Stig Brodersen  1:20  

Marin, let’s just jump right into the first question here because one of the reasons why we wanted to ask you to come on the show is because we’ve seen this stock market slide here over the past few weeks, but it is still trading at a very high level, historically,.

We know that many investors are looking for other asset classes to invest in. If you are a stock investor with very little knowledge about commodities, how should he or she think about the pros and cons of diversifying into commodities?

Marin Katusa  1:50  

That’s a great question. I think the key takeaway is that anyone looking at the sector has to understand that this is a very cyclical sector and a very volatile sector. It’s a very cost-extensive sector. 

For example, the process of even before you get to drilling, the early stage project, the time to get permits, the time you got to build roads, you got to do sampling and geophysics. 

Then even if you get lucky and you’re part of the one out of 3000 exploration projects that ever becomes a mine, the process to build a mine is also a big runway, whether it’s financing costs or permitting and the time to get there. 

I think those are the key factors. You have to understand your timeframe and what phase of the sector are you getting involved in.

Preston Pysh  2:39  

Marin, in the stock market, you have a ton of different sectors and types of securities to invest in. Can you help us understand the numerous different types of commodities that a person can invest in?

Marin Katusa  2:50  

Sure. The major commodities like oil and copper and gold trade on an exchange. Then you have a niche commodity such as uranium, vanadium, and rare earth. They’re not anywhere near as big as oil or copper, gold, or met coal, for example. However, they’re also really interesting, but they don’t trade freely on an exchange. You really have to know what you’re doing there. 

Then you look at inflationary markets when you’re talking about the overall markets. 

Historically, gold has performed exceptionally well in an inflationary market, as do most commodities. If you’re in a deflationary market, then they would do less well than in an inflationary market, generally speaking. There’s less dollars to go around. Therefore, the commodities would get less bid and there’s less speculation.

Then you also have to factor what price these commodities are traded in and the reality is the US dollar is the king of currencies presently, so you have to understand the cycle of the US dollar and FX currencies with commodities. 

In a strong US dollar environment, if you believe the US dollar is going to get stronger, then you have to have a specific outlook. If you believe the US dollar is going to get stronger the way I do, as of today, I think the next six months the US dollar will do phenomenally well relative to other fiat currencies. Then you should expect a pullback in the commodities.

Niche commodities are a little bit different. They’re not as correlated to the US dollar. For example, gold. There’s so many factors that people have to understand. I’ve kind of highlighted the big ones.

Stig Brodersen  4:35  

Very interesting. Marin, I noticed that you expect the dollar to appreciate oil the next say, six months. What is your analysis behind that?

Marin Katusa  4:44  

Many, many reasons. Actually, I’ve been publishing this since early January. The US dollar has performed exceptionally well in 2018. Tomorrow, actually, I’m publishing what I think will be one of my most monumental research reports. I’m calling it The Katusa Paradox, which gets into all of the details of the US dollar.

[The Katusa Paradox] looks at interest rates, for example. You look at the growth rates across the emerging markets versus the US dollar, or you look at the eurozone and their export rates. 

The reality of the matter is as much as the US dollar is hated and it’s the easiest currency for people to talk about all the reasons why it won’t perform well.

Stig Brodersen  5:27  

So would it be fair to say that it’s the least bad currency? Is that how you look at it? Why do you have that as your time horizon? Is that because that is just how far you can see because there’s so many other factors that you just can’t foresee? 

Marin Katusa  5:45  

Exactly. Look, this world today with the information and the tweets… Today’s the election, so many things can change. If you’re a real investor, you have your inclinations, but you have to have the reality at hand. Also, you have to make your investment decisions with the best available information at hand. 

Now, look, when I’m financing some of these large projects, you have to look at your long term trends so if you’re financing, do you hedge your currency? Do you hedge your production?

All these factors come into play, but I don’t know what the US dollar is going to do on August 1, 2025. Though I do know that considering where the US economy and government are at, where you look at the other economies in the emerging markets… A betting man would say, “You’re probably in the near term better to do with the US dollar relative to the other fiat currencies.”

Preston Pysh  6:46  

Marin, anyone who’s ever invested in commodities, they know that they’re extremely volatile. They typically require high fixed costs to set up and the market conditions might easily have changed before the original investment started generating any kind of cash to get back as an investor. 

How then can our audience take advantage of that uncertainty and volatility in commodities?

