Tag Archives: basic-materials

AMLP Shareholders Beware

By hidden design, the ALPS Alerian MLP ETF (NYSEARCA: AMLP ) robs shareholders of 37% of their upside gains. It was the first ETF do this, and when I revealed AMLP’s dirty little secret to owners and potential buyers, many did not seem to care. “It’s all about the dividend,” they emphatically stated. “Plus, in a down market, AMLP will only fall 63% of the underlying index,” they crowed. AMLP clips 37% of performance because it is a C-corporation that is liable for federal and state taxes, estimated to be about 37% of any capital appreciation and taxable income. The supposed “benefit” of this horrendous tax drag is that it would act as a buffer during down markets, limiting declines to just 63% of those experienced by the underlying index. However, AMLP is failing to live up to those expectations. The fund has been falling like a rock the past ten weeks. Shareholders missed out on the lion’s share of gains on the upside, and now they are getting screwed again as the fund loses more than its underlying Alerian MLP Infrastructure Index. The promise of smaller losses in a down market is now history. Evidence of this can be found on AMLP’s website , where the one-month performance of the fund was -7.96% for November, while the underlying index is showing a 7.95% loss. The problem began in mid-September, so the three-month performance of -13.36% doesn’t reveal this discrepancy, yet. The performance table also shows that since inception, AMLP has had a cumulative return of +14.63%, while its index returned +34.56%. AMLP has returned less than 38% of the underlying index return. The other 57% has been eaten up by taxes and fees. Owners of AMLP are blinded by the yield. Based on its fourth-quarter distribution of $0.299 and Friday’s (12/4/15) closing price of $10.91, this C-corporation disguised as an ETF has a seductive yield of 10.96%. What many owners do not comprehend is the degree of principal being robbed in order to support the illusion of a high yield. Fortunately, the UBS ETRACS Alerian MLP Infrastructure Index ETN (NYSEARCA: MLPI ) tracks the same Alerian MLP Infrastructure Index, making it easy to see AMLP’s shortcomings. Using data and software from Investors FastTrack , I was able to produce charts making a revealing comparison. Please note that MLPI uses an exchange traded note (“ETN”) structure with its own drawbacks , but its performance helps to understand the flaws of AMLP. Here is a long-term performance graph comparing the two. AMLP is in red, MLPI is in green, and the light-blue line in the lower half shows the relative strength of AMLP to MLPI (a rising line indicates AMLP is performing better than MLPI). From AMLP’s inception on 8/25/2010 through its performance peak on 8/29/2014, it had a total cumulative return of 67.4%. During the same period, MLPI had a total cumulative return of 110.5%. During this rising market, AMLP only returned 61% of what MLPI captured. (click to enlarge) During that up market, MLPI’s price went from $26.74 to $46.22, resulting in 72.8% capital appreciation. Meanwhile, AMLP’s price went from $14.98 to $19.31, resulting in just a 28.9% capital appreciation, or only about 39.7% of what MLPI delivered. One of the unwritten promises of AMLP was that while it lagged on the upside, it would shine in down markets because its deferred tax liabilities would become assets, greatly reducing the downside impact. However, AMLP’s price fell 43.5% from 8/29/2014 through 12/4/2014, while MLPI’s price fell 48.6%. The ratio of AMLP’s price decline to MLPI’s was 89.4%-much worse than the “promised” 63% and nowhere near the 39.7% of the upside it captured. From a total return perspective, AMLP fell 43.5% to MLPI’s 48.6% decline. For the entire cycle, AMLP’s price went from $14.98 to $10.91. This principal erosion of 27.2% is the cost of supporting the 10.96% current yield. Since inception, AMLP has returned 3.8% (0.71% annualized), and MLPI has returned 15.4% (2.75% annualized). AMLP had an upside capture of 61% (39.7% based on price) and a downside capture of 89%. It won’t take too many cycles like this to completely obliterate AMLP’s principal. Zooming in reveals AMLP’s most recent problem. During falling markets, AMLP is supposed to fall much slower than MLPI. That was true from mid-May through mid-September of this year, and it can been seen in the rising light-blue relative-strength line. However, beginning around September 11, that changed. The relative-strength line went flat as AMLP plunged 19.54% between 9/11/2015 and 12/04/2015. Over this same period, MLPI dropped slightly less-19.49%. (click to enlarge) AMLP’s touted downside buffer has disappeared. Presumably because it used up all of its deferred tax liabilities/assets, exposing the more than $6 billion of shareholder assets to the full brunt of the MLP market decline. History has shown that AMLP investors don’t care. They only care about the yield. The erosion of principal helps to exaggerate the current yield while robbing long-term holders of principal. Owners who bought their shares on in 2014 at $19.31 per share do not receive the new 10.96% yield. They are getting a 6.2% yield on their initial investment, and it has cost them 43.5% of their principal. Maybe now they will start to care. Note: In early trading today (12/7/2015), AMLP plunged another 9% to a price of less than $10. Disclosure: Author has no positions in any of the securities, companies, or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) is received from, or on behalf of, any of the companies or ETF sponsors mentioned.

