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Why Optimism Regarding Future Small-Cap Returns May Be Misplaced

January 9, 2024 in Best Ideas Conference, Letters

This article is authored by MOI Global instructor Brad Hathaway, managing partner at Far View Capital Management, based in Aspen, Colorado.

Brad is an instructor at Best Ideas 2024.

Investors in small capitalization stocks (small caps) are hoping that their suffering is finally ending. For the past several years, small cap indices have significantly underperformed large-cap indices as overall market performance has been increasingly driven by a few massive companies.

The Russell 2000, a US small cap index, has declined over 5% in 2023 and generated a +17% five-year return; a substantial gap to the 10% gain in 2023 and +69% five-year return generated by the large cap S&P 500. European small cap indices have also been weak with the MSCI Europe Small Cap declining 6% in 2023 and generating an +8% five-year return (in USD).[i]

As a result of this significant underperformance, investors have begun expecting mean reversion combined with low valuations to drive outperformance for small-caps. In the past month, I have seen headlines like “Small Cap Funds Are More Promising Than They Have Been in Years”; “The Case for US Small-Cap Stocks”; “Big Value Available in Small Cap Stocks”.[ii] This optimism has also been apparent in conversations I have had as many investors I respect are excited for the opportunity in small-caps. However, even though most of my investing career has been focused on small caps, I think blanket optimism for smaller stocks is dangerous. Here are three reasons why I think it is a mistake to invest blindly in small caps:

Pervasive Adverse Selection

The burdens (regulatory oversight, competitive disclosures, quarterly reporting) often outweigh the benefits of being public for small companies. As a board member of a small, publicly-listed company, I have seen these challenges firsthand.

Because of the unattractiveness of public markets, combined with significant availability of private capital, early-stage companies are going public later in their maturity cycle and small companies are going private more often. For example, the number of US-listed public companies has fallen over 50% from >8,000 in 1996 to 3,700 in 2023.[iii] As a result of these trends, the small companies that remain public are often those that do not have another option.

In many cases, if a public company has remained a small cap for a long time, then it is reasonable to assume some fundamental flaw in the business that has prevented it from successfully scaling to a larger size. Simple compounding suggests that a good small company should eventually graduate from being a small cap.

Because of this adverse selection, I am highly skeptical of any long-tenured small-cap unless I deeply understand why it is a public company and why its future will be dramatically different from the past (new management, new product, industry change etc.).

Inferior Businesses and Management Teams

It should not be surprising that smaller companies are generally weaker than their larger peers. As an example, at the end of 2022, 40% of the companies in the Russell 2000 were unprofitable and the S&P 500 has historically enjoyed double the profit margins of the S&P 600 (smaller cap).[iv]

Smaller businesses are also more fragile. A $5mln unforeseen expense is a much larger problem for a company with $25mln in cash flow than it would be for most S&P 500 constituents. Compounding this impact from unforeseen expenses, smaller companies also have fewer attractive financing options during periods of duress. As a result, smaller companies face greater likelihood of a one-off event forcing a dilutive financing that materially impacts shareholder value.

Smaller companies also frequently have weaker management teams. As ambitious people, it should not be surprising that CEOs tend to be higher quality at larger companies with more pay and greater resources.

Furthermore, smaller companies often suffer from a lack of management depth, leaving them far too reliant on one or two key executives. The reliance on key personnel materially increases the risk of smaller public companies as outside investors will not receive any advance warning of their departure. Executive turnover can remove critical knowledge and irreplaceable skills, seriously wounding a small business.

Unreliable Price Discovery

Active investment depends on finding undervalued companies with the belief that market participants will eventually recognize and correct that undervaluation. However, recent trends have damaged the price discovery process in small caps.

The increasing prevalence of passive index funds means that a large portion of a company’s ownership is not comprised of investors who have an opinion on a company’s fair value. At the end of 2022, passively managed strategies had increased to 46% of the US equity market, compared to 22% at the end of 2012. Furthermore, actively managed mutual funds have experienced $2.3 trillion of outflows from 2013 to 2022.[v]

Companies with high passive ownership have fewer independent analysts assessing their value. Therefore, their share prices are more influenced by macro factors including investor risk tolerance, sector fund flows, and index inclusion. As a result, individual company share prices can often be buffeted by factors well outside of their control and any mispricing can take longer to correct. Small caps have been heavily impacted by these trends as they have the largest percentage of the company owned by passive investors.[vi]

In small cap, this price discovery challenge has been exacerbated by the decline of sell-side research. As trading commissions have continued to decline, investment banks have invested fewer resources in quality research, especially for smaller companies with low trading liquidity. As a result, there are fewer sell-side analysts to help investors appropriately value small companies.

As a result of this lack of price discovery, my experience is that small caps generate long periods of underperformance followed (hopefully) by massive outperformance over a very short time. This persistent negative feedback causes significant discomfort for most investors, even when their small cap investments end up generating strong returns.

While carefully chosen small caps provide the potential for substantial returns, I believe it is critical to remember the structural headwinds that make this asset class difficult to invest in. A superficial approach to small cap investing is likely to generate a portfolio filled with subpar companies who remain undervalued longer than most investors are willing to wait.

[i] Data from Bloomberg 10/25/2018-10/25/2023; 12/30/22-10/25/23
[ii] Barrons, 10/6/2023, https://www.barrons.com/articles/small-cap-funds-buy-3f836365; BNP Paribas 9/29/23-
https://viewpoint.bnpparibas-am.com/the-case-for-us-small-cap-stocks/; ETFTrends.com 10/19/23-
https://www.etftrends.com/etf-building-blocks-channel/big-value-available-small-cap-stocks/
[iii] https://www.cnn.com/2023/06/09/investing/premarket-stocks-trading/index.html;
https://www.yardeni.com/pub/sprevearnmar.pdf
[iv] https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/market-updates/on-theminds-of-investors/is-there-an-opportunity-in-small-caps/
[v] https://www.ici.org/system/files/2023-05/2023-factbook.pdf; p. 22; 48
[vi] https://www.etf.com/sections/features-and-news/passive-funds-ownership-us-stockssoars#:~:text=The%20report%20noted%20that%20stocks,midcap%2C%20value%20and%20dividend%20funds.

If You Could Pick Twenty Stocks for Twenty Years, Which Would You Pick?

January 9, 2024 in Best Ideas Conference, Letters

This article is authored by MOI Global instructor Bogumil Baranowski, founding partner at Sicart Associates, based in New York.

Bogumil is an instructor at Best Ideas 2024.

Beyond temperament, investing is a lot about filters and mental models. A question I pondered this year would be a good example — if you could pick 20 stocks to hold for 20 years, what would you pick? You might think of the big and older brands and well-established businesses that stood the test of time because they might still be around in 20 years. It’s an intriguing strategy, but it is not exactly the question I had in mind. Let me explain.

A Mysterious Story of an Old Portfolio

I regularly review the accounts I manage, but recently, something really stood out. A smaller subset of stocks did all the heavy lifting, especially when I looked back at the last 5-10 or even 20 years.

As much as most accounts have similarities, there is one that stands out from one particular perspective. It’s an account where I did less selling and more holding due to the client’s preference. I let the proverbial winners run. The phenomenon I noticed was even more visible there since the account saw a rise in position sizes in about 20 holdings out of 50 or so. It’s no surprise that some didn’t keep up with the rest, too.

20 stocks is an interesting count since it’s also the number of holdings where most of the individual stock risk gets diversified away. Studies show that for large caps, the number is 15, and for small caps, 26. A 20-stock portfolio is also concentrated enough that each holding has enough weight to matter, and make a hopefully positive contribution.

Infinite Horizon, Finite Assets

An infinite investment horizon is usually the preferred time frame for the clients I am privileged to serve. The last thing they ever want to risk is losing everything and starting from scratch again. At the same time, they would like to see their wealth grow at a respectable rate over time.

This infinite investment horizon faces a serious challenge. The assets we invest in are finite. Businesses don’t last forever; even if they survive longer than average, their glory years are counted.

How finite are their lives? Studies show that, on average, successful companies have about 20 years at their peak. As much as the big-picture investment horizon is infinite, the preferred holding period for many stocks might be as much or as little as two decades then.

Who Can Wait That Long?

A year ago, I wrote an essay about a stock for a grandchild. I explained how it’s someone who can wait that long for the investment to fully play out. It’s not the only candidate for this kind of investing, though. More broadly defined, it’s the future being. A grandchild, a nephew, a niece — yes, of course, but it can be you, the future self.

Anyone who experiences sudden wealth or wants to put their nest egg to work for the long run can think of a 20-year investment horizon and choose investments accordingly. It allows them to focus on everything else: work, career, and new ventures, while a certain portion of the capital continues to grow with that 20-year horizon.

What Kind of a Stock Deserves a 20-Year Wait?

Big brands and big well-established businesses of today may well be around 20 years from now. U.S. Steel is still with us over a century later. It was once the first billion-dollar company, but a quick math will reveal that it wasn’t necessarily a good place to grow or even preserve wealth.

I emphasize the word deserve. I’m looking for a business that will use those 20 years to truly impress us. It has the potential to grow many times over, expand margins, generate cash flows, and, most of all, reinvest back in the business at respectable rates.

It needs long-term thinkers at the helm and a long runway ahead so that time works in our favor. It has to be already publicly traded and with enough history to prove that it has a winning formula and favorable odds of future success.

Why Wait 20 Years?

The power of compounding becomes visible when we wait. With respectable returns and a sufficiently long timeframe, even smaller sums are bound to grow to meaningful amounts.

