On 4 July, i posted the following story on Hotcopper when Mins...

On 4 July, i posted the following story on Hotcopper when Mins was at $24.44.

I posted it on twitter also, and it has been read 4500 X so far and counting.

A few funds contacted me, and when i explained the numbers they went from short to long, and are now sitting on 25% gains from the quick reversal and change of mind set. Most still remain short and wrong.

My message today is exactly the same. I have just updated the numbers for spot rates in the following story:

Dont short Berkshire Hathaway on a P/E of 4.5 X

Imagine if a fund manager came to you and said:
"My plan to make money is to short Berkshire Hathaway."

You would rightly respond saying: "That's insane. You are betting against Warren Buffett, who has shown over a long history to be one of the world's most astute share investors ever! There could only be one reason for this; valuation grounds; is Berkshire trading at a large premium to the sum of the parts."

And the fund manager responds: "No, it is actually trading quite cheap. On a current mark to market it will generate nearly 50% of its equity value in free cash flow in the next two years, or trades on a Price/ Free cash flow of 4.1 X".

You would respond: "Well that bet is even more insane then."

But it gets worse.

Buffet long run has returned about 20% per annum; that's pretty good.

But there is one company that has done significantly superior returns than Buffet over the last 19 years..... and that company is ....
MINERAL RESOURCES, 39.5% per annum since listing in November 2006 at 90 cents;
run by one of the truely great capital allocators of all time, Chris Ellison:

Onslow $4 bn spend, sold a small chunk of the infrastructure for $1.3 bn, so on a net $2.7 spend it now generates for Min Res over $1 bn of free cash flow a year for the next 25 years and counting. That is what i call capital allocation. The graph below is a truely beautiful picture of value creation. Capitalism at its finest.

And it gets even better: 13.91 % of the register is short: dumb, fast money based on rumourtrage, AFR irrelevant piss & wind etc, that is about to get blown up really badly. They lost 3% yesterday, 3% the day before and 4% the day before that.

And it gets worse from here because iron ore, Min Res's key production commodity, is rallying up: both spot and deep into the forward curve which is approaching contango!

What could save the Shorters?

The Onslow Haul road doesn't work? Well that option has gone because Min Res is doing 32 m t pa, and their manager has said there is "no risk at all" to the 35 m t pa production target.

Iron Ore falling to $70 in the next two weeks: Yes, that may happen, but the chances of an asteriod hitting the world and destroying everything, including the Min Res infrastructure, is probably a more likely and better hope.

Reversing the bet and instead going long MINs at $31. Yes, that does work, as it will be $55 plus in a year's time.

As John Maynard Keynes famously said:
"When the facts change, i change my mind, what do you do, sir?

Happy trading in Mins today.