This week I saw a very interesting item for sale on eBay (EBAY) , one that has investment overtones and also offers a lesson on value investing. It’s an actual truckload of circulated copper pennies, more than 20 tons, with a face value of $60,000. The truckload is comprised of 15 bags each containing 400,000 pennies. This massive load of 95% pure copper can all be yours for just $98,000 plus $4,000 in shipping costs.
The first question is why anyone would fork over $102,000 for $60,000 in pennies. The simple answer is that these aren’t just any pennies; these are the 95% copper variety minted prior to 1983. As of Thursday, copper was valued at $4.29 a pound, which means that each of these pennies contains about 2.8 cents worth of copper. Within this massive hoard of pennies there are 39,081 pounds of copper and an additional 2,057 pounds of zinc (valued at about $1.28 a pound), putting the total value at about $170,290.In essence, the buyer of this asset would be paying $102,000 and receiving $170,290 of metal.
Unfortunately, practicality gets in the way of making this deal a slam dunk. First, it is illegal to melt these coins. Second, it is pretty impractical to store 20 tons of copper and way impractical to move these coins around.
Sounds a bit like some of the dilemmas that can come along in areas of value investing. It’s a bit like taking a position in a name that owns valuable assets (land or water rights as an example); you know that the value is there — at least that is what your research and due diligence have revealed. The problem is that in order for that value to be realized, something needs to happen for you to prosper as a shareholder. Either the company must sell and monetize those assets, or markets need to realize and buy into the theory that the assets are undervalued. Either can take ages. It shouldn’t, but it certainly can.
That does not mean you run away from these situations; you just factor in a potentially lengthy wait to see value realized, if it ever occurs. However, you may want to consider discounting the value of the assets in question to factor in the potential wait.
In terms of copper, the spot price has doubled over the past five years and many gold/silver bullion dealers are now also selling copper bars. I’ve seen 1 ounce copper bars selling for $2 or $3, well above melt value. They may look pretty, but they don’t offer the same value proposition as copper pennies, which are selling at a discount or are available for face value in your change or at your local bank. That is, if you can get enough of the pre-1983 version to make it worth your while.
Last night, I somewhat jokingly tried to convince four friends to go in with me on the 20 tons of pennies available on eBay. There were no takers. None of them wanted to explain to their wives why they bought four tons of pennies.