If you look out 20 years, it’s easier to capture those 10x-100x stocks that many studies have researched before. Great companies become even bigger and better, but they need time, and not just a few quarters, but decades.

Finally, the 20-year time frame allows us to have a more relaxed attitude to any short-term market fluctuations, economic cycles, recessions, panics, and more. We keep asking if it’s something that matters if we are genuinely willing to wait that long.

Conclusion

20 stocks for 20 years is a thought experiment, a mental model, a helpful filter that I’ve been pondering for a while now. I notice how the moment you raise the bar and focus, the quality of the research and investment process rises, too. It’s also worth noting that with this approach, the competition for ideas might be slimmer than for a 3-5-year horizon and even more so than for 1-year or 1-quarter stock flipping contests.

I don’t imply here to pick 20 stocks and forget them; I think the world is subject to too much change to do that. Those holdings will require care and attention. Yet, if we intentionally look for those 20-year stocks, we are bound to come across some true long-term winners.

There will be lemons, there always are, but looking for stocks that deserve the wait for investors that are in a position to wait might be just the right mental model worth considering, especially if you are playing the long game, maybe even an infinite game.

The only immediate question that remains is, what’s a good example of such a stock?

Best Ideas 2024 Preview: Pharma Supplier Sartorius Stedim Biotech

January 7, 2024 in Best Ideas Conference, Letters

This article is authored by MOI Global instructor Frank Fischer, CEO and CIO of Shareholder Value Management AG, based in Frankfurt, Germany.

Frank is an instructor at Best Ideas 2024.

The approach is familiar from the times of the gold rush in California or Alaska: only a few of the gold prospectors were really successful in the end and an even smaller number became really rich. However, those who sold the equipment to the gold seekers – whether shovels or buckets – reliably earned good money and achieved considerable prosperity through steady yields without straining their luck.

Sartorius Stedim Biotech (France: DIM) belongs to the category of bucket and shovel sellers: it is an international provider of products and services that enable biopharmaceutical manufacturers to develop and manufacture medicines. The company focuses on single-use technologies and value-added services.

Biotechnology is a long-term trend for the future – but only a few companies are really taking off to a flying start with their new pharmaceutical products. The risks in this sector are therefore very high. On the other hand, the risks for producers of the necessary equipment can be assessed much better. For them, the success of product developments plays only a subordinate role. It is precisely in this category that Sartorius Stedim Biotech falls with its high-quality single-use technologies, without which no production in biotechnology can be successfully set up.

To understand Sartorius Stedim Biotech’s business model, we need to take a quick look at the drug development processes. Historically, drugs have been made by chemical synthesis, and the result has simply been molecules such as aspirin. These drugs act systemically, i.e. they act over the whole organism to achieve their goal. Undesirable side effects are inevitable. To stay with the example of aspirin: You fight the pain but risk a strain on the stomach mucous membranes.

For producers, the approach is fraught with risks. Many new drug candidates fail during clinical trials because, for example, the side effects are too harsh.

The next generation of drug production

In contrast to synthesis, fermentation can be used to produce much more complex molecular compounds. The advantage is that the active ingredient can be targeted much more specifically to the clinical picture, which means that higher dosages are possible. To put it simply, the core of fermentation is genetically modified cells that expel the active ingredient (i.e. the desired active ingredient) as part of the process.

This process has revolutionized drug manufacturing. The first significant successes were achieved in the biotechnological production of insulin in the mid-1990s. Instead of extracting the drug from the pancreas of cattle and pigs, an optimized E.coli bacterial culture has taken over the production in eight-meter-high fermenters with a capacity of 16,000 liters. These had to be cleaned after each production process. This was expensive and labor-intensive.

And that’s where Sartorius comes in. This is because Sartorius produces so-called single-use containers, in which fermentation can take place. This has three advantages: the production process is cheaper, more flexible and even faster.

Single-use container Sartorius Stedim Biotech

The older steel-tank bioreactors had a volume of up to 20,000 liters. Such sizes may be useful for the production of so-called blockbuster drugs such as insulin. But the requirements are changing. Today, an increasing number of small and medium-sized biotechnology companies are developing more and more specific biologics for the different subtypes of diseases. Due to the increasing individualization of therapies, the addressable group of patients is getting smaller and smaller. As a result, the big cauldrons of the “blockbuster” generation are becoming less and less of an option. Instead, small containers, such as the single-use containers with a capacity of up to 5,000 litres, are an advantage.

There is no question that Sartorius CEO Joachim Kreuzburg played a decisive role in this development. Until entering the new segment of single-use containers, Sartorius was primarily active in the field of precision scales. Kreuzburg is a salaried CEO, but he also owns small shares in the company. The ownership structure is about to undergo a major change. Until now, the family’s shares have been held by a lawyer as administrator of the last will and testament of Horst Sartorius, the grandson of the company’s founder. After that, these shares will pass into the hands of the family. Since it is more than 50 percent, it will have a greater significance. It is then quite possible that Sartorius will be taken over by a competitor such as Thermofisher from the USA.

Natural oligopoly protects against new competitors

The bioprocessing market has historically grown at a rate of 12 percent per year. Currently, the growth rate has fallen to just 10 percent. However, many experts believe that the market will return to its historical growth rate.

At the same time, the barriers to market entry in this innovative business area are very high – and protect the existing suppliers in a kind of natural oligopoly. The most important factor is the approval of new drugs. When new drugs come onto the market, manufacturers also look at the production processes from phase III onwards in the development process at the latest. This is where the different filters and membranes come into play. The production method is approved by the regulatory authority and is not changed after a successful approval.

As a rule, these processes are then protected and completely fixed for periods of 10 to 12 years. And this is exactly where pharmaceutical manufacturers rely on the well-known names in the industry such as Sartorius, Thermofisher or Danaher.

“One stop shop” gives pricing power

If a new supplier, for example in the field of filters, has an innovative product, the probability that the major drug manufacturers will use such a product is still low, because there are still many other aids missing. In this respect, the few producers who have been able to position themselves on the market as a “one-stop shop” are very well protected from new competition. Innovative niche providers prefer to be taken over by them rather than look for competition in the long term. This market structure allows the industry leaders to have very good pricing power and forms an economic moat.

Innovations are now driving this sector and the next forms of therapy, cell and gene therapies, are already in the starting blocks. This area has a growth potential of 20 to 30 percent per year. With a recent acquisition of Polyplus, Sartorius Stedim Biotech is already well positioned to be part of this new basic technology.

Victim of success

The company became a bit of a victim of its own success here. During the Corona pandemic, it was a matter of getting the essential consumables at all for a longer period of time, after the vaccine manufacturers had reduced inventories in the market to almost zero. In the tense supply situation, many pharmaceutical companies built up high inventories in order to be able to continue production in any case. From 2021 to mid-2022, there were above-average growth rates and a special boom in the share. After that, the pendulum swung back: less vaccine was produced and at the same time many pharmaceutical producers still had high inventories. Since Sartorius Stedim Biotech has proven to be a particularly reliable supplier during the crisis, the company is more affected by the reduction in inventories than its competitors.

Recovery after sharp price correction

For the 2023 financial year, management now expects a 19% decline in revenue after two profit warnings. In addition, the 2025 targets have been reduced. This has led to a sharp correction in the stock. However, initial data points show that destocking is coming to an end. At the same time, underlying growth remains strong, precisely because of the long-term trends outlined above. We believe that with the new medium-term targets to be released by management in January 2024, the focus will shift back towards the company’s long-term potential. At the same time, order intake should also improve again with each quarter. The low point here was the third quarter of 2023, according to consistent statements by several management teams in the industry. That’s why we’re betting on a recovery of the stock in 2024.

Christopher Tsai and Peter C. Keefe on Long-Term Outperformance

January 6, 2024 in Audio, Diary, Equities, Featured, Invest Intelligently Podcast, Latticework, Latticework New York, Member Podcasts, Podcast, Transcripts

Christopher Tsai, President and Chief Investment Officer of Tsai Capital Corporation, led a conversation with great investor and thinker Peter C. Keefe, Principal Manager of Avenir Corporation. Peter has quietly amassed one of the most impressive long-term track records in the business.

Christopher and Peter joined the MOI Global community at Latticework 2023, held at the Yale Club of New York City on December 12.

This conversation is available as an episode of Invest Intelligently, a member podcast of MOI Global. (Learn how to access member podcasts.)

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About the session host:

Christopher Tsai is President and Chief Investment Officer of Tsai Capital, an investment management firm focused on the long-term growth and preservation of capital on behalf of select families and organizations. With more than two decades of experience, and as a third-generation investor whose financial roots date back to World War II, he leads the firm’s investment activities and is Chairperson of the firm’s advisory committee. Christopher pursues a value-oriented investment approach and seeks high-quality, growth companies that offer significant upside potential and a margin of safety at the time of purchase. He utilizes a multidisciplinary approach to identify companies that he believes have a sustainable competitive advantage and can compound earnings at an above-average rate over the long-term. Companies in his portfolio tend to have strong balance sheets, a history of producing high rates of return on capital, and a culture of innovation. Christopher’s investment approach has been most influenced by Warren Buffett, Philip Fisher and Charlie Munger, as well as by his grandmother and father, the late investor and philanthropist Gerald Tsai Jr. who was the first Chinese-American to lead a Dow Jones Industrial company. Christopher’s financial roots date back to World War II, as his grandmother, Ruth Tsai, was the first woman to trade shares on the floor of the Shanghai Stock Exchange. Christopher has written for Wealth Management Magazine about investing in durable, long-term trends, and for Investment & Pensions Europe about investing in art as an alternative asset class. He is also the author of “Back Door to China”, which was published in Worth Magazine. Prior to forming Tsai Capital, Christopher was an equity analyst at Bear, Stearns & Co. Inc., John A. Levin & Co., Inc., and Gabelli Asset Management. Christopher has been a benefactor of numerous museums and cultural institutions, both nationally and internationally, and is the world’s foremost collector of works by contemporary artist Ai Weiwei. When not looking at businesses, he loves running in nature, quiet time with his books and family, submersing himself in the arts and a perfectly steeped pot of tea. Christopher is a member of the CFA Society New York and received a Bachelor of Arts degree in philosophy and international politics from Middlebury College, where he served on the Middlebury College Arts Council.

