Fellow Investors,

Kingdom Capital Advisors (KCA Value Composite) returned 4.77% net of fees in the first quarter, vs. 2.74% for the Russell 2000 TR, 7.50% for the S&P 500 TR, and 20.77% for the NASDAQ 100 TR. The KCA Value Composite returned 27.87% net of fees since inception on January 13, 2022, 43.54% cumulative outperformance when measured against the Russell 2000 TR.

It was another tumultuous Q1, with bank runs and failures causing added anxiety for investors. The general market response was to sell small cap stocks (Russell 2000 +2.74%) and flee to large tech stocks (Nasdaq 100 +20.77%), which is certainly not a rotation that benefits our strategy. Our top contributors to Q1 returns were A-Mark Precious Metals (AMRK) and Dole Plc (DOLE), while index hedges and Unit Corporation (UNTC) were our largest detractors. We are well positioned for the current market environment and look forward to the future performance of our holdings.

A-Mark Precious Metals Update

Entering 2023, we narrowed our focus and concentration on A-Mark Precious Metals (AMRK). Our investment thesis won “The Investor’s Podcast” pitch competition in January:

AMRK is not a new investment for KCA. I initially profiled the company on Seeking Alpha in January 2020 when the price was less than $3.50/share (split-adjusted). At the time, the business was valued at about $50m and has subsequently earned over $300m of net income in three years. Opportunities like this exist among small companies, and occasionally we are fortunate enough to find one.

Today, AMRK trades for about $37/share, already a nice improvement on the sub-$30 prices paid when we doubled our position last month. AMRK remains misunderstood and undervalued, which becomes increasingly evident as the stock initially failed to respond to the substantial business tailwinds created by recent market panics.

AMRK is a bullion dealer, participating in both wholesale and direct to consumer sales of precious metal products (silver, gold, platinum, etc.). AMRK owns mints which create unique coins and bars to supplement products sourced directly from the sovereign mints. AMRK sells approximately one third of the products minted at the US Mint, and they own several Direct-To-Consumer bullion platforms, including the largest platform in the US, JM Bullion.

Why are we increasing our position now? It’s not only because AMRK continues growing their assets at 10% per quarter, or because the stock trades for about 5 times their last twelve months of earnings. AMRK profits most when demand for precious metals outpaces supply.  This has been the case for most of the last three years, and AMRK has been proactive in acquiring competitors at attractive prices with their newfound earnings. Each deal has strengthened their position in the sector and created significant value for shareholders.

The most recent banking fears drove March bullion sales higher than any month in recent history, according to public statements from peers SD Bullion and Miles Franklin. The CEO of Miles Franklin noted sales volume in the two weeks following the bank failures equaled 15% of 2022 total volume. SD Bullion increased minimum order sizes to $500 and issued apologies to customers for delayed shipping due to overwhelming demand. Even the US Mint sold the most ounces of gold in a single month since 1998.

In January-March 2021, the last peak for bullion demand, AMRK earned over $4/share in a single quarter while owning less consumer brands than they do today. AMRK closed their JM Bullion acquisition at the end of March 2021, and noted on their subsequent conference call, “A-Mark had the strongest quarter of financial performance in our history, with JM Bullion contributing $8.5 million of gross profit and $6.8 million of pre-tax income in just the last 12 days of March.” This was just for the JM Bullion segment, and demand appears higher now.

A sale of the company is the most likely catalyst for realizing shareholder value, as the business model is misunderstood and the stock trades without a meaningful peer. Many investors assume that AMRK needs high gold and silver prices to do well, and they fear the business will revert to 2019’s earnings level after markets calm. Few understand the lack of direct exposure to precious metal prices and the transformation the business has undergone via their acquisitions since 2019. The complexity of the balance sheet is also a deterrent:

At the end of 2019, in reference to plans for selling the business, AMRK CEO Greg Roberts noted “Selfishly, as a big shareholder of the company, I would want to hope that happens when we have two or three years of great results and we’re in a bull market for precious metals and the stock market is back to 2009 levels and we have crisis everywhere and you have interest rate problems and you have default problems, that is what’s going to make A-Mark worth the most money and that’s probably the most likely time where either a commodity bank or a non-commodity bank is going to want to get into our segment, and they’re just going to say, here’s our stock come be a part of this.”

