Dave Iben is the Chief Investment Officer and Lead Portfolio Manager of Kopernik Global Investors. He had the chance to interview him in June 2019 in Munich.
In a small series between the years we are sharing this transcript and some transcript of evergreen interviews now.
We have discussed the following topics:
Dave Iben’s way into Value Investing
[00:00:22] Tilman Versch: That’s a long time.
[00:00:23] Dave Iben: Yeah. People did not like stocks, they didn’t like bonds. Everything was a value then. I worked for a firm that ran its own money, so they didn’t really care about value growth. But it was instilled in me that that’s what investing was. You figured out what a company was worth, and you paid less than it was worth.
And later on, when the consultants came in, they said, “Your value works for me.” Certainly, it does seem to be in my DNA. I don’t like overpaying.
Evolution of Dave Iben’s style of Value Investing
[00:00:53] Tilman Versch: That’s good. So how did the style of value investing change in these 38 years?
[00:01:00] Dave Iben: Well, I think the basics probably have not changed, but I think over time I hopefully have evolved in terms of how we look at enterprise value and how we define that and looking at different metrics. It used to be fairly simple, let’s discount dividends, or discount earnings later.
But as things went on, it became clear that maybe asset-heavy businesses should be looked at under asset ratios like book value or replacement value or asset-light businesses should be looked at more on their cash flow and cash flow ability. So a lot of different many metrics and also industry-specific metrics.
[00:01:45] Tilman Versch: What would you tell a young value investor when he comes into the industry or starts investing for himself? What would be the first three steps do?
[00:01:54] Dave Iben: Three steps? Good question. Yeah, I think now would be an interesting time to come in because it’s been 12 years, I think since values did well. Our kind of value has been better, but it’s been pretty much six tough years, even for our style. So if somebody believes in value now, I think they’ve got a lot of potential as a value investor.
I think now would be an interesting time to come in because it’s been 12 years, I think since value’s done well. Our kind of value has been better, but it’s been pretty much six tough years, even for our style. So if somebody believes in value now, I think they’ve got a lot of potential as a value investor.
But I think people should read all the great value investors, read the great growth investors, and invest their own money and see how they feel and see how they’re wired. And for me, I like value because if you’ve done your homework and you bought something below what it’s worth then it drops more.
It’s easier to have conviction and increase the position, whereas, if you’ve bought something on momentum or you bought things on speculation or you bought things based on a scenario of a very optimistic future, it’s hard to keep your nerve when life disappoints you. So value works for me, but certainly, it’s less exciting at cocktail parties.
[00:03:06] Tilman Versch: How would you describe your strategy?
[00:03:10] Dave Iben: Our strategy, I would value is a prerequisite. It’s not even a philosophy. Our strategy is to spend all our time appraising businesses, deciding what we want to pay for and looking for a discount, and adjusting the discount we want based on where the country’s company is located, geopolitical risk, balance sheet risk, management risk, obsolescence risk, and then buying things when they’re below that.
Our strategy, I would value is a prerequisite. It’s not even a philosophy. Our strategy is to spend all our time appraising businesses, deciding what we want to pay for and looking for a discount and adjusting the discount we want based on where the country’s company is located, geopolitical risk, balance sheet risk, management risk, obsolescence risk, and then buying things when they’re below that.
Now, buying good assets less than they’re worth usually requires that you do something unpopular. Usually, it’s because people don’t like the industry or they don’t like the country, or they don’t like the stock movement, or you name it. So often it means being quite contrary, which we’re comfortable with.
[00:04:07] Tilman Versch: And what kind of unloved sectors are you currently fishing?
[00:04:11] Dave Iben: Well, now, like 1999, there are things that are loved and things that are hated. And the things that are loved are very, very expensive, which makes it all the more exciting. And the other things are cheap and very attractive. In ’99, it was an old economy, bricks, and mortar, small-cap.
Now, people tend to not like emerging markets, they tend to not like cyclicality, they tend to not like hard assets and that sort of thing, which has led us to a lot of emerging markets. We’re getting growth at a cheap price and a lot of tangible assets that are selling way below what we view. They could be replaced.
[00:04:56] Tilman Versch: And what kind of industries for instance?
[00:04:59] Dave Iben: Our biggest holding right now is gold miners. We like gold for a lot of reasons, but even if one didn’t like gold, over the last decade, gold’s gone from about 1300 to about 1300. But the companies that own gold underground have gone down by 85%. So you get gold at a massive discount if you’re willing to buy it on the stock market. And so that’s our biggest holding. And we see some downside protection because they’re trading below liquidation value, and we see massive optionality if gold goes to what we think is a more appropriate price.
[00:05:39] Tilman Versch: What else do you like?
[00:05:41] Dave Iben: We similarly like uranium. Uranium is a commodity that people don’t like because it’s radioactive, but they do like it because there’s no carbon footprint, there is no CO2 or greenhouse gas, and there’s also no pollution. So it’s got strengths and weaknesses like a lot of things. People got very excited about it.
A couple of dozen years ago, the price ran up to $137 a pound. It then fell to $18 and now it’s around $24. At these prices, nobody’s opening mines. People are shutting mine down. Japan’s reopening its nuclear reactors. You’ve had the U.S. government stop selling uranium, has had the Russian government stop selling uranium.