Yamana Gold Is Making Progress On Reducing Its Cash Costs And Its Debt

Summary Yamana Gold recently announced its third quarter 2015 financial results. Total gold production of 325,897 ounces is a 9% increase from last year, with solid all-in sustaining costs per ounce of $841. Operating cash flow after changes in non-cash working capital was strong at $77.6 million. Foreign exchange hedges that will eliminated by year end will improve the company’s AISC on its core gold mines by $40 per ounce. Debt remains a little high, but a recent streaming transaction with Sandstorm Gold is a step in the right direction; shares are becoming attractive. Yamana Gold AUY data by YCharts Recent Stock Price: $1.95 Shares Outstanding: 946.56 million Market Cap: $1.85 billion 52-Week Range: $1.42 – $4.84 Gold miner Yamana Gold (NYSE: AUY ) recently reported its third-quarter 2015 financial results, and low all-in sustaining costs, higher production levels and a recent streaming transaction should all be seen as positive developments for the stock. First, I’ll discuss the company’s financial results, before giving an updated valuation. Strong Production: In the quarter, Yamana produced 325,897 ounces of gold (9% increase from last year), with notable increases seen at the Jacobina mine (32% increase), Gualcamayo (17%), and at Canadian Malartic (12%). Low AISC: More importantly, all-in sustaining costs came in at $841 per ounce, leading to cash flows form continuing operations after changes in non-cash working capital of $77.6 million, or $.08 per share. But without its non-core Brazilian gold mines, AISC would actually have been $748 per ounce. Brio Gold Outperforms: The monetization plan at the company’s Brazilian mines is going as planned. Yamana saw production of 38,430 gold ounces and an improvement in AISC to $866 per ounce at these mines. The company is still aiming to monetize these non-core Brazilian assets (either through an IPO, a straight-up sale, or a joint-venture), and these strong results should certainly help it achieve that goal. It’s still hard to tell how much Yamana can get for Brio Gold at this point in time, but the fact that Yamana has reduced AISC from $1,002 in the first quarter to $866 this past quarter is real positive news. Balance Sheet Improving: Yamana ended the quarter with $137.8 million in cash and equivalents, but this does not include the $148 million upfront payment Sandstorm Gold (NYSEMKT: SAND ) made to Yamana in the latest streaming transaction. So, the company’s current cash balance should actually be around $285 million, and Sandstorm is also required to make another $4 million payment in six months. Yamana also gained 15 million share purchase warrants in the deal, with a strike price of $3.50 and a term of five years (Sandstorm currently trades just under $3 per share). Declining Debt: In addition, Yamana’s total long-term debt declined to $1.86 million in the quarter, down from $2.025 billion a year ago, with a net debt position of $1.75 billion. However, following the streaming transaction, its net debt position would actually be reduced to $1.6 billion, with just $147 million left of its revolving credit facility, according to the corporate presentation (the plan is to get this balance to zero by the end of the year). Finally, Yamana’s debt repayment schedule remains flexible, as the company owes just $97 million in 2016, $18 million in 2017, and $112 million in 2018. Final Thoughts: In conclusion, I really think Yamana is about to turn a corner as the company is delivering on its operations, has reduced its net debt with a favorable streaming transaction, and has made significant progress at its Brio Gold mines. With an EV/EBITDA of just 4.38, shares look attractively valued here and could outperform peers on a gold price rebound.