About the guest speaker:

Peter C. Keefe has managed client portfolios at Avenir since 1991. Prior to joining Avenir, Peter worked with Johnston, Lemon & Company, a New York Stock Exchange Member Firm, where he served in several capacities, including Director of Research. Peter received a B.A. from Washington & Lee University in 1978, and formerly sat on its Board of Trustees. He is a CFA Charterholder, a former Director of the Washington Society of Investment Analysts, and a member of the CFA Society of Washington, D.C.

Phil Ordway and Michael Mauboussin on the Art of Intelligent Investing

January 6, 2024 in Audio, Diary, Equities, Featured, Invest Intelligently Podcast, Latticework, Latticework New York, Member Podcasts, Podcast, Transcripts

Phil Ordway, Managing Principal of Anabatic Investment Partners, led a conversation with the one and only Michael Mauboussin, Head of Consilient Research at Counterpoint Global, Morgan Stanley Investment Management. Michael is one of the most influential investment thought leaders of our time.

Phil and Michael joined the MOI Global community at Latticework 2023, held at the Yale Club of New York City on December 12.

This conversation is available as an episode of Invest Intelligently, a member podcast of MOI Global. (Learn how to access member podcasts.)

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About the session host:

Philip Ordway is Managing Principal and Portfolio Manager of Anabatic Fund, L.P. Previously, Philip was a partner at Chicago Fundamental Investment Partners (CFIP). At CFIP, which he joined in 2007, Philip was responsible for investments across the capital structure in various industries. Prior to joining CFIP, Philip was an analyst in structured corporate finance with Citigroup Global Markets, Inc. from 2002 to 2005. Philip earned his B.S. in Education & Social Policy and Economics from Northwestern University in 2002 and his M.B.A. from the Kellogg School of Management at Northwestern University in 2007, where he now serves as an Adjunct Professor in the Finance Department.

About the guest speaker:

Michael Mauboussin is Head of Consilient Research for Counterpoint Global. He joined Morgan Stanley in 2020 and has 38 years of investment experience. Prior to joining the firm, he was director of research at BlueMountain Capital Management, head of global financial strategies at Credit Suisse, and chief investment strategist at Legg Mason Capital Management. Additionally, Michael is an adjunct professor of finance at Columbia Business School and chairman emeritus of the board of trustees at the Santa Fe Institute. Michael earned an A.B. in government from Georgetown University.

Elliot Turner and Mario Cibelli on Investing and Activism in Small-Caps

January 6, 2024 in Audio, Diary, Equities, Invest Intelligently Podcast, Latticework, Latticework New York, Member Podcasts, Podcast, Transcripts

Elliot Turner, Managing Partner and Chief Investment Officer of RGA Investment Advisors, led a conversation with highly regarded investor Mario Cibelli, Managing Partner of Marathon Partners Equity Management. Mario is a small-cap aficionado and breakout star of the book Netflixed.

Elliot and Mario joined the MOI Global community at Latticework 2023, held at the Yale Club of New York City on December 12.

This conversation is available as an episode of Invest Intelligently, a member podcast of MOI Global. (Learn how to access member podcasts.)

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About the session host:

Elliot Turner is a co-founder and Managing Partner, CIO at RGA Investment Advisors, LLC. RGA Investment Advisors runs a long-term, low turnover, growth at a reasonable price investment strategy seeking out global opportunities. Elliot focuses on discovering and analyzing long-term, high quality investment opportunities and strategic portfolio management. Prior to joining RGA, Elliot managed portfolios at at AustinWeston Asset Management LLC, Chimera Securities and T3 Capital. Elliot holds the Chartered Financial Analyst (CFA) designation as well as a Juris Doctor from Brooklyn Law School.. He also holds a Bachelor of Arts degree from Emory University where he double majored in Political Science and Philosophy.

About the guest speaker:

Mario Cibelli is the Founder and serves as Managing Partner at Marathon Partners Equity Management. Mario has been in the investment business since 1990. Prior to founding Marathon Partners Equity Management, LLC, Mario worked for Robotti & Company, Prudential Securities and Gabelli Asset Management Company (GAMCO). An early public company investor in companies such as Expedia, Netflix and 1-800 CONTACTS, Mario has been investing in consumer-facing internet brands for over 15 years. Mario earned his Bachelor of Science in Business Management degree from the School of Management at Binghamton University. He also serves as the Board Member at Shutterfly.

Will Thomson and Adam Lundin on Mining and the Lundin Group

January 6, 2024 in Audio, Diary, Equities, Invest Intelligently Podcast, Latticework, Latticework New York, Member Podcasts, Podcast, Transcripts

William Thomson, Managing Partner of Massif Capital, led a conversation with business leader Adam Lundin, Chairman of Lundin Mining Corporation. Real asset investors will instantly recognize Adam and his brothers as “outsiders” in the sector, having created enormous shareholder value over time.

Will and Adam joined the MOI Global community at Latticework 2023, held at the Yale Club of New York City on December 12.

This conversation is available as an episode of Invest Intelligently, a member podcast of MOI Global. (Learn how to access member podcasts.)

Replay this keynote fireside chat:

printable transcript
audio recording

The following transcript has been edited for space and clarity.

Will Thomson: Last year, I spoke about real assets and why you could think about them in much the same way you think about other value investing and how it wasn’t just a commodity cycle. One of the recurring topics today has been the importance of management, of sometimes sticking with management as they move from one company to the next.

Adam is part of a family that has been in the real asset space in natural resources – oil and natural gas and mining – for three generations. To give you a flavor of what they’ve done, they have 11 companies right now, with a total market cap of 15 billion. If you had bought every Lundin family company since 2002 and held it through May of last year, you would have compounded at a rate of 23% per annum.

The point is that while there is a commodity cycle, real assets and natural resources are businesses like other businesses that you can invest in thoughtfully and with an eye towards value. Adam and his family – three brothers are in the business and one is out of the business – are a prime example of the type of management teams you want to look for and follow. At the moment, Adam is the chairman of the board of Lundin Mining. He sits on the board of Filo Mining as well as Lucara Diamond, NGEx Minerals, and the Lundin Foundation.

One of the things the Lundins have done so well is generate wealth for shareholders on a continuous basis over time. Adam, in preparing for this, I watched a couple of interviews you and your brothers have given recently. One of the reoccurring themes for you guys has been the idea of generational wealth and creating generational wealth. Perhaps you could start by sharing what that means to you.

Adam Lundin: I think the term “generational wealth” began with my grandfather when he was starting the business. When he thought of generational wealth, he wanted to be the Swedish Rockefeller. That was his ambition. I think it was a bit tough on my grandma as work caused my grandfather to travel a lot. His way in was through exploration because that’s how he could get into the business. He felt it was about making world-class discoveries with the scale and quality of grade that would last through generations and create that generational wealth for all stakeholders involved.

When my dad, my brothers, and I thought about it, it was that we still get into exploration, but now we turn to real businesses with cash flow. Can you build, get to scale, and have that great quality that allows you to survive cycles but also deliver returns to shareholders? It was about focusing on tier-one deposits.

Thomson: You run the mining side of the family business, and your younger brother runs the oil and natural gas side. Within the context of deposits and mines that can last a lifetime or beyond, how does the effort to build generational wealth shape the capital allocation decision framework you guys have?

Lundin: You have to be quite disciplined. It’s hard to time cycles. If you get these big assets, you know they’re going to give you the ability to catch a few cycles, and you’re going to end up doing very well. However, it’s a very capital-intensive industry.

We’re positioning ourselves. We’re overweight in oil and gas. We sold Lundin Energy three years ago. We’ve been investing more on the mining side but also growing another one of our oil companies. When you study the outlook and see the lack of supply and new discoveries being made, then you look at your IRR and your returns and what that profile looks like on a discounted cash flow basis, you have to rank up. You can’t do everything at the same time.

We move projects forward, then see which one we can put into production or move forward without being too dilutive for shareholders. You need to have a good macro backdrop where you’ll be able to have your lenders come in or to have cash flow from your other operations to go out and build.

How you’re going to allocate capital changes quite frequently. Sometimes, it’s best to do share buybacks if you’re not getting proper value of the business. You must have your finger on the pulse to see the timing of when to build, to buy shares back, to pay a dividend, and all that. There’s a no proven formula. You have got to see what it’s like at that time and what the outlook is.

Thomson: In terms of the decision to build versus buy back shares, have you guys found that a counter-cyclical approach works best? Or is it working within the cycle and trying to shape it, if you will?

Lundin: I think the best time to explore and buy new assets is at the bottom. Buy and explore. As you get the tide coming in your favor, start to expand and build. However, it’s way easier said than done. Putting exploration dollars to work at the bottom of a cycle is not always the most favorable decision. It’s tough, but that’s why we should be increasing exploration budgets.