Marin Katusa  7:07  

After two decades, you kind of come to the realization to expect the unexpected. After traveling to over 100 countries and being involved in all sorts of developments, at this stage in my career, where I think the market is going, I am avoiding what I call the AK-47 nations.

It’s very exciting and sexy to go somewhere and find a world class deposit in an exotic part of the world, but here’s the reality of it: I’ve put on body armor before to go to projects. The reality is by the time you deal with the government’s take, the high cost of electricity and infrastructure, you can make bigger scores closer to home. I mean, North America. I’m saying US and Canada, where you have infrastructure and where you can bring modern technology to old pass proof. 

The best place to find a mine is in the shadows of an old mineshaft. For example, in 2006, I became the largest investor in an old copper mine that everybody forgot about. Yet in World War One, it produced 25% of the copper for Canada during the war effort, but everybody forgot about it.

By bringing modern technology to the story, within 10 years, or actually, within six years, it became the country’s third largest copper producer. 

Another great example is understanding the history of the Balkans. A lot of people think of it as an AK-47 area, be it what happened to Serbia and the former Yugoslavia… People forget that the five largest silver lead zinc mines during the 60s, 70s, and 50s was in Yugoslavia. It was a mining country. It goes back to the Roman Empire days of *inaudible*.

Time and again, if you’re able to buy when nobody wants the story, what I call is the paradox moment. You can make a return that you can’t make in any other sector. 

Take shale oil of the revolution. It’s not like people didn’t know the oil was there. They’ve known about these oil deposits since the 50s and 60s, but the technology unlocked that ability. 

Billionaires remained. They’re buying acreage, but you have to be early to a trend and stick to it and understand the cyclicality of the industry. Again, the number one rule is investing with the right people.

As much as it’s about cycles, the commodity, and your developing a world class asset, I have found through my experience, when you invest in the second line or the second string quarterback, you might get to the end zone, but he might fumble it just before. You want to invest in the top team like franchise players. You want Michael Jordan. 

Stig Brodersen  9:50  

Well, I’m really happy you said that. I know it’s such a complex thing. It’s like saying, “Only trust a good management when you’re investing in a stock.” 

It’s very hard to validate and it’s really hard to read between the lines, at least for stock investing. I am not as familiar with commodities as you are clearly. How do you look at commodities and accessing the best team? What do you look for?

Marin Katusa  10:18  

Number one is when the story is on the front page of The Wall Street Journal, you’ve missed it. You want to be investing where it’s in the back and when nobody’s talking about it. It’s in a small font and there are no pictures. It’s unloved. You have to be contrary. That’s a given. 

Number two, you can find great people, but if their cost base is $1 per share, and the share price is at $10 per share, have the management team add 10 times more value to the story, or are you just paying a 10 times promo? 

Generally speaking, if you go back to all of the biggest wins in the sector, you can find that paradox moment where you, as a retail investor, during the paradox moment, you can buy stocks at a cheaper price than the guys who are the best in the business with serious skin in the game.

If their average cost base is $1, you can pick it up for 80 cents or 75 cents a share. That’s what you want to start out. 

Ask yourself who are these guys? What are their past successes? 

Secondly is just because someone was a successful developer of copper deposits, and now he wants to develop, let’s say, an open pit copper porphyry project in Canada… Is going to be successful developing a nickel project in Brazil?

Well, it’s a different country. It’s a different commodity and you have different metallurgy and different processing. There are so many different factors. That necessarily isn’t the right skill set. It’s kind of like saying, just because Tom Brady’s an incredible quarterback, it doesn’t necessarily mean he’s going to be an incredible hockey player or a basketball player.

Stig Brodersen  11:58  

With something like natural resources, if you’re too early, you can really get in the world of pain, even if you’re eventually right about your investment thesis. With your wealth of experience, what process can be used to enter and build the positions?

Marin Katusa  12:17  

Number one rule, I don’t want to come out here and try to pretend that I’m some guru or any that. I’m in the trenches. Generally speaking, I have been early to trends and that’s okay. I go in knowing that.

The irony of the businesses, you can buy something called a unit in a financing offering, where you get a warrant also attached to it like a five year warranty. I’m okay being two years early through refinancing if I get a share and a warrant. 

Secondly, I talked about buying in tranches. Let’s pretend you like this gold story, and you think it’s going up ten times. Let’s just say you’ve done all your research. Never ever, ever buy all your stock at once. I call it buying. I call it the matrix or the tranches. 