FXZ And RTM: Material Evidence

Summary An opportunity for long term investors to be pre-positioned in the materials sector. One fund is equally weighted, conservatively invested; the other more diversified and alpha weighted. Either fund challenges the investor to take advantage of the business cycle. There’s an old Wall Street adage to ‘buy low, sell high’ and based on the basic principles of investment, this statement is axiomatic. However, it does beg the questions, ‘how low is low?’ and ‘how high is high?’ So to apply this axiom, the idea would be to find an investment that is low. Anyone who has paid attention to global financial news over the past few months is well aware that the supply of strategic materials, as well as production, has run far, far ahead of demand. But just what is the ‘materials sector’? According to Investopedia : … A category of stocks that accounts for companies involved with the discovery, development and processing of raw materials. The basic materials sector includes the mining and refining of metals, chemical producers and forestry products. .. So apparently, this is a starting point: supply is high, demand is low therefore prices decline, thus profits, thus stock prices of ‘basic materials’ producers. (click to enlarge) Unless one has the time, effort, patience and knowledge to analyze and filter through the hundreds, if not thousands of global basic materials manufactures, it best to select a basic materials ETF and then a ‘plain vanilla’ one at that. Lastly, the individual would be wise to select the best fund in the class. By filter U.S.Equities => Basic Materials=> All, then excluding ‘Leveraged’, ‘Inverse’ and ‘ETN’, the very handy Seeking Alpha’s ETF Hub tool identifies nine suitable results. There are two candidates with a “least bad” one year performance and the best three year performance. First is the Guggenheim’s S&P Equal Weight Materials ETF (NYSEARCA: RTM ) and second is the First Trust Materials AlphaDEX ETF (NYSEARCA: FXZ ) . According to Guggenheim , the investment’s objective is to: … replicate as closely as possible, before fees and expenses, the performance of the S&P 500 Equal Weight Index Materials[S15] … Clearly, the 28 component holdings of the Guggenheim Materials fund are then equally weighted and readjusted quarterly according to the index it tracks. The underlying S&P tracking index: …imposes equal weights on the index constituents included in the S&P 500 that are classified in the GICS® materials sector… (Note that ” GICS ® ” is an abbreviation for G lobal I ndustry C lassification S tandard , developed by S&P and M organ S tanley C apital I nternational ). (click to enlarge) The First Trust fund’s investment objective: … is to seek investment results that correspond generally to the price and yield, before fees and expenses, of an equity index called the StrataQuant® Materials Index [STRQMT]. .. This is an: … enhanced index developed, maintained and sponsored by the NYSE Euronext or its affiliates which employs the AlphaDEX stock selection methodology to select materials stocks from the Russell 1000 Index .. The AlphaDEX methodology , as the name suggests will identify index components with the greatest potential for capital appreciation. In plain speak, the fund will weight companies in the sector which are performing better than the average company in the sector. So instead of just trying to just replicate the index, it weights its holdings more towards the best performing stocks. (click to enlarge) Observe though that both funds have performed similarly in both good and bad market cycles, but interestingly, the Guggenheim fund conservatively equally weights its holding whereas the First Trust Funds weights slightly more towards risk. The Guggenheim Fund has a far more simple subsector allocation construction, five in all and then most heavily weighted in Chemicals at 57% of the fund’s total holdings. The First Trust fund allocates among ten subsectors, also most heavily weighted in Chemicals, 34%, but also includes an allocation for Aerospace and Defense, 5%, normally part of the Industrial Sector. (click to enlarge) (data from First Trust and Guggenheim) Both companies, as might be expected, have holdings in common; 21 in all. These are listed by First Trust’s weightings; (since Guggenheim equally weights): Holdings in Common Name and Symbol FXZ Weighting SEALED AIR (NYSE: SEE ) 3.47% MARTIN