I was running one of the exploration companies. I remember that at the bottom of this cycle, we had what was probably the biggest exploration program going on in South America. It didn’t make a whole lot of sense when you have many huge companies in the space not running exploration programs. I was like, “Dad, the rig company are favorites right now because we’re putting rigs to work.” He said, “It’s going to pay off.” When the tide turns and you’re there with an asset that can be developed and people wanting to grow, you’re standing above everyone else. We’ve done it time and again, but it takes a lot of guts.

Thomson: One of the important takeaways is that you can think about how a natural resource company deploys capital in much the same way as any other business. Your concern is how management are deploying the capital, when they are deploying it, and if they’re deploying it thoughtfully. I think a lot of people miss this when they look at natural resource companies – often just looking at the commodity cycle – but there’s so much more to it than that. In fact, equity is perhaps a messy way to think about expressing a commodity viewpoint.

One of the things you brought up is the capital intensity of the whole process. Value investors are always greatly concerned with dilution. One of the challenges with a lot of mining or oil and natural gas businesses developing an asset is how to raise that billion dollars to build an asset. One thing the Lundins have always done is put money in when money needed to be raised. They did so at a rate above or at the very least in keeping with how much of the business they already owned. How do you think through and balance the need to raise capital that usually occurs through equity raises with efforts to build generational wealth for the Lundins and your fellow shareholders?

Lundin: I think you see it a lot in the natural resource base and with junior mining companies. They’re very good at capping their stock because maybe they’re on a run and money is available. When money is available, you should take it, but if you don’t have a use for proceeds, you should not take that dilution on. Understanding that money is available can be tempting, but we’ve been in a position where if we have to raise equity, we like to backstop it.

When running some of the exploration companies, my dad said, “What’s the budget? Is that the most efficient? Yes? Okay. How much do you need? We’ll do half. Go find the other half.” That’s worked out well for us. We never want to take on unnecessary dilution. We always find ourselves – more or less – the largest shareholder in our publicly traded companies. We are certainly very focused on dilution.

Thomson: When it comes to dilution, the primary driver is the capital costs associated with the project. The Lundins have always pursued elephants – big projects, oftentimes more associated with companies like Exxon Mobil or Freeport-McMoRan, which are some of the largest names in the industry. Yet, you’re often considered a mid-tier player, but perhaps going to be a major shortly. How do you think about balancing the risks associated with taking on both the operational challenges of a major project and the financial risk? How do you balance those two and think through that decision?

Lundin: As a business evolves, it’s all about your management team and the people you have in your organization to be able to succeed. We feel like we’re the most efficient explorers and starting to become one of the most efficient builders. When it’s family and your capital on the line, you don’t need to build a Ferrari every time. Sometimes, a Cadillac will do it. You find a lot of the majors gold-plating things and having stretched capex. We very much want to under-promise and over-deliver.

As we move forward, we’re happy to take on those challenges. We are becoming a better operator. We see the businesses mature, but we’re very proud of the teams we’ve assembled in our companies and are happy to empower them. We have good mine builders and good explorers, but we feel more comfortable being able to blame ourselves as opposed to being a non-operator and having to blame your partner.

Thomson: One of the things you mentioned is giving decision-making capability down the chain. How important has empowering your employees been to the success of the Lundin businesses?

Lundin: I think it’s been everything. Obviously, you don’t always get it right. Sometimes, you do have to make tough decisions and changes. We’re not going to pay the biggest salaries and be able to compete with some of the biggest companies, but what we focus on is being able to align the management teams with ourselves and the shareholders by offering a friendly option package.

You’re going to do well as long as the shares do well. That’s how we want to incentivize our guys. We always say, “Grandpa and dad never took a salary.” You get some fees as a board member, but I’m not taking a salary. I’m going to do well and the family’s going to do well through the share price going higher. That’s how we like to incentivize the teams. When they’re motivated the same way as us, you see them start to excel.

We are happy to be as hands-off as possible but also happy to be hands-on. We realized growing up that most of the phone calls my dad or grandpa would be getting were about problems that management teams couldn’t fix. They needed the help and never shied away from that. You want to be on the front lines with your team, but you also have to give them room to run and come up with solutions together while also letting them know you are just a phone call away if they need anything.

Thomson: Your brother Jack has become the CEO of Lundin Mining. Is he taking a salary for this position?

Lundin: He’s not taking the same salary as the past CEOs. However, if you are the CEO and you are responsible, I think it’s important to demonstrate you’re not put in that organization for just any reason. It is important he’s on the senior management team.

There are exceptions when you have a builder come in and it’s for a project. He could have a higher compensation than the rest of the management team. I think he’s 50,000 more than the CFO and COO, but try to have a bit of a flat structure so that the CEO is not way out of whack compared to the other chiefs.

Thomson: There are four brothers in total, and they’ve all come up in the business, if you will. As value investors, we come across family businesses that are of interest all the time. As the third generation, how did you guys prepare to be put in the positions you’re in now? What lessons have you learned that maybe you would do something different for your kids?

Lundin: What lit a fire was a family meeting and sitting there at 13. Someone comes in and you hear that the success of this third generation is about 15%. Normally, the first generation starts it, the second generation grows it, and you guys are going to fuck it up. I remember me and my brothers looking around and going, “Who’s this guy? Is this for real?”

That fire still burns. I still think that being publicly traded, you have proven yourself every day, but for us coming up, it was always our dad saying not to expect anything. It was very important during high school and university that summer jobs be always in the field, working with either the exploration teams or on construction. It was, “Here comes the boss’ kid. He must be pretty soft.” You always felt like, “I want to gain the respect of my colleagues. I’m going to have to work that much harder to do that.” That’s the mentality me and my brothers – Jack and Will – had going into it.

Thomson: Your father, Lukas, was renowned in the industry for generating loyalty among his employees and having a very strong following. Do you think the mindset he instilled in you is the mindset that generates this loyalty among employees and willingness to work? Oftentimes, mines are out in the middle of nowhere. People are flying in and out. You’re away from your family for weeks or months on end. Is that mindset key to building loyalty?

Lundin: Yes, I think you have to set the tone, and it comes from the top. Me and my two younger brothers especially are highly driven. It’s nice. As you’re coming up, you want to be the first one in and last one out. You don’t want to be sitting behind the desk doing nothing. You want to lead by example. I think that’s what my grandfather and my dad did and what me and my two brothers are trying to do as well. It’s only possible if you enjoy it. We thoroughly enjoy what we do. We are very active in the business and definitely on the road a lot, but I am a keen believer in leading by example.

Thomson: At the moment, there are about 11 companies under the Lundin umbrella. There are a couple on the mining side, a couple on the oil and natural gas side, and one renewable energy company. You serve as chairman of the Lundin Group. How do you think about allocating capital across all those companies as opposed to the allocation occurring at one of them?

Lundin: A lot of the companies are good dividend-paying companies today, so we have the ability to reinvest in the business. If we think one is undervalued, we’re happy to increase our position there.

With some of the companies being sustaining and having cash flow, we try and find one of those exploration companies, at least for a bit of a runway. If you’re not getting good drill results, then people know that’s the end of your capital because you are at the end of drilling. Here are the results, and you’re not seeing the benefit of those results because everyone knows another capital raise will come. Instead of going higher on good news, you’re going lower on good news because they know the financing is coming. That’s why we try and structure it so that we give ourselves more runway than just one drill campaign.

With that in mind, you start to have a roadmap of when you’ll to have to put more money into those companies – if they’re on that trajectory – where you’re proving up a deposit. You lay out a map of the companies that will require capital down the road and make sure you’re prepared for that. It’s always super important to be able to have a bit of a war chest to take advantage of opportunities when the sector is not doing so well.

Thomson: What role, if any, does the commodity cycle play in some of this thought process? It sounds like it’s primarily driven by operational opportunities at the companies, but does the war chest get used based on the commodity cycle? It clearly gets used based on operational opportunities, but does the commodity cycle also play a role in it?

Lundin: Yes, definitely. When you feel like you’re low in the cycle, you definitely want to be buying more. Again, it’s easier said than done.

With different companies, you have to silo yourself and make sure you’re doing what’s best for that set of shareholders in that entity. If it’s exploration, you need to deal with financing two years down the road and make sure you have capital tucked away for that, but with the cycle, you can see it’s starting to ramp up. When it rolls over, you definitely feel it. That’s when you want to put the war chest to work.

Thomson: A lot of the businesses you guys run and the assets you develop are in jurisdictions that many would find somewhat touch or go – Argentina, throughout Africa, the DRC. These are all interesting places, at least in my view. When I think about political risk, I often think about the skill you guys have had in managing it. The example that always comes to mind is Fruta del Norte in Ecuador. Could you walk us through this case and how you think about political risk now?

Lundin: Fruta del Norte in Lundin Gold is a great case. Starting with Fortress Minerals at the time, we were in Russia, and we felt like we weren’t having success with that asset. We decided to cut bait and sold it for cash. With Fortress, I happened to be on the board with Ron. We would always get assets shown to us.

A gold company called Kinross bought Fruta del Norte for $1.2 billion, I think. It couldn’t get anywhere with the country. When we found out it was for sale, Ron and I were viewing another project in Finland at the time. He said, “You guys get back here. I got the asset.” We were like, “We’re just finishing the report. We’re in Finland.” He said, “Drop it. This is the one.” We flew in and asked what was going on, to which he replied, “There’s a buried gold bar in Ecuador that we need to go check out. It’s very high grade – 10 grams a ton – and it’s 10 million ounces.”