It’s an educational process where you buy your first tranche and I break it up as 25%. Usually in a financing if you’re early, and then you build your position as the developers as the story develops, because these stocks rarely go up the day or month after you buy it. These things take time. They’re a very long lead, as you suggested. it takes time for dividends to come back, but if you buy in tranches, you never spend and you never invest money that you need. 

For example, don’t speculate with your mortgage money, your students tuition, money, and rent money. The resource sector is very, very cyclical and volatile. 

I’ll give you a great example. I was one of the largest investors in the tungsten sector in the early 2000s. I’ve again learned the hard way. I was so convinced about this investment thesis. I went all in on three stocks. 

Within 10 months, I was down 60%. Within 12 months of that point, each stock went up over 10 times. That took a lot of strain and intellectual fortitude to stick with the story because I was so convinced of my research.

That could have shaken out a lot of people, but if I bought in tranches, buying in tranches, starting with having understanding what private placements are and the financing advantage with the warrant, those are two key strategies to help you succeed in a very high risk sector.

Stig Brodersen  14:36  

Well, thank you for that elaboration, Marin. I’m actually very curious to hear which commodity that’s on your radar right now. Also perhaps how you assess the intrinsic value of that undervalued commodity.

Marin Katusa  14:53  

The first thing everyone has to understand when these companies, any publicly listed company, wants to develop their project, they start with a PEA, or preliminary economic economic assessment. Then a PFS, preliminary financial study. Then a BFS, bankable feasibility study. 

As these stories develop, you have to look at your inputs. They try to make these technical studies look as positive as possible. After you visit hundreds and hundreds of projects, you start to figure out and know the engineers of these firms. You have to understand that if the price of let’s say gold is $1200, an ounce, and the economics of the study are based on $1500. Is that a good investment? No, right? 

You want to be able to understand what the thesis is? Are they going to put that project into production? Or is this a leverage play to a future gold price? 

Therefore, understand what you’re buying and why you’re buying. 

When you talk about intrinsic value, in the resource sector, it comes down to one thing, what is the cost to produce it? No one mine is the same. Mother nature is very tricky. So what I look at to answer that question is, I only focus on the lowest cost quartile of production assets to be a world class asset. 

Secondly, do you really want to focus on a small project? No, because the time spent working on something small is going to be the same as working on something big. There’s only small profits and small projects, but you have all of the same big headaches as a big project. 

There’s an old joke in the mining sector that the only way to cut costs on a small goldmine is to fire the mine manager, but when you talk about big gold projects, or whatever resource projects, you get scalability. You got multi generational *inaudible* assets. More importantly, who’s going to buy out all the assets?

I love gold. I think it’s a great place to be, but the companies that I’m investing in, I’ve been to the projects. I know the management. I’m one of the largest investors in the deals, but their cost, they’re all in sustaining cost has to be 30% to 40% below the current spot prices.

I won’t invest in a producing gold mine that needs $1400 to break even when gold’s at $1200. I look at $6-7.50 per ounce cost of production. Again has to be world class, and it has to be able to move the needle of whoever’s going to buy it out, because that’s what the big gains in the sector. You want to be part of a *inaudible to get that big premium. 

Right now, I’m very excited about gold. I’m very excited about uranium, because it’s so unloved. It’s so beaten down. Not a single mine in America makes money at current spot prices in uranium. It’s just such a perfect setup over the next few years.

Preston Pysh  17:44  

Marin, talk to us a little bit more about this uranium position. Specifically, talk to us about how you think about the company that has the high fixed costs, like we were talking about earlier and the low variability cost. Then how do some of those factors play into the way you assess a company’s value.

Marin Katusa  18:01  

There are two types of uranium mines. There’s the hard rock mines where you go and dig up rock and you extract the uranium from the rock. Then there’s something called ISR, in-situ recovery, basically it’s like a water process. You have no big mining trucks, shovels and haul trucks. You don’t have a crusher or a ball mill, or any of those conveyors. Your mine is much lower electricity, because it’s essentially like a water plant or a dairy farm. 

Right off the bat there so what you’re talking about is you can’t really reduce your truck costs. Your fixed costs go. That’s why we’ve seen the world’s second largest uranium mine. It’s also the highest grade mine, McArthur River, owned by Cameco. It shut down because the costs are so high, but yet an ISR mine, you can ramp it up by pushing more water through the system or you can ramp it down. You’re not changing. There’s no trucks, there’s no shovels. 