MARIETTA (NYSE: MLM ) 3.12% VULCAN MATERIALS (NYSE: VMC ) 3.03% NEWMONT MINING (NYSE: NEM ) 2.70% The MOSAIC (NYSE: MOS ) 2.61% NUCOR (NYSE: NUE ) 2.42% LYONDELLBASELL (NYSE: LYB ) 2.26% ALOCA (NYSE: AA ) 2.25% DOW CHEMICAL (NYSE: DOW ) 1.89% SHERWIN-WILLIAMS (NYSE: SHW ) 1.89% EASTMAN CHEMICAL (NYSE: EMN ) 1.86% CF INDUSTRIES (NYSE: CF ) 1.65% BALL CORP (NYSE: BLL ) 1.24% AIRGAS (NYSE: ARG ) 1.18% E.I. du PONT de NEMOURS (NYSE: DD ) 1.11% WESTROCK (NYSE: WRK ) 0.76% ECOLAB (NYSE: ECL ) 0.68% AIR PRODUCTS & CHEMICAL (NYSE: APD ) 0.65% PRAXAIR (NYSE: PX ) 0.58% INTL PAPER (NYSE: IP ) 0.56% PPG INDUSTRIES (NYSE: PPG ) 0.53% Data From First Trust and Guggenheim As a general rule, the investor should take the time and trouble to compare the holdings of any ETFs in the same asset class for a reason exemplified here. Of the 28 holdings of the Guggenheim Fund, only 7 are not in common with the First Trust fund. Of those 7, four are in the Chemical subsector, 2 in Containers & Packaging and one in Metals and Mining. Further, as mentioned above, the Guggenheim fund seems rather heavily weighted in Chemicals compared to the First Trust fund; 57.06% vs. 34.09%. In Containers & Packaging the Guggenheim fund is slightly more weighted than Firsts Trust; 18.17% vs. 13.25%. First Trust is a little more weighted in Metals and Mining; 14.23% vs. 20.10%. Lastly, by applying some simple arithmetic, the average weighting of the First Trust’s holding which are not in the Guggenheim fund is just over 2%. The equally weighted unadjusted Guggenheim holding averages 3.57%. The point being that Guggenheim fund is mostly contained in the First Trust fund in terms of holdings, similar in allocation and reasonably close in average weighting. Also as noted above, the First Trust fund has two Aerospace & Defense holdings, 4.69%; a subsector more properly defined as an Industrial subsector. One is Hexcel Corporation (NYSE: HXL ) and the other is Precision Cast Parts (NYSE: PCP ) . In the case of these two companies, the sector to which it belongs just might be a matter of perspective since both companies manufacture specialized materials . Hexcel manufactures: … everything from carbon fiber and reinforcement fabrics to pre-impregnated materials… …and honeycomb core, tooling materials and finished aircraft structures … Precision Cast Parts, as the name implies, manufactures precision and complex casting using high performance nickel and titanium alloys. Hence, although classified as Aerospace and Defense companies, they do produce materials used in industry so are appropriate holdings for a materials fund. Fund and Inception Expense Ratio 1 Year Return 3 Year Return 5 Year Return TTM Yield P/E 3 Month Average Volume Beta Guggenheim [RTM] 11/1/2006 0.40% -7.48% 11.67% 10.78% 1.54% 17 12020 1.09 First Trust [FXZ] 5/8/2007 0.70% -11.43% 9.36% 10.65% 1.57% 17 85131 1.08 (Data from YaHoo!, Guggenheim and First Trust) So what it boils down to is this. RTM is investing conservatively in this volatile sector. FXZ may be viewed as an extension of RTM, with the opportunity for capital appreciation. However, in doing so its accepting a little more risk in this volatile sector. Both are good choices, but the decision of which to choose depends on the risk tolerance of the investor. Having described both funds, the original point must be reiterated: Is this the time to buy into the Material Sector? By referring to the included price divided charts, it is evident that both funds are well off their lows, both lows having occurred in the recession year of 2008. Hence both funds appreciated during the recovery years, in particular those years for which emerging market nations created a seemingly insatiable demand for materials. If those emerging market nations are correcting towards a more sustainable growth rate, then the Materials sector correction may not yet be over. However, this is precisely what is meant by the ‘business cycle’. Eventually, excess supply will be worked down and production capacity will adjust accordingly so that supply and demand will again come into balance. Hence, for a risk tolerant individual investor, a gradual accumulation in the materials sectors, in particular, by patiently dollar cost average in over a long period of time will put the investor in an advantageous position to be able to take advantage of the next, inevitable, up cycle and put to the test the old adage, buy low, sell high.