The view was that it was extremely hard to get fiscal agreements done with the country. My dad said, “If we don’t try, we’ll never know.” We flew there, met with the country’s president, and told him what we wanted to do. I distinctly remember dad telling him, “This is your resource. This is your gold. We’re happy to come and help you put it into production. You guys are going to benefit the most. We and our shareholders will benefit as well. But if you want to do this, it has to be a partnership. We have to want to be able to do it together.”

He was happy. He said, “What is this Fortress thing?” “Here’s the portfolio. This should be in your bigger company. This should be in Lundin Mining.” At that time, we didn’t want to call any more companies after Lundin but came to an agreement. “Why don’t we call it Lundin Gold?” and they said, “Okay. That will work.” Then, at the follow-up meeting, the president said, “It’s so nice to see you and have you come down to the meetings and take this seriously, Mr. Lundin. I never met Mr. Kinross before.” There’s no Mr. Kinross. It was Tye Burt running the company at the time, but to have that engagement, go down there, and show that respect, especially in Latin America, goes such a long way.

Thomson: Kinross bought it for a billion. It invested how much?

Lundin: 236.

Thomson: You guys bought it from them for?

Lundin: It was very tough. It was October or November 2014. I think the last day of the equity financing gold dropped $40. In the last meeting in New York, we went to go see a famous investor in gold. He tried to talk us out of doing it. At the end of the meeting, my dad, who’d had a long relationship with the gentleman, said, “We only had so much time and so many things to do. You didn’t have to take this meeting. We won’t be seeing you again.” That was it.

We put a financing package together for a billion dollars, built it, and it’s been a tremendous success. Also, the stability agreements – which are super important when going into these places – set the framework for companies that are now looking to build mines in Ecuador, and those were direct agreements with the company in the country. If anything changed, you’d be going to international court, and the country would not win, but it offered good protection and made banks and creditors happy to lend us money to continue pushing the project forward.

Thomson: The political risk created a tremendous opportunity. The natural resources space always strikes me as having interesting opportunities created by political risk. It isn’t just something you have to suffer from. I think the Lundins are a prime example of investors and capital allocators who have found ways to take advantage of that, but you guys also occasionally sell a business – as last year with Lundin Oil and Gas. Walk us through the decision to sell an asset like that, with the name on the door and one of the top 10 oil and natural gas discoveries in the last decade.

Lundin: With Lundin Energy, we made a big discovery in 2011 – the Johan Sverdrup oil field. We went through unitization, and we had about 21% of the field. It was nice back then because you had reserve-based lending. We did not have to raise any equity to be able to hold on to our position and put the field into production.

We were producing about 200,000 barrels a day by the time the exit occurred two years ago now. Also, at that time, we had other production outside of Norway. The view was you’re just getting value for Norway. That’s why everyone’s investing in the company. We spun out IPC to shareholders. The viewpoint dad had was, “I think this electric revolution is real. I don’t think it’s going to play out in the time people anticipate, but let’s refocus ourselves and start getting more weighted towards copper.”

You put this in production. You’re having a great time. Johan Sverdrup hasn’t got peak production yet, but dad used to say, “I’d rather be early than one day late and not be able to sell the business.” We were able to sell it for cash and shares, so we still own the shares today. We are bullish on oil, but we’ve started to position ourselves more heavily toward the copper space.

Thomson: One of the things I find so fascinating about the Lundin family is this ability to continuously recycle capital at high rates of return into new businesses, which we all look for in compounders but is not something generally associated with the natural resource industries yet. It is something that people like the Lundins accomplish. It becomes a question of finding the right people and the right management teams. It seems like the criticality of management always shines through.

Turning from some of these bigger risk management decisions, you were the CEO of Jose Maria, which was bought by Lundin Mining. It’s a copper deposit. It was a project that I think you acquired 24 years ago. You’ve been working on it since something like 1999, so how do you generate the conviction to stick with something like that for that long?

Lundin: It staked the ground in 1999. We have had a lot of success in Argentina. My dad went there in the late 1980s. Menem came to power. We saw the country opening and were able to get a foothold in Bajo de la Alumbrera. We were a small group then. It was tough for us to hang on to it to development, so we sold it.

Then we went and made the Varadero discovery, which was a massive one. Our geo was telling us it was going to be 20 million ounces. Barrick declared it a 20-million-ounce deposit two years ago. We had to fend off a hostile bid from Barrick and ended up doing a friendly deal with Homestake. Barrick went and bought Homestake.

From there, you’re having that success with that team, and you want to continue to do it. We had 10K mining at the time, which was in the DRC and in force majeure. We didn’t have a vehicle, but we said, “Let’s go and stake some ground in the Vicuna district,” as we call it today. That was in 10K in 1999. We brought in the Japanese as partners and started to explore.

The DRC got better. We spun that out into NGEx and started making a lot of discoveries. It was tough at the bottom of the cycle. We were drilling seasonally. We wouldn’t drill through the wintertime because of harsh conditions. I think that made us know that if we were going year-round, maybe we wouldn’t have taken this long to achieve success, but we said it was going to take a bit longer, so we continued to make new discoveries and prove things up. We felt like still having success. “We’re finding metal. Let’s stick with it.”

What truly changed the story for us was that three or three and a half years ago, we made a huge discovery. We drilled a kilometer hull, which was mineralized all the way. On average, it had over 1% copper. We called it “the 20-year overnight success story.” It was just being able to keep with it, knowing that because of the seasonality we probably doubled the length of the time we had to have that success, but kept at it and also made sure we didn’t encumber the asset along the way by selling a royalty or a stream on it. The Japanese got fatigued, and we were able to buy them out of two of the deposits we found at good prices. I think it was just keeping at it and knowing that we were on to something special.

Thomson: As I mentioned, if you owned all the Lundin companies from 2002 to May of last year, you’d have compounded at 23%. Of course, probably 20 years of exploration occurred before that. These are long cycles, and it requires a lot of capital discipline. The Lundins demonstrate that nicely.

Maybe we could now talk about the opportunity in copper. With a generalist audience, when we think about copper or gold allocations, one often might say, “I’m going to look at Freeport-McMoRan or Barrick Gold.” Those are big, safe names that generalists would be comfortable with. Why should a generalist look at something more like Lundin Mining (which has the Jose Maria deposit in the Vicuna district) or NGEx or Filo Mining, which also have deposits in the Vicuna district? Full disclosure: My firm, Massif Capital, is invested in all three.

Lundin: When you look at the big companies, what underpins them is their phenomenal large-scale deposits. For us, when we think about the prize, you have the biggest mine in the world. The copper space is about a 25-million-ton market, and the biggest producer on an asset basis is Escondida, which does a million tons. You have a couple of others that do around 400 to 500. Then it starts getting quite small.

The main owners of Escondida are Rio and BHP. The NAV they’re getting out of that asset is around $42 billion. When you have those big assets that can underpin your businesses for long periods of time, you want to hang on to as much as you can, but NGEx and Filo are exploration companies, so it’s going to be very hard for them to stay in it. At some point, the Vicuna district will be consolidated, and it will probably be Lundin Mining and another mining player. You would have room to bring in a trading house, as we have done on a couple of our assets. We know it’s there. We have the prize and the goal, and to be able to transform Lundin Mining into a powerhouse, you need that strong asset base, and we’re sitting on it now.

We’ve got to be smart as hell. We put the puzzle together and move it forward in a disciplined manner, but it’s super exciting for me to be able to make those discoveries, to push them forward, and create a lot of shareholder value along the way. It’s super rare and special. We saw it with Lundin Energy and Johan Sverdrup. You have these tremendous assets that are going to survive cycles and allow you to create a lot of meaningful value for all stakeholders.

Thomson: Could you contextualize for us how big Vicuna looks like it’s going to be?

Lundin: Escondida is 36 billion tons, containing 180 million tons of copper.

Thomson: The largest copper mine in the world at the moment.

Lundin: I don’t think it’s hard to rationalize that with what we’ve discovered, you’re sitting today on 18 billion tons. That should be able to support 90 million tons of copper, and you still haven’t found the limits to that. That’s talking about one deposit within the broader Vicuna district.

When we talk about these giant metal districts, which is what we’re onto, they form in clusters, and then they surprise to the upside. Two years ago, we put a presentation together called “The Vicuna.” It was 1.0. We said, “This is starting to become a giant metal district.” You’re getting to that level where you’re pushing 13 million tons and 17 million tons and able to do that. We definitely see we’re on our way to proving out one of the major metal districts holding a lot of metal that has been the backbone for a lot of the great mining success stories in the industry today.

Thomson: Before I hand it off for questions, I want to give you an opportunity to talk about the Lundin Foundation, specifically some of the work it is doing around cancer and cancer research.

Lundin: The Lundin Foundation is something we’re immensely proud of. It helps differentiate us in the resource space. The Lundin Foundation supports all the companies in the group. It’s about helping with sustainable investments around the local communities where we operate.

The goal is to be able to set up sustainable businesses that will survive the mine lives or the oil field’s life, so these areas can still prosper after those deposits are depleted. The only way to have success in moving assets and deposits forward is with a social license. It’s super important to do that, and the Lundin Foundation helps all the companies in the group with those goals. Also, when it’s Lundin Mining doing an initiative versus the Lundin Foundation, there’s a bit more trust there because you have some separation, so it’s been very helpful.

My father passed away last year from glioblastoma. He had a lot of care and help. He was treated at the hospital in Lausanne, Switzerland, where he passed away. He donated $10 million. We were working closely with the hospital when we formed the Lundin Cancer Fund.