You then have to understand the sector you’re in and then also in the gold sector, what type of ore is it? Is it hard rock? Is it? Is it a softer rock? Are you leaching? Are you crushing? 

There are different factors here like open pits or underground.

Take it even to the oil sector, I remember in 2009 and 2010 in Iraq when we had to put on body armor. You look at the costs of security and drilling costs. Everybody at that time assumed that Iraq was the holy grail when it was opening up in Kurdistan. 

When you work backwards and count your full cycle costs, remember that there’s a big difference between half cycle and full cycle. Full cycle includes all your exploration and development costs and your lifting and your operational expenses.

Stig Brodersen  19:46  

I absolutely love your response here because it really reminds me of Warren Buffett. We have an audience here in The Investor’s Podcast and they’re primarily old school value investors. 

One of the methods that were talked about is the scuttlebutt method. It is something [Buffett] learned at a very early age in terms of learning everything you can about a stock before you invest in it. It might be speaking to employees or speaking to suppliers or customers, whatever it might be, just learn as much as you possibly can. 

Then I hear stories like you’re telling here. When you visit the mines that you actually invest in, what do you gain from that that other investors who are sitting behind their screen do not?

Marin Katusa  20:35  

Let’s explain producing mines, because it’ll be much easier to explain this.

You look at how clean the mill is. For example, if there’s garbage everywhere, if there’s coffee cups hanging around, if materials are not organized properly. Try to visualize big crushers that are 38 feet wide and all these equipment moving. If it’s messy, you know this isn’t run properly like a streamline business. 

Another thing I look at is the condition of the equipment of the mine. If this is all rusted out, and you look at the road conditions within the mining operation,  bad road conditions, which mean they’re going to chew through their tires. People don’t know that tire costs make up almost 5% of the price of copper, believe it or not. 

If I look at big rocks everywhere, those are going to cut into your tires, well, 5% is a big difference when copper goes down to $2.25 a pound or not. Now for a dollar copper, no one really cares. 

I’m always looking at what is my worst case scenario.

Another key factor that I always talk about, what’s the safety record of the mine, because a proper mine and a proper management care about their employees.

More importantly, if they care about their operation, by caring for their people, they’ll be much more optimized.

If you see a lot of people getting injured, I avoid any mine that has anything but the lowest quartile of injuries, because something’s wrong with the design or the management. 

By going through there, I can see how much rock are they crushing? What are the stockpiles? If something happens, let’s say a water storm or an electricity outage, how big is their stockpile? 

All these things, by going to the sites, it gives you a picture of by lifting up the hood of the engine. You can’t really figure out what’s wrong with the car unless you get inside the equipment and that’s the same for any of these operations.

Preston Pysh  22:39  

Marin, talk to us a little bit more about your process of conducting these site visits.

Marin Katusa  22:44  

I go on these site visits alone because I organize with the management for the site visits I go to. Very rarely do I do big site visits because I call that the dog and pony show. When it’s the dog and pony show, for example, the two I mentioned when I went through Iraq and the Middle East, that was by the big banks.

Obviously management is going to polish and make everything look as good as it can. I like going to these sites when no one expects me to go when it’s just an average Wednesday.

In certain areas like Canada, I go to the First Nation reserves to talk to the people about what are the relationships between the First Nations or the indigenous people with the mining operations. All these are key. 

Stig Brodersen  23:27  

Marin, I want to talk about the oil price. The oil price is so complex. You hear all these rumors all the time. You probably remember back in 2016 when we saw the oil price below $30. I think today it was as low as $27. 

At the time, many people thought it would stay down there, as a result of the cheaper onshore reserves. In a way that did not seem to be included in the market’s original assessment. 

We had this very volatile and bumpy ride. Today, 6th of November, we have an oil price just above $60, but we have even recently seen prices in the mid 70s. Where do you see oil going these days?

Marin Katusa  24:15  

Again, I have to put a timeframe on it. We’re nearing the end of 2018. I think oil in the near term, over the next six to 12 months is going to go lower. Let me explain why 

America has increased its market share better than any other oil producer. The US is the world’s largest oil producer at 11.3 million barrels a day. A lot of people don’t know that. The Russians are 11.2 million barrels a day. Then the Saudis are about 10.5 million barrels a day. 

