This one popped up on my radar a few days ago and I can’t tell if it’s super undervalued and poised for a big future or a dinosaur headed for extinction. I need opinions from people smarter than me.
NACCO Industries ($NC) is a coal miner that is pivoting their business away from coal mining and to a miner-for-hire fee-based management structure. Basically they let someone else own the land and take a fee based on the tonnage of material extracted and delivered to the land owner. This is a small but growing segment of their business making up a negligible amount of their revenue in 2018, 30% in 2019, and 31% through Q3 in 2020. This is a very small company with total revenues across all segments being $135m in 2018, $140m in 2019, and $105m for 9 months ending in Sept 2020.
Currently, their main material is limestone which they extract from 20 quarries owned by 10 different customers.
However, in 2019, they signed an exclusive contract with Lithium Americas ($LAC) to be the exclusive miner of the Thacker Pass lithium development in Northern Nevada. $LAC has been in the news a lot for the Thacker Pass project and it’s stock is up over 300% in the last 12 months. The development is believed to be the largest lithium deposit in the United States and is estimated to have a little over 3 million tonnes of lithium. Last month, LAC and NC received approval from the Bureau of Land Management to begin construction of the mine. $NC is fronting $50m to build the mine which should be ready to begin production in 2023.
In the technical report made to the BLM, LAC/NC estimated 300% growth in the demand for Lithium from 2017 to 2025 with an estimated price of $12,000 per tonne (prices now are between $9,000 and $10,000). The report also says they expect to extract 30,000 tonnes in the first 3.5 years and then 60,000 tonnes for the next 42 years (If we’re doing the math, that’s $360m of lithium per year for the first 3.5 years and $720m per year thereafter).
Let’s remember that they are only being paid a fee per tonne of ore extracted and those are numbers for the refined lithium. The lithium is estimated to have a concentration of .33% meaning to pull 60,000 tonnes of lithium, you would need to mine 18 million tonnes of ore. The details of the contract signed with LAC have not been disclosed so we don’t know how much revenue to expect from this operation. This is where the opportunity lies, in my opinion.
If we look at their existing limestone operation as a guide (those contracts are also not public that I could find), they extracted 10.2 million tonnes in 2019 and 11.6 million tonnes in 2020 creating $8.9m and $9.4m in revenue respectively. From what I can find, limestone is currently valued around $30 per ton meaning they received about 25% of the value as their fee. I don’t think we can expect 25% but hell, even 5% of the value of this lithium would double the contract mining segment’s revenue and increase the total company revenue by 10-20%.
The big takeaway here is that we have A LOT of uncertainty. We don’t know what lithium prices will look like, we don’t know what the fee structure of the contract with LAC is, and we don’t know what the costs of this revenue will be.
HOWEVER. This stock is currently trading under 60% of book value. It’s at a P/E under 7. They have nearly no debt and over $100m in cash (some of which is earmarked for the mine construction undoubtedly). The downside on this seems very small with an upside that looks very, very promising. The risks associated with the future uncertainty seems more than offset by the valuation. They’ve got cash, cash flow, and a growth story in front of them as they change the trajectory of their business away from coal mining and hopefully use Thacker Pass as a springboard to other major projects.
Admittedly, I know nothing about miners or the materials industry. Am I completely off base here or is this a diamond in the rough?
edit disclaimer: I opened a small position in $NC earlier this week when I found it. I plan on increasing that position if it withstands further scrutiny so please poke holes in my thesis.
Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence or consult your financial professional before making any investment decision.