All processes and equipment exist for the 50,000t production level, and have been proven to be capable of running at full capacity "

Also uranium can be extracted profitably from the ore as by-product. Talvivaara has already made an agreement with Cameco regarding building a uranium extraction plant and delivering uranium. The current environmental permit is for 30,000 tonne annual capacity and does not cover uranium extraction.

Back in February I published An Analysis of Talvivaara Mining Company which needs to be updated to reflect the recent guidance. Talvivaara is now experiencing serious headwind pushing stock price to all time lows:
• production problems
• environmental problems leading to bad press, investigation by police and public pressure from Minister of Environment (Ville Niinist√∂ – the chairman of the Green party)
• nickel price has been falling significantly since February (from $28000 USD/tonne used in my first analysis to $18000 USD/tonne used in this update)
• overall economic uncertainty

Valuation of Talvivaara Mining Company

For this update I used the following metal prices:
• Nickel $18000 USD / metric tonne
• Copper $7500 USD / metric tonne
• Cobalt $28500 USD / metric tonne
• Zinc EUR 350 / t + USD 268 / t (Nyrstar 1.25Mt streaming agreement)
• Uranium (Yellow Cake) 55 USD/lb (82 EUR/kg)

Treatment charges are estimated as follows:
• Nickel: 3000 USD/t (2012), 2500 USD/t (2013-2014), 2000 USD/t (2015)
• Copper: 25% treatment charge
• Cobalt: 44% treatment charge

EUR/USD = 1,35

Table 1. Value of production (30ktpa Nickel)
*) Streaming contract.

Table 2. Value of production (50ktpa Nickel)

*) Streaming contract.

Table 3. Value of potential uranium production

The following calculation assumes:
• Operational costs for 2012 (and Nickel production level 30ktpa in general): 250 MEUR
• Operational costs for production level 50ktpa of Nickel: 375 MEUR (Assuming basically 90% of OPEX being tied to the level of production)
• Depreciation etc. 2012: 45 MEUR and 50 MEUR from thereof
• Finance costs: 30 MEUR per year
• Corporate tax level 26%
• Talvivaara stock quote in Helsinki 18.11.2011: 2,42 EUR
• Number of Stocks (millions): 250 (2012), 263 (2013-2014), 290 (2015)
• Attributable to owners: 84%
• Uranium extraction begins late 2012 and it takes until end of 2013 to repay Uranium extraction facility construction ”loan” to Cameco. 

Table 4. Estimated profit levels and P/E

Talvivaara stock price appears to already discount the 30,000 tpa production level (est. 2013). Uranium extraction, if permitted by authorities, will have significant impact on bottom line (est. 2014). Further upside comes from operating at full capacity of 50,000tpa (est. 2015; if permitted by authorities) and ”operation overlord” (expansion to 100,000tpa production). Talvivaara states that they have also excellent near-mine exploration potential especially between Kolmisoppi and Kuusilampi deposits.

There is nothing Talvivaara can do about Nickel prices. There is, however, a lot it can do about environmental problems and bad press. If not handled properly these might become blocking points for uranium extraction and ramp up to full capacity (not to mention production expansion / mine area expansion).

Full disclosure: Long Talvivaara at the time of writing.

MEUR = million euros
tonne (t) = metric ton = 1000 kilograms
kt = kilotonne = 1000 tonnes
Mt = Megatonne = Million tonnestpa = tonnes per annum


Friday, November 11, 2011

Interesting article about rare earth companies

Streetwise Reports interviewed recently John Kaiser the editor of Kaiser Research Online about rare earth companies. He singles out several companies that have a chance to be producing towards end of this decade (2016-2017) by stating: “The world does not need dozens and dozens of these deposits, however, which is why I think the race has already pretty much been wrapped up by companies Quest, Rare Element Resources, Tasman Metals and Avalon Rare Metals..”. He talks about companies with heavy rare earths prospects [Please check my earlier post about rare earths on why some rare earth elements are more rare than others].
His estimate is that Tasman’s Norra Karr deposit could take care of Europe’s needs for 50+ years. The problem with Norra Karr is that it “involves a mineral that has never been commercially exploited. So a key milestone is the publication of a preliminary economic assessment based on a bench scale-established metallurgical flow sheet that establishes the recoveries and the associated energy and reagent costs.”

Note that the following companies mentioned in the interview are sponsors of The Critical Metals Report: Commerce Resources, Quest Rare Minerals, Tasman Metals, Rare Element Resources. Note also that John Kaiser stated that he personally and/or his family own shares of the following companies mentioned in this interview: Quest Rare Minerals and Tasman Metals.
The author of this blog also owns shares in Tasman Metals at the time of writing (11/11/11). Please also note that investment into exploration stage companies is highly risky.

Friday, November 4, 2011

Exposure to Emerging Markets via an ETF

A while ago I decided to start a new position in Vanguard MSCI Emerging Markets ETF (NYSE: VWO). The fund holds 540 equity components mainly from Asia (55%) and Latin America (21%). There are mostly large cap corporations scattered over great many industries. Banks (18%) are the largest sector, which is typical to emerging markets.

Country exposure: China (16%), South Korea (15%), Brazil (14%), Taiwan (11%), India (7%), South Africa (7%), Russia 6%), Mexico (4%) and a whole bunch of countries at 3% or below. The largest holdings are Petroleo Brasileiro (2,11%+1,75%), Samsung (2,78%),  and Gazprom (2%) at the time of writing.
In my previous post I discussed direct stock holdings vs. owning an ETF. This particular ETF meets my general conditions for a good ETF:
  • seems to directly own the stocks as far as I can tell (as opposed to playing with swap-contracts)
  • low expense ratio (0,22%; source XTF)
  • average ask/bid ratio of just 0,03% (source: XTF)
  • XTF ranks the fund in 78th percentile with regards to structural integrity (takes into account many things such as previously mentioned metrics as well as tracking error etc.)
Vanguard is a big player. This one ETF alone has market capitalization of $46,2 billion USD.