The point here is that $60 oil is a bonanza for many of these nations now. The US and Russian have very different types of production. 

When I went to Kuwait, a Kuwaiti well can have its recovery of a new well within three months at $80 oil. So at $50 oil, it’ll be, say eight weeks. That’s an incredible return on investment. 

Why don’t they just produce more wells? Well, it’s about shipping, infrastructure, and pipeline capacity. In the US, they’re increasing the Permian pipeline capacity by over a million barrels a day, over the next 18 months. We will see the US produce over 12 million barrels a day over the next few years.

I know that sounds crazy, but that’s what the numbers are saying.

How about the Russians? The Russians have the opposite. They’re not even fracking yet. 

Now, the Russians have invested in a very different type of production. They’re still conventional. So whether the price of oil is $25 a barrel or $80 a barrel, they’ve benefited from almost 20 years of increasing oil prices. That’s not going to change. 

Then you have Saudi production of over half of that is within the Ghawar District. That’s what we call swing production. The Saudis have increased their production versus because of what’s going on in Iran. Iran has decreased their production. 

Where do I see all this going? There’s no shortage of oil. I didn’t even mention Canada yet. We could increase production by 50% today, if Canada had the pipeline infrastructure. 

These things are very cyclical. Canada will build the pipelines. When they build the pipelines to the west to tap into the Asian markets and east to tap into the European markets, Canada will increase its production also. There’s no shortage of oil, even at $40. 

Preston Pysh  26:42  

Marin, when you look at oil, and we try to understand where the price might move, there are countless amounts of variables that we could examine that are impacting the supply and demand. I’m just kind of curious what your framework is for trying to understand something that’s so complex.

Marin Katusa  27:00  

My framework has been developed over 20 years. It’s by learning. I’m still learning and my framework is evolving. I haven’t figured it out perfectly. No one has. It changes daily, but thinking about the future, for example, Europe’s largest shale company is a company called Cuadrilla. 

The president of BP, Lord Browne, became the chairman of this company. Well, I was one of the founders of this company and the largest investor in 2006. By learning these factors, when we started this company, we said, “Hey, fracking is the future. Let’s go to Europe and frack because we can get away from the… There’s like the UK *inaudible* and shales have the potential to get away from the Russian imports.”

It was just a business economic solution that I saw, but when we started to do this, there were no frack sets that could actually frack and drill. In Europe, it was all crappy old equipment through Romania or Bulgaria, or old Russian equipment, because no one’s ever done it before. 

By talking to traders, investors, and in all the permitting, you figure out all of these different factors of the pipeline infrastructure and the geopolitics of it all. You just kind of, like my life, as you do more and more reading, traveling and investing, you kind of add and evolve your investment framework. 

Preston Pysh  28:30  

Marin, it’s quite obvious that we’ve only covered just the tip of the iceberg when it comes to your knowledge and expertise in the commodity sector. I’m sure many people listening to the show would love to know more about you and some of your resources. Can you share some of those details with us?

Marin Katusa  28:47  

I publish a weekly, it’s free on my website, it’s katusaresearch.com and you can just go and see my style. More importantly, if anyone was to truly understand where I think the resources are going and where I’m betting, I believe, now is the time to educate yourself. 

Warren Buffett will say just stick to your principles, your value investing framework. I don’t want to be making these grandeur statements. It’s about hard work, investing in what you know, and your framework. 

If your thesis changes, you have to stay disciplined and sell. So that’s what my style is, but it’s where I’m betting my money because what I think is going to happen next is going to provide a once in a generation value investor opportunity in the resource sector. It’s what I’m doing with my money and that’s why I’m calling it a paradox because no one’s expecting it.  I think it’s actually a likely outcome. 

For your audience, I highly recommend going to katusaresearch/TIP.com which I’ve set up for your audience to best understand where I think the results sector opportunities will be. 

Preston Pysh  30:02  

Marin, thanks so much for coming on the show and sharing your knowledge. We greatly appreciated this. I know I was learning a ton just listening to some of your responses.

For anyone listening, we have links in the show notes to all the resources that Marin mentioned during the show. We highly encourage everyone to check out those resources because you’d be hard pressed to find a better place and better information out there on this topic of commodities.

Stig Brodersen  30:29  

Guys, that was all that Preston and I had for this week’s episode of The Investor’s Podcast. We will see each other again next week.

Outro 30:36  

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