I dipped my toe today. For anyone interested:

- I discounted potash royalties at 4% into perpetuity (using q2 payments)

- I discounted Chapada at 6% for 50 years (having modelled volumes and assumed $2.7/lb flat)

- I applied a multiple of 3x to 777 and 4x to thermal coal

- I valued IOC and the other major equity holdings (i.e. the ones where they give the # of shares on the website) at market

- I applied zero value for the smaller equity holdings and the exploration royalties

- I included the debt and Fairfax prefs at face value

- I discounted holdco costs at 10%

This gets me to a p/nav of 1x. I'm happy there **given optionality around commodity prices moving up, exploration success, and sensible deployment of future capital.**

Helpful post as it really gets to the heart of the matter.

Interestingly, the royalty model mutes the optionality and this puts it in "no man's land" in the investment landscape now, although that may change. Even if relatively muted, volatility may induce large changes in the optionality value, but in two directions.

I continue to struggle in building a sufficient margin of safety because, somehow, the economic and commodity cycles have to be integrated into the range of outcomes. With cyclical stuff, timing can make a huge difference. Some suggest that the likelihood of a mistake in cyclical industries is either to ignore the cycle or to think that you can precisely forecast it.

In terms of the inflation, a look at long term graphs is sobering as commodity price indices can significantly deviate from inflation rates for significant periods. There have been long periods when commodities lagged. Reconstruction after WWII and the China boom helped restore long term trends and one has to assume that there will be more of those defining trends. Optimist but progress is not linear.