I’m not convinced a bank remains the likely acquirer, given AMRK’s growth of DTC sales in addition to their wholesale segment. A private equity buyer seems most likely to be drawn to the substantial cash generated by AMRK. I imagine it would be difficult for the Board and management to entertain selling the company when their acquisition strategy continues to add immense value; however, the scenario Roberts outlined above has mostly transpired.

We are hopeful the recent bullion frenzy will unearth new investors willing to dig in and understand the value of AMRK’s business, and the size of the moat they’ve built around the platform. We look forward to learning how much profit was captured during this recent demand spike on the May earnings call.

An Update on Energy Positions

Prices in the energy sector materially declined during the first quarter, which negatively impacted our key holdings Unit Corporation, Arch Resources, and Pardee Resources. We underwrote these investments acknowledging the cyclicality of energy prices, and despite recession fears, we believe these companies will benefit from a higher “floor” in the energy sector.

• Unit Corporation (UNTC): The decline in oil and gas prices hurt UNTC’s share price; however, the business remains poised to grow earnings in 2023. UNTC’s average barrel of oil was sold for $57.48 in 2022 (due to significant hedges added in 2020), versus an average oil price excluding hedges of $94.28. For 2023, less production is hedged and the current hedges average a higher sales price. Additionally, UNTC’s in-demand rig segment is poised to realize significant earnings in 2023. We expect UNTC to earn approximately $150m in 2023 while their business is only valued around $300m. The company has actively repurchased shares in the past two years and recently began a generous dividend program. Shareholders received a $10/share dividend payment on January 31st with an additional $2.50/share dividend to be paid in Q2. If the business were to be wound up and sold, we would expect the total value to be at least twice where the shares currently trade.

• Arch Resources (ARCH): We are optimistic investors in the forgotten coal industry, where metallurgical coal remains a key input for steel manufacturing. New electric vehicles, solar panels, and wind turbines slated for production in the coming decade will need a tremendous amount of steel. Labor and equipment costs for coal mining have dramatically increased since 2020, and non-controllable costs (like royalties in Australia) have seen significant increases. This provides a competitive advantage for a low-cost producer like ARCH. The company continues to generate exceptional cash yet shares trade for a mere 2x multiple of our expected cash flow.

• Pardee Resources (PDER): The least “exciting” of our main energy positions, Pardee continues to collect checks on timber, coal, and natural gas production, along with some solar energy credits and agriculture investments. Pardee rewarded us with a $20/share special dividend in December, continuing their long-term record of returning value to shareholders. The story hasn’t changed, Pardee owns assets worth far more than their share price implies, and those assets generate a lot of cash. We are happy to remain patient and collect our dividends alongside Management.

In summary, we chose to own three well-capitalized businesses with an outsized focus on generating cash and returning it to shareholders. Each one can earn money in periods when many peers will struggle to survive, and each has a very attractive valuation at current (lower) resource prices. We don’t think they have the highest upside in a rapidly rising environment for energy, but they have strong track records of value creation that will benefit patient owners.

Business Update

We continue to onboard new clients and seek out patient investors interested in our actively managed small-cap strategy.

In Q1 we continued actively posting our work to Seeking Alpha, publishing writeups on Wheeler Real Estate Investment Trust, Arch Resources, Beyond Meat, Qurate Retail, and CVR Energy. We remain dedicated to flipping over rocks and finding the best corners of the market to allocate our capital.

Sincerely,

David Bastian

Chief Investment Officer

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