To raise awareness, my two younger brothers decided to climb Mount Everest this year. They’re not mountaineers, but they had an excellent team and trained properly. They were successful in summiting, so we’re putting a documentary together – the same guys who did 14 peaks with Nims, who was their guide. We’ll roll it out and do some fund-raising events. I’m happy to share it with everyone once it’s complete.

Glioblastoma is not common enough for big pharma to see profitability because it’s very deadly. I guess it doesn’t happen enough to make pharmaceutical companies spend money on research, so we said, “Let’s give it a go and see if we can help.” We’re working closely with the CHUV Foundation in Lausanne on initiatives and seeing if we can make a difference.

Thomson: Let’s take some questions now.

Participant: I wonder if you could comment on two things. Firstly, it seems a lot of investment that might otherwise head toward precious metals is getting diverted to crypto. Secondly, valuations on streaming companies seem to be far above those of, say, general mining companies.

Lundin: It’s tough for us to catch onto crypto because there’s nothing tangible. We don’t understand why it was backed, so we never forayed into it. We never truly understood it.

Wheaton Precious Metals and the Francos, which are streaming royalty companies, do extremely well, and their view is not having any asset risk, but it’s not all the way true because we saw what happened in Panama. Wheaton overtook Franco in market cap, but I think these are good businesses. Also, for us, that’s money. You can go to the streaming companies, but to not be able to have a buyback option on a stream is very tough.

When my dad bought Zinkgruvan in Sweden off Rio Tinto, he paid $140 million for the deposit. About a month later, he sold a silver stream to Wheaton – Wheaton River at the time – for $150 million. He thought that was a fantastic deal, but the silver stream was for the life of mine, and silver was at $450 an ounce at the time. Then it ran and is very painful to see today. You still feel it.

They do extremely well, and they do extremely well with the deals, but I think the industry is a bit more astute in knowing you need a buyback clause if that’s the only access to capital you have, but it’s not the first option.

Thomson: I would add that from a purely investing perspective, the streaming space is getting a little crowded. At first, this way of financing appeared quite attractive. Over time, it has become perhaps less so and more of a second or third call you make if you can’t raise capital otherwise. The books Franco-Nevada has are quite valuable, and while some of the newer guys, like Sandstorm, have a giant book of assets, only one or two of them are producing.

You’re paying that premium right now for potential future assets, but you buy into a stream with hopes that you don’t have development risk yet. You do have a tremendous amount of development risk across that portfolio because none of those assets are in operation, and since they couldn’t find capital elsewhere, they went to a streamer. They may or may not be the best quality assets you want exposure to.

Lundin: Yes, I think it’s very tough if you encumber. We had to go with streaming when we were building Fruta del Norte with Lundin Gold. Private equity provided, and we had to sell a stream. We have a buyback option. With things going well, we’ll be able to execute on buying back the stream.

Sometimes, it’s your only avenue, but private equity is in that game now, which gives you a buyback clause. They still did extremely well, but we were pushing the project forward and needed to pull that lever to continue to build the mine. We’re thankful that door was open. Otherwise, we would have gotten stuck with Fruta del Norte in the middle of building. It’s good. Sometimes, you have to go that route.

Participant: It’s your third time in Argentina with a monster deposit. The country recently had an election, and there is a new leader. Let’s call him colorful. Any comments?

Lundin: We are quite optimistic, but it’s going to be painful for Javier Milei’s administration. Anything he does will require devaluing the peso, and he’s trying to ready the population for that. Still, taking currency controls off, opening up the country, and allowing people to get their money out will be exciting and will allow for a new wave of foreign investment into the country. It was the same when we first went in and Menem was president.

We’re optimistic and look forward to seeing what Milei does. The finance minister is talking this afternoon, and I’d be curious to see the beginning of the measures the government will take. However, it’s a delicate balance. You want to open it up rather quickly, but you also have to be careful. For the population, it will be tough with further inflation and devaluation, but I think they’ll get through it. I’m quite optimistic.

Rajiv: It’s great to hear from an operator at this conference. You have multiple listed companies within different spaces. If someone were to think about investing, could you have combined all these companies into one so that an investor could have the benefit of all the diversification inherent in your business? If you cannot, what is the one company you think can give us the best returns today?

Lundin: My dad would always complain that maybe we had too many companies and should rationalize or just consolidate. At the same time, if we’re not getting value for this asset that sits in this company, spin it out, but spinning it out creates another public entity. You’ll have to put a management team and a board in place and all the rest. Shareholders were not feeling the benefit of what we have, so we’ve been very successful with the spin-outs.

Even if we think it makes the most sense to bring things together, it’s tough doing transactions within the Lundin Group portfolio. Everyone thinks there’s some benefit for us to gain, but it’s not so. We just want to create the most shareholder value.

So far, it’s been very much spin-outs. Also, the view at the time was that if you’re investing in oil, you don’t want gold; if you’re investing in gold, you’re pessimistic; you don’t want copper because then you believe in growth. We always try to keep things separate to ensure that the shareholder base can get direct exposure to what they’re looking for. That’s how we felt it was best to keep things separated.

When it comes to the portfolio, a lot of the companies are in good shape. The challenges and the turnarounds are good. We’ve had a company called Lucara Diamonds in Botswana, and it is a super special diamond pipe where you do about 2% of the diamond production in the world, but you’re producing around 50% of the carats – over 10.8 carats per stone. You’re a bit insulated because 70% of your revenue is coming from those big stones. The whole synthetic push is not really eating into the company, and your peers are not doing so well. The space hasn’t done that well, so you haven’t seen a lot of capital flow there.

We’re transitioning from an open pit to underground. With such transitions, it’s a wait-and-see story. We had a delay on the underground and had to make a few management changes, but now I believe we’re coming off a very low floor and getting things back on track. We’re quite excited about the story. It’s one I think can do quite well from here from a rebound point of view. It’s coming off a low level where I feel comfortable with.

Thomson: One of the attractive qualities for natural resource companies or real asset businesses in general is oftentimes the clarity of catalyst that Adam mentioned in saying it’s a gold company and it’s within a copper company. We’ll spin out the gold company into a gold company only, or we’re developing an asset and turning it on. There are very clear timelines. You can get great clarity of the thesis and the catalysts. That creates a very clean investment thesis that is often harder to get, and clarity of thesis is something we all search and hope for.

With many project-based companies, it’s something you can achieve. It also enables you to invest intelligently through commodity cycles. You can find some of this research on our website. If you look at a gold company or a copper company, when they turn on an asset, it doesn’t matter what the copper price or the gold price is doing. That company will go up.

Again, the commodity cycle is important. It’ll go up more if copper or gold is running, but there are ways to think through these businesses, the cycle, and your investment process that enable you to generate returns through the cycle as opposed to just with commodity cycles.

Participant: Could you talk about some of the hardships your company might go through? Your industry might have a bad connotation in terms of mining and disturbing natural resources such as the habitats. I wonder how you try to get a win-win situation in the foreign locations you enter and how you deal with their governments and also social activists.

Lundin: It’s a great question. Historically, the oil and the mining sectors haven’t done a good job of explaining the benefits of what they’re doing and the impact they’re making. We shouldn’t be shy. We should be a little more vocal in explaining those benefits – being able to create a tremendous number of jobs, bringing stability, and increasing the social standard in the areas around us.

I think the most important people that should benefit are the local communities. We are proud of that. There’s also the educational system – you see mining school after mining school or engineering school after engineering school shrink. My brother Jack sits on the board of the mining school at the University of Arizona. It’s the shittiest building on campus. No one will want to go and do a major there. We’re starting where you can take mining as an elective, putting in money to give the building a bit of a facelift.

It’s also important to be present at the student fairs in China and be able to resonate, but I think we should do a better job of talking about the benefits of the space and what we’re doing for the local communities. When you’re trying to fend off a paid protest or something like that, your community is your best spokesperson. As long as you have that social license and they’re backing you, you’ll be okay and will get through that stuff. Bring on as many locals as you can when you’re building and running these operations.

Participant: You’re in many areas, and you’re very focused on your specific assets, but do you take a call on commodities long term? Do you say, “I really like copper. I don’t like this one. I like the other one, but not those other two”?

Lundin: If you look back and ask how you would proceed if you did it again, I think you know very well you’re not in charge of the biggest value driver a lot of the time, which is your commodity price, and you don’t have a big say on that. It’s very much a volume business and one about margins.

Especially on the mining side, a lot of the big companies that do extremely well are iron ore companies. We try not to get into too many niche metals. We have a bit of a competitive advantage, and copper is a big space. Yes, we do some nickel and zinc with Lundin Mining, but that’s why we avoided the lithium space. Maybe we were wrong. People created a tremendous amount of value with lithium, but this being the second most abundant metal in the earth’s crust, we felt it wasn’t going to be that hard. You had these big lithium deposits in South America. We felt they could ramp up, but since it was a smaller space than copper, it was one we shied away from.

When you look at more niche metals, there are rules to the exception. We never thought we would get into the diamond business, but when there was a project we felt had the potential for really high quality, we went after it. Still, it has to be something special for us to go into niche markets.

Participant: Denison Mining, a uranium miner, used to be a Lundin company. We can think of uranium as a bit of a niche. Is that still an asset you are involved in? If not, why did you choose to get out?

Lundin: We were in the uranium space for a very long time. We felt we weren’t creating the returns for shareholders or ourselves. After Fukushima, we said, “This is going to be tough.” When the Kazakhs came out and were able to make money at $30 a pound, it became extremely challenging, and we thought it may be better we leave it to someone else.