You said Cameco shut down the best mine in history. You’ve had investment funds start up just to own uranium. People can argue about the right price for uranium whether it’s $40 or $60 or $80. But $24, we’re certain, is not a long-run sustainable price. We see a lot of upsides without any positive changes in fundamentals.
It just meets the needs of the existing reactors. And incidentally, China is building reactors a lot faster than the plans for Germany or other countries to shut reactors down. So there should be growing as well. But that doesn’t even need to happen.
Hydroelectric power stations
[00:07:12] Tilman Versch: You also like dams. I’ve heard.
[00:07:14] Dave Iben: Yeah, the dam business. But we also like the fact that we think whatever change is happening in the world, electricity is not one of those things that are threatened. People will still want air conditioning; they’ll still want to heat. And they may even want it to run their cars increasingly.
And then the electricity that’s preferable is the electricity that’s cheapest, that’s cleanest, that doesn’t have the CO2 footprints and doesn’t have the pollution. So hydroelectric power, it’s a wonderful source of cheap, clean electricity. And there are only so many places you can build dams. There are not that many rivers that you can do that with.
And once you’ve done it, you can’t really put another one anywhere nearby. So you have a monopoly of cheap, clean power. If it costs $2500 to build something for a kilowatt of capacity, theoretically the market should value that, or at least that price maybe at higher prices. But because people are afraid of emerging markets right now, if we go to Brazil and Russia and places like that, we can buy things at two-thirds off.
Once again, if we’re patient, there’s a chance of doubling or even tripling our money. So we very much like cheap, clean power that’s trading way below the price of replacement.
Finding good companies and capital allocators
[00:08:45] Tilman Versch: And how do you find good companies and good capital allocators in those sectors like uranium, gold, or hydro energy?
[00:08:54] Dave Iben: You know, one of the knocks with gold is that they’re notoriously bad at capital allocation, but we do different things. One, we try to buy it way too cheap. So even if management makes a few mistakes, we’re likely to be okay. But we also buy some of the better management teams and we buy the largest resources, and we diversify.
We diversify against different management teams, different countries, different chemicals, different geology, you name it. So that helps. I think with the uranium, they have allocated the capital a lot better, although they’re far from perfect, they’re better. The utility space, whether it’s the hydroelectric dams you mentioned or nuclear power in France we have on that and we found other utilities.
They’re not tremendous capital allocation. They tend to be run with a lot of government initiatives. So in France, they’re forced to underprice electricity, to make the customer happy. And Korea, they’re forced under pressure to make the industry happy. And Brazil, they were forced to lose money and now they’re not. So the stocks went up quite a bit.
In Russia, they’re allowed to make a pretty good return, but then they’re forced to raise capital at an appropriate price and build a dam. So we get this, and we have to give that much back through politics, but we’re paying a small amount. So even after all the problems we’re getting, we think good return prospects, very good return prospects.
Uranium and gold sector companies
[00:10:39] Tilman Versch: Can you name some good and interesting companies in the fields? And interesting companies, for you.
[00:10:45] Dave Iben: In that field?
[00:10: 46] Tilman Versch: Yeah, in uranium and gold for instance.
[00:10:48] Dave Iben: Oh, certainly, uranium, the two biggest in the world are Cameco. That’s a Canadian company, is to be owned by the Canadian government, and they’re pretty diversified. They have some of the best minds in the world, well run, we think and Kazatomprom, which was also owned by the government, and they have just recently sold off some of that and Kazakhstan still owns a lot of it, but now they’re the biggest in the world now.
And so they’ve increased a lot of supply. They’re very profitable, they make a lot of money. So those are the two that most people will get comfortable with. And then there are companies that have good prospects, but they don’t have mine yet. NexGen is a company, whose stocks become very, very cheap, but they don’t have a reserve yet. They have resources of maybe £300 million, which is theoretically where many, many, many times above the stock price.
Another one is Fusion, which is located right next to NexGen. Also huge optionality to the upside. Yeah, because of the gold industry we have a sort of two-pronged process. We are arguably the best company in the business. Its name is Newcrest, and it’s in Australia. One of the other participants talk to you about it today, but it’s one of the largest. It’s got great mines in Australia and in Papua New Guinea. It’s got three to four decades’ worth of reserve.
Now, gold, it’s both a good and a bad thing that people aren’t making it anymore, they’re not finding it anymore. It’s hard to find. So owning the reserves is a very positive thing. So they own a lot of gold and they’ve actually allocated a couple of pretty well. So we’re impressed with management, and we’re impressed with the reserves.
So that’s sort of our anchor holding. We used to own a couple of the other big ones, but more recently we’ve found some great opportunities and companies that are small, but they own big reserves. In Alaska, we have Nova Gold, and we have Northern Dynasty, both of which don’t have mines running yet, but they have massive amounts of gold or are theoretically worth way more than they’re selling it. We have Seabridge in Canada.
It’s very similar, massive amounts of gold, no mine yet. And we’ve got a hodgepodge of other companies around the world. And so some downside, massive upside as things go, as we expect they might.
[00:13:47] Tilman Versch: Thank you very much for the first part of our interview. I’m looking forward to the second part where we discuss Global Focus. Thank you.
[00:13:55] Dave Iben: All right. Thank you.
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