Investors naturally gravitate to industries with strong growth prospects. But there are opportunities too in “picks-and-shovel” strategies, where investors instead (or additionally) buy shares in the providers of services and equipment needed by end producers.
If everyone is buying into the same growth story, this type of sideways approach can offer better value, and allow you to reap profits even in the early stages of a promising trend. A picks-and-shovel holding typically means exposure to a number of companies, thereby lowering your overall risk, especially when it’s not clear who the eventual winners in a market will be.
Indirect plays can cover a wide range of options. Gaming, oil and gas and critical infrastructure are lucrative and important markets, and all require high levels of security. One way investors can tap into their success is via security and surveillance specialist company Synectics, which supports companies operating in “demanding environments”.
Or investors can gain diversified exposure to mining through Ecora Resources, which supplies upfront finance to customers in return for non-operating interests in projects. These earn Ecora a percentage of revenues known as royalties and streams — the right to buy a percentage of the metals produced at a discounted price.
Although the companies are not taking on the same level of risk as the businesses they support, picks-and-shovel investing is not hazard-free. Much of AI investing is of a picks-and-shovel nature as investors buy into this new technological revolution through infrastructure providers such as semiconductor giants, such as Nvidia, Broadcom and TSMC and wafer fabricators.
If AI fails to deliver the level of benefits expected, their shares can be expected to crash down to earth. And troubled oil services company Wood Group shows how once highly rated businesses helping a multitude of companies can suffer spectacular falls from grace.
HOLD: Ecora Resources (ECOR)
The royalty and streaming company spends as Kestrel keeps contributing to the balance sheet, writes Alex Hamer.
The measure of a royalty and streaming company is how efficiently cash moves from the top line to the bottom line and then into the pockets of shareholders.
Ecora Resources has the added difficulty of needing to invest to replace its Kestrel coal royalty in Australia, which will soon stop bringing in revenue. To help with that strategy, the company reduced its dividend last year, and so the final payout for 2024 will be 2.8¢ per share, around a third of the 2023 payout.
At the same time, adjusted earnings dropped by 5 per cent to $29mn (£22mn), while reported earnings took a hit from a $15mn writedown on the cobalt stream on the Voisey’s Bay mine in Canada. Taxes and interest payments knocked free cash flow from $29mn to $22mn.
Voisey’s Bay contributed revenue of $6.2mn, thanks to a one-third uptick in tonnes received.
The weaker price limited the year on year rise to 11 per cent, however. The cobalt price has moved up in recent months after the government of the Democratic Republic of Congo announced an export ban, though, which should boost first-half sales in 2025.
Kestrel brought in $41.4mn, a figure expected to increase this year.
Ecora chief executive Marc Bishop Lafleche said the company would keep buying new royalties and streams as the weaker investment environment for small and mid-cap miners has “created demand for alternative, and less dilutive, forms of financing”.
Last month, Ecora spent $50mn on a producing copper stream, which it says has a payback period of around six years. The company’s balance sheet is now split between producing assets (valued at just over $180mn) and pre-production assets, worth $246mn.
The market value now solely captures the production assets (as of December 31), which we think is reasonable given the long development timelines and risk in the industry.
BUY: Bioventix (BVXP)
The sheep monoclonal antibody company sounded disappointed with the pace of sales, writes Julian Hofmann.
Bioventix is a specialist within a highly specialised area. In producing monoclonal antibodies in sheep that can then be used as the basis for disease markers and treatments for hard-to-detect conditions, it occupies an almost unique niche. But not even this was enough to overcome what looked like a disappointingly slow half, reflected in the share price nearing a 12-month low.
Sales of troponin antibodies, which are used to mark potential cardiac problems, were slower than management expected in the half, while the core antibody business saw sales broadly similar to last year. The company could point to the fact that the troponin business was not yet mature and that its partner Siemens had received US Federal Drug Administration approval for a revised troponin assay that covered a new application, which will eventually help to boost sales.
Higher research and development costs, as Bioventix expanded spending on industrial pollution and water quality projects, as well as for Alzheimer’s disease projects, meant there was a corresponding reduction in reported profits.
Management forecasts that broadly flat revenues from its core business, plus slower troponin sales, combined with higher R&D spending, will mean reduced profits for the full year, although cash generation should be unaffected.
FactSet consensus has Bioventix at a forward price/earnings ratio of 16 for 2025. This represents an interesting discount to the company’s five-year average of 27.5. With a dividend yield of over 6 per cent, there is reasonable compensation for risk on offer for interested biotech investors.
HOLD: Caledonia Mining (CMCL)
Gold miner reports currency error between 2019 and 2023 as 2024 results show higher profits, writes Alex Hamer.
For a gold miner with consistently low costs and stable production, Caledonia Mining has not been able to show investors enough on the bottom line in recent years. The company has now had to knock millions of dollars off past profits due to an accounting error. This was down to using the wrong currency for deferred tax liabilities, which led to foreign exchange losses being understated.
The restatements are $4.2mn (£3.3mn) for 2023 and $10.9mn in 2022 in the negative, although a $2.4mn reduction to the tax expense in 2022 went Caledonia’s way.
Last year saw stable mine output from the Blanket mine, at 76,656 ounces, and costs level at around $1,500 an oz including capital spending. This latter figure kicked up to more than $1,800 an oz in the December quarter, however. The average realised gold price made up for the costlier quarter, hitting more than $2,800 an oz.
Thanks to the higher price, operating cash flow increased from $15mn in 2023 to $42mn last year, although this just represented a return to the 2022 level, when sales were $40mn lower. The dividend has been held at 14¢ a quarter.
Caledonia is working on a new mine, Bilboes, a project also in Zimbabwe bought in 2023. Higher forecast costs than expected and “new factors that we expect could positively impact project economics” have delayed a new study expected by the end of March. Management had previously forecast a 150,000-oz-per-year mine over a 10-year production life, and will fund the build through debt and new equity.
For 2025, analysts forecast a 5 per cent rise in sales and 25 per cent increase in cash profits, to $193mn and $71.5mn respectively.