I think it is one of the cleaner sources, and it’s good if it can get buy-in. It was just tough all the way through. You had people closing nuclear power plants across Europe. You had the Kazakhs being able to bring on new supply out of nowhere very cheaply, and us not generating the returns we strive for. I still think uranium will play a significant role in the world going forward, but I don’t see us getting back into it.

Participant: Speaking of not generating the returns you look for, do you have an internal hurdle rate that you shoot for? Would you share it with us if you did?

Lundin: No, I think you’re going to create a tremendous amount of value with exploration success, but we find you can create even more value with building a mine, bringing it online, and getting those cash flows. Then, starting to be a dividend payer or buying back shares, you can continue to create value – not jumping out of bed every morning to go out and make 10%, but to make multiples of what we’re doing. My brothers and I have lofty goals. We see where the group is today. If we can’t double or quadruple from here in the next 10 years, we’d probably be pretty disappointed in ourselves.

Participant: Can you share your family’s philosophy on hedging commodity price risk and how you think about it through your companies?

Lundin: We normally don’t hedge and want to be able to have full exposure to the upside.

Right now, IPC is a good example where we’re committed to buying up to 7% of the shares outstanding each year. We’re committed to building the Black Rod project that will increase our production from 50,000 barrels of oil equivalent per day to 75,000, and we took on some debt to do that. We want to make sure we execute on those two things. We’ve hedged a bit of our oil production there, but generally, we haven’t done it in the past in our operations.

Participant: I would love to hear your thoughts on the oil and gas business and how you guys look at various opportunities relative to what you’re doing in mining.

Lundin: I think this transition is going to play out. It’s not going to play out as quickly as forecasted because it takes a lot of time to bring new supply online, specifically in the copper space. Electrifying the globe, I believe this trend is happening, but it’s not going to happen on the timeline we have. We believe that should lead to elevated prices and some really elevated prices in the mining space, but oil and gas are always going to play a significant role.

As we increase our production profile at IPC, we are focused on being able to also buy shares back. It’s not necessary. Is there a point down the road where you take the company private but get to a level where you have a very tight float, and it makes sense to flip from buybacks or dividends?

It’s just that the capital pool has shrunk dramatically going into the equities in the oil and gas space, where the valuations aren’t the same. You have got to focus on high-quality assets. We’re big fans of SAGD in Canada and heavy oil because your decline rates are around 10% – they are quit steep on the shale side. You have to be constantly reinvesting; especially with reserve-based lending from banks not there, maybe you have to go into the high-yield debt market, so your cost of capital has increased over time.

It’s a space we continue to grow in, but we’re not looking to be back to where the portfolio was 70-30 oil and gas versus mining.

Participant: A quick follow-up on that. It seems to me that in the last few years, domestic oil and gas producers have found capital discipline that was sorely lacking in the prior – you tell me – 15, 20, or 50 years. I’m curious if you consider that sustainable. What kind of players would you be watching – maybe as a canary in the coal mine – to check if that discipline is slipping away again?

Lundin: Shale is definitely on this wheel. It wasn’t about returns; it was about reinvesting, and you had such sharp decline rates. Then people said, “No, we need to make a return,” and now you’re seeing a wave of consolidation. I think you’ll have a few players left, which is healthy, and they will definitely be focused on more returns. Today, the world’s consuming the most oil ever in its history, so we’re quite bullish on the outlook.

It’s tough to say, but I think the discipline should continue, and you also see a bit more spending, but on a necessary basis as well.

Thomson: Let me chime in here. At least in terms of the discipline on the U.S. side and the fracking side in particular, what we’ve seen over the last couple of years is growth that has occurred at a much slower pace because rather than drill new wells, many fracking companies are either refracking old wells or going back into the so-called DUCs (drilled but uncompleted).

However, the DUCs inventory is dwindling very fast. That has enabled many domestic fracking firms to maintain production at a much lower investment cost because a lot of the wells are already drilled but just uncompleted. As that DUCs inventory gets used up, if they want to sustain or even grow – and my expectation wouldn’t be for much growth from here – they’ll need to start reinvesting in drilling. They may still remain disciplined, but some of the capex spend will have to increase because they don’t have access to that DUCs inventory anymore.

Mihaljevic: Adam, on capital allocation, could you tell us how you think about M&A? In other words, would you ever consider buying up shares of another public company if you thought they were extremely cheap and maybe, instead of acquiring projects, acquire a company if there’s a large discount to NAV?

Lundin: On the natural resource side, we know it’s all people and management and having those management teams aligned with shareholders – this is extremely important. Going out and buying a company where you don’t know the people or what they’re about is hard for us given our history. However, there are certainly opportunities – like people being spooked about Venezuela going into Guyana, which I don’t think is going to happen. Then you have Hess trading 10% off the takeover price. Sometimes you see opportunities like that, and those are areas where I feel you can take advantage, but these opportunities are quite rare.

Mihaljevic: Would you ever do a creeping takeover where maybe instead of deploying capital into your own shares, you might buy more of a company that’s deeply undervalued? You mentioned Lucara Diamond. Would you ever consider increasing your stake in something like that?

Lundin: I think the first approach is to try a friendly transaction. If that doesn’t go anywhere, you have a dialogue with the shareholders on the opposite side to see if they feel this is something that should happen. We’ve always avoided going hostile because of the time and the cost, but it depends. If someone brought a story to us and said, “We don’t believe management are doing the right thing,” we take a look, but historically, we haven’t done hostile or creeping takeovers.

Thomson: We have heard several times that management teams are crucial in the natural resources space. One of Warren Buffett’s famous quotes is “I want to buy businesses an idiot can run.” An idiot can’t run a natural resource business because it is technically challenging and complicated. That makes management all the more important relative to, say, a brick company. None of the businesses Warren owns seem like an idiot could run any of them, so I don’t really know what he’s talking about when he says that.

I think the Lundins are a family to keep an eye on. There are other investors and entrepreneurs in the natural resources space who are perennially successful. Hopefully, we’ll have some of them with us next year.

Adam, thank you for your time and insight.

Lundin: I appreciate it. Thanks a lot, Will and John, and thank you everyone for listening.

About the session host:

William Thomson is the Founder and Managing Partner of Massif Capital, LLC. Will has experience in private equity and credit/political risk insurance and has served as a strategic and economic adviser to NATO/ISAF in Afghanistan. Before starting Massif Capital, Will worked in the New York office of Chaucer, a Lloyd’s of London insurance syndicate, serving as the co-portfolio manager for a $750 million portfolio of credit and political risk insurance policies. During this time, Will focused on underwriting the credit risk associated with project finance for businesses within the real asset ecosystem, writing bespoke political risk insurance policies for firms operating in emerging and frontier markets, and supporting physical commodity traders in cross-border trade execution. Will also served as strategic and economic advisor to NATO ISAF in Kabul, Afghanistan. In that role, he advised senior leadership at the one- and two-star general staff level on various issues, including economic development, counter-corruption, and planning for the 2014 presidential election. He also served as the flag writer for General Rick Waddell, commander of a joint interagency counter-corruption task force. Will is a Graduate of Trinity College and holds a Masters in Government from Harvard University. Will is a member of the Value Investors Club and has won or been a finalist in several investment contests, including Sohn and the VanBiema Associates Small Cap Challenge hosted by SumZero. He is consistently ranked as one of the top analysts on SumZero, a buyside community of 10,000+ members.

About the guest speaker:

Adam Lundin serves as Chair of the Board of Directors of both Lundin Mining and Filo Corp. He also serves on the Board of Directors of Lucara Diamond Corp., NGEx Minerals Ltd., and the Lundin Foundation. Adam has many years of experience in capital markets and public company management across the natural resources sector. His background includes oil & gas and mining technology, investment advisory, international finance, and executive management. He began his career working for several Lundin Group mining companies in various countries before moving into finance where he specialized in institutional equity sales, ultimately becoming co-head of the London office for an international securities firm. For more than five decades and three generations, the Lundin Group has created meaningful value through responsible resource development at scale. The Lundin Group company portfolio has a strong operating foothold in Chile’s Atacama region, including a controlling interest in an emerging giant copper-gold-silver district located between two established mining belts straddling the Chile/Argentina border.

Hingham Institution for Savings and the US Regional Banking Sector

January 5, 2024 in Equities

This report is authored by MOI Global instructor Gwen Hofmeyr, equity research analyst at Folly Partners, based in Victoria, British Columbia.

Gwen is an instructor at Best Ideas 2024.

Since the Silicon Valley Bank crisis in March of this year, the banking industry has been dismissed as uninvestable by almost every smart person I’ve spoken to, spare for a couple weirdos that I managed to convince otherwise.

Common responses to my interest in US regional banks have gone along the lines of:

  • “There are too many regional banks in the US to analyze. There are a lot fewer in Canada.”
  • “I don’t look at banks because I don’t think that I can understand them.”
  • “I feel that the US banking sector is weak following the SVB debacle and therefore I don’t want to invest.”

A lot of the commentary builds on sentiment held since the Great Financial Crisis that banks are black boxes riddled with complexity and moral hazard, and that the work required to discern between the flowers and the weeds is not worth the effort.

My research findings disagree, as not only are there many banks run by credible underwriters with simple balance sheets, I have uncovered one that I think deserves to be in a textbook: Hingham Institution for Savings (NASDAQ:HIFS).

