Earthlabs Inc: A Potentially Great Business Trading as a Net-Net?
Today, I want to highlight a company I am a shareholder of that exemplifies the deep value I am finding in current commodity markets: Earthlabs Inc. (TSXV: SPOT).
I believe this company has the potential to become a great business, especially in a stronger commodities market. However, it is currently valued as a classic Ben Graham-style net-net by the market, with total cash, cash equivalents, and investments of $44.9M at the end of Q1 2024 and a market cap of $25M.
While this is a microcap company, it’s not your typical exploration company in the junior mining sector, as it does not directly participate in the production of commodities. Instead, it is an interesting "picks and shovels" play on the commodities market. At least, I like to think of it that way.
The classic picks and shovels story goes something like this:
Levi Strauss moved to San Francisco during the California Gold Rush in the 1850s. Instead of exploring for gold, he sold explorers and miners the goods they needed for their operations and eventually introduced the classic blue jeans. While most explorers lost money, Levi Strauss profited significantly by selling "picks and shovels," marking the start of the great Levi's story.
I think this can be a great strategy, as producing commodities directly can be extremely tough, as we recently witnessed with the incident at Victoria Gold’s Eagle Gold mine last week and the subsequent 80% decline in their stock price. If you instead sell picks and shovels to the whole market, and something goes wrong at one mine or exploration project, it doesn’t have as dramatic an effect on your bottom line.
However, Earthlabs is not your traditional picks and shovels company, as it does not sell miners equipment or provide drilling services, engineering, or similar offerings. Instead, they sell cash-strapped junior commodity companies something they need just as much: marketing services.
I believe it is in a unique position to provide those services, as it is an ecosystem company in the mining media space, catering to commodity companies and investors. They own, among other things, the commodity-focused social media platform CEO.ca, which has over 12.5 million unique users and great user-generated content from their engaged community, and the Northern Miner, which I discuss a bit more below.
The company’s revenues primarily come from advertising on their platforms, but they also sell subscriptions and other services, including a cartography service for mining companies. Ad sales are their biggest revenue line, but the other business lines have the potential to become important revenue drivers as well.
Their goal is to be "the platform for resource investors, leveraging cutting-edge trading analytics, breaking news coverage, detailed mineral mapping, and investment execution." Interestingly, they also have a portfolio of equities and royalties in the mining sector, offering optionality and leverage to an improving market in metals and mining equities.
What initially caught my attention was that Eric Sprott owns around 17% of the company, but I became even more interested after their strategic acquisition of the Northern Miner during the challenging market in junior mining equities last year.
I believe that was a fantastic acquisition, as they bought multiple great brands and expanded their media portfolio to include magazines, news media, and symposiums, solidifying their position in the marketing space and enhancing their reach to potential investors. They can now focus on ads, sponsored content, and subscriptions at scale, with the ability to cross-sell across products and platforms.
Now, you might be asking yourself: If this is such a great opportunity, why is it a net-net?
Their significant leverage to the metals and mining market is a double-edged sword, following the volatile junior commodities market up and down.
Most junior mining companies have not been able to spend much on marketing for the last year or so, as they have had to focus on avoiding bankruptcy in this incredibly challenging market for junior mining companies. Meanwhile, investors are weary of the sector after a prolonged bear market with multiple false starts, while seeing others profit in areas like tech and crypto.
This has resulted in poor financial performance for Earthlabs, as it means that their revenue lines—such as ad sales and subscriptions to their products—have been challenged due to a lack of investor interest in the sector. At the same time, their equity and royalty portfolio does not get much love from the market in this tough environment.
With sentiment in the junior mining sector becoming marginally better, I think the company’s prospects are starting to improve. Many mining companies are engaging in larger financings and M&A deals, boosting marketing spend and news flow, creating a virtuous cycle for all of Earthlabs’ business lines. The company’s Q1 financials were promising:
A 79.1% increase in advertising revenue compared to Q1 2023
A 38.0% increase in subscription revenue compared to Q1 2023
Net investment gains of $3.1M from their investment portfolio
However, total revenues of ~$1.78M for the quarter were still considerably less than the ~$3.39M in total expenses. The investment gains were large enough during the quarter for the company to be profitable, but they are still losing money in their core operations.
Annualizing the results from their core operations, they are losing money at a rate of ~$6.5M a year. They do have a buffer in cash and marketable securities, allowing them to sustain this for some time and potentially even be profitable if their investment portfolio performs well. However, to make this a great investment, they need a better commodities market and to drive more profitability in their product offerings.
The company is actively working to improve product offerings and sales, which is hopefully positive for future results. However, coming from a background in software engineering and product development, I know that execution is critical. Maintaining high margins and a robust platform requires diligence, and it's easy to spend a lot of money with low returns on investment. I’m sure a stronger commodities market will help out, but I will continue to monitor their operating performance closely.
Ultimately, commodity markets are cyclical, and we have been at extreme sentiment lows recently, which makes it challenging to operate a company catering to investors and companies in this space. However, in a better commodity market, I believe this company has significant potential and could perform really well.
What I really like is that they are not just sitting here and waiting but instead using this challenging market to acquire complementary assets and drive initiatives to become more profitable. That’s what I want to see companies like this do in a market like we are in.
In my opinion, the market is mistakenly selling the shares to extremely depressed levels, and I am happy to be on the other side of that trade. I am comfortable with my investment, with my cost basis around today’s share price, and if they continue to execute well, I intend to hold this for a long time through what I believe will be a great commodity bull market.
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Disclaimer: This article is for informational purposes only and does not constitute investing advice. Please consult with a qualified financial advisor before making any investment decisions. I am an investor in this company so I am biased. I did not receive any compensation for this write-up.