Through comparative analysis of 138 companies included in the SPDR S&P Regional Banking ETF (NYSEARCA:KRE), I provide context for why I believe Hingham Institution for Savings is one of the best banks in the US, with performance vastly exceeding KRE averages on the basis of efficiency, profitability, and managerial prowess.

To truly understand a business, you must understand it in relation to other companies within its industry. In total, my dataset for the report comprised nearly 3,600 data points, most of which were manually derived at the report-level. Through analysis of the data over the course of many late nights, I now have a sound understanding of what I like to see in a bank, but most importantly, I confirmed my suspicion that Hingham is an unusual one.

I feel as though I have barely scratched the surface of the US regional banking industry, yet the general apathy towards the sector, in tandem with the tremendous analytical work required for understanding, leads me to conclude that the sector is ripe for further analysis; for opportunity is most often found where people are unwilling to look.

The India Story: Krish Mehta on the Long-Term Investment Case

December 27, 2023 in Equities, Letters

This article is authored by MOI Global instructor Krish Mehta, investment analyst at Enam Holdings, based in Mumbai, India.

Krish is an instructor at Best Ideas 2024.

Much has been written and spoken about India’s ascent as an emerging economy and about the Indian stock market over the past few months. However, if we assess the fundamental drivers for India to become a $10 trillion economy by 2030, there is a lot of merit to the attention the country is drawing currently.

With a per capita income of $2600 slated to go to $4000 by 2028 (as per IMF), and favorable demographics with a median age of 28[1], supported by a strong fiscal position, India seems to have all the structural drivers in place.

While the argument can be made that the structural factors have always been in India’s favor, what is different this time?

There are several factors that have dramatically changed from the past, which are part of the evolution in a developing economy. Firstly, there has been a strong government push on capex and a reduction in wasteful expenditure. Analyzing the data over the past four political regimes in India spanning two decades, the data shows the increasing focus on capex and infrastructure (as seen below).

[2]

[3]

Given this capex push and focus on infrastructure, the government is translating policy goals into action. Infrastructural development and bridging the gap between rural and urban India is a key foundational pillar for the path to $10 trillion. Moreover, every Indian has been given a unique digital identity through Aadhar. With the linkage between Aadhar and new bank accounts particularly for new to bank customers, India has seen a rapid adoption of digital payments and efficient transfer of government subsidies to the target beneficiaries. Today, India has over a billion mobile phone users and consumes the highest mobile data per smartphone user in the world (as seen below).

[4]

The widespread digital adoption in India is evidenced by the success of UPI (as seen below).

[5]

With GDP per capita forecasted to rise from $2600 to $4,000 by 2028, credit growth will be central to India’s economic growth. The banking sector will be critical for India’s incremental growth ambitions in the coming decades and is poised to take off.

If the economy were to grow at 7-8% p.a. in real terms and 11-12% in nominal terms, credit growth will be in the mid to high teens for sustainable and well-rounded economic growth.

[6]

The table above shows the household assets in India by asset class. Given the low level of financial assets compared to physical assets, there is tremendous room for the financialization to go up in India. The financialization trend will be driven by bank deposits, insurance funds, pension funds and equity investments. As this share goes up with incremental household savings being invested in financial assets, banks will play a fundamental role and grow at a multiplier of nominal GDP growth (mid to high teens).

While viewing the market share dynamics, the high market share of public sector banks in the economy’s banking system (65%), leaves plenty of room for efficient private banks to gain market share and grow their businesses. One such private bank that has been the best-in-class lender for over two decades is HDFC Bank. Post the merger with HDFC Limited (it’s parent mortgage entity), the bank has a behemoth balance sheet of $300 billion and a market capitalization of $150 billion.

Having produced best in class growth (20%), ROA (2%), ROE (20%) and having maintained a highly conservative risk framework since inception, HDFC Bank is best placed to capitalize on the ongoing economic growth India is witnessing and will witness in the coming decades. It will play a central role in India’s growth ambitions, as validated by RBI’s classification of the bank as a Domestic Systemically Important Bank.

[1] World Population Prospects (WPP)
[2] https://theprint.in/economy/rising-capex-share-falling-subsidy-burden-how-modi-govts-spending-priorities-differ-from-upas/1896931/
[3] https://theprint.in/economy/rising-capex-share-falling-subsidy-burden-how-modi-govts-spending-priorities-differ-from-upas/1896931/
[4] Ericsson Mobility Report 2023
[5] NPCI
[6] RBI, AMFI, Jefferies

Best Ideas 2024 Preview: Lollapalooza of Scale, Consolidation, and Growth

December 26, 2023 in Best Ideas Conference, Letters

This article is authored by MOI Global instructor Keith Smith, fund manager at Bonhoeffer Fund, based in Rochester, New York.

Keith is an instructor at Best Ideas 2024.

What are the characteristics of a good investment theme? First, the investments that are a part of the theme must generate an adequate expected return. In today’s interest rate environment, where an investor can obtain low teens expected returns from well underwritten first lien debt on a growing capital light firm, the expected returns need to be at least in the mid to high teens. Positive equity returns are generated from two sources:

1) from growth in underlying firm cash flows as a result of being internally re-invested, shares being repurchased or paid out as dividends, and

2) the increase in the cash flow valuation multiple the market applies to the cash flows.

The more predictable source is through growth as changes in cash flow multiples reflect the speculative element of market pricing. Therefore, in searching for higher expected returns, growth should carry most if not all the load. Lower multiples provide a margin of safety against multiple contraction and should not be relied upon to generate most of the return. If multiple expansion occurs, it is a bonus.

Another characteristic of a good investment theme is that it should be applicable to multiple industries and have generated excess returns in the past. Consolidation is one such theme. Over the past few years, a number of industries have gone through consolidation with economics of the leading firms in the industry getting better with time. In many cases, the valuation of these consolidating firms are based upon their historical performance and not their improving current and future performance. Thus, there is a lag associated with valuation multiple appreciation as well as cash flow appreciation. This can lead to a favorable situation where both cash flows and multiples increase at the same time. Three examples of the growth/consolidation theme are found in our subject companies (North American Construction, The Ashtead Group and Builders FirstSource).

Consolidation and organic growth are important sources of scale for many businesses. Evidence of scale is seen in higher margins and higher asset turns over time. Scale occurs primarily at either a local level (as in retailing businesses) or on a national level (as in consumer durables or staples). As a firm grows, bureaucracy can dilute the positive effects of scale. Scale can also enhance larger players’ moats, as the larger firms can afford technology to improve productivity, reduce bureaucracy and provide less costly and more timely products and services.

Consolidation can occur geographically or functionally along a value chain. If done geographically and if more synergies are realized locally than nationally, cluster or customer density are important. Generally, fragmented markets are consolidated via both organic growth (gaining market share) and consolidation. Depending upon the difficulty, cost and timing of gaining market share and the price of an M&A targets, many times M&A is a better approach to consolidation than organic growth.

An interesting question is where in the consolidation life cycle does it make sense to invest? In the emerging portion of the life cycle (the top firm have less than 1% of market share), many of the economies of scale and synergies are not reflected in the financials of the firm so the valuations are typically lower and potential for growth is higher. Specialization can create favorable economics in the emerging portion of the life cycle. Later on, in the consolidation lifecycle, the economies of scale and synergies are more evident in the financials, but the valuation is typically higher. Investing in these consolidation situations as they develop can benefit from an increase in business quality not reflected in the recent price. All of the firms examined below have expected equity returns of greater than 20%.

The first firm we will look at is North American Construction (US: NOA), which is specializing in mining construction services (including moving dirt and road construction and repair) in remote locations for both mining and infrastructure firms. This a nascent fragmented market in North America and Australia. The mining segment of the construction services market is fragmented with many players having less than 1% market share. NOA has developed operational key performance indicators (“KPI”)s (such as equipment utilization) to help estimate NOA’s return in invested capital (“RoIC”) for projects they bid on. These KPIs provide guidance on what projects to bid on. A few other high RoIC specialty construction services firms have recently emerged in Australia, namely Duratec and Mader, which also focus on specific segments of the construction services market. Beginning in oil sands construction services, NOA over time has expanded its functional footprint (into mine management services) and geographic footprint (into Australia). NOA’s management team has also used traditional capital allocation such as leverage and share buybacks to enhance shareholder returns over time.

The second firm is the Ashtead Group (UK: AHT), which has historically rolled up and gained market share in the equipment rental market in the United States, Canada, and the United Kingdom. Equipment rental firms can achieve local economies of scale (clustering) through shared equipment pools (higher utilization), cross selling opportunities, technology automation and service opportunities. Ashtead uses a hybrid consolidation approach. Ashtead purchases firms providing new rental equipment types (such as cleaning equipment) or equipment rental firms in new geographic areas. Once a beachhead is established, Ashtead relies on organic growth for growth within a region or functional area. Ashtead has developed a nationwide distribution platform where new products and services can easily be distributed and provided to its customers. In addition, Ashtead’s management team has used traditional earnings growth techniques such as leverage and share buybacks when Ashtead’s stock price is low and there are no immediate consolidation opportunities available in the market.

The third firm is Builders FirstSource (US: BLDR), which has rolled-up and gained market share across different segments and geographic regions for the supply of value-added building products and building product distribution across the United States. As a part of the roll-up process, BFS is increasing its total addressable market both geographically and via new product/service offerings. Like Ashtead, BFS has developed a nationwide distribution platform for the distribution of new value-added building products and services. BFS’ management team has also used traditional earnings growth techniques such as leverage and share buybacks when BFS’ stock price is low and there are no immediate consolidation opportunities available in the market.

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