Stock Talk Podcast Episode 300 Show Notes

You are listening to KeyStone’s Stock Talk Podcast – Episode 300

Great to chat with you again. This week I will kick off with Part 2 of my segment on “Picks and Shovels” Investing focusing on 5 Steps to Identify “Picks & Shovels” Stocks. Brett answers the question on everyone’s mind – is steel a steal. He explores the action in steel & aluminum stocks including Cleveland-Cliffs (CLF: NYSE), Century Aluminum Company (CENX: NASDAQ) which jumped over 20% and, on the flipside, Algoma Steel (ASTL: TSX) which dropped after, US President, Donald Trump again increased tariffs on Steel and Aluminum to 50%. In our YSOT segment, Brennan revisits Pyrogenisis Canada Inc. (PYR:TSX), which designs, develops, manufactures, and commercializes plasma processes and systems in Canada. Last, but not least, the Birthday Boy, Aaron Dunn provides a synopsis on his Small-Cap Gold Stock Playbook: 7 Timeless Rules for Picking Winners.

Let’s get to the show – I welcome my cohost, Mr. Aaron Dunn, and the killer B’s, Brett and Brennan.

Poll Question

5 Steps to Identify “Picks & Shovels” Stocks.

The “picks and shovels” approach to investing in stocks, involves buying companies that provide the tools, services, or technologies needed to support a larger industry, rather than investing directly in the major product or service businesses.”

How to find “picks and shovels” stocks.

1. (Start by) Identifying the trend.

Make sure the trend is economically significant and reasonably sustainable.

The Pet Rock was a popular trend in the mid 70s – Aaron still has one – it was literally a rock marketed as a pet, While its founder, Gary Dahl, got rich off the trend, it really was not large enough nor sustainable enough for our “Picks & Shovels” purposes today.

As far as a trend that was large enough, Recall Samuel Brannan (from part 1) and the California Gold Rush: gold fever was a national phenomenon attracting people from around the world to dream of a fortunes in California. While rare, it was a trend where big fortunes were made. If there isn’t money to be made in a trend (the golden carrot), then there won’t be that much demand for suppliers to keep that trend going.

The type of trends we are looking for include: the Internet, AI, cybersecurity, cybersecurity, electrification, blockchain tech, and gold as a store of value etc.

2. Find market leaders.

Once you have found a significant, market-moving trend, you want to identify the market leaders in that segment.

Take a look at an investing website such as TradingView and either search the trend itself or look into the sub-the sector to identify the largest players.

For some trends, the players are well known – in the AI space, most people can identify Microsoft (MSFT:NASDAQ) and Alphabet (GOOG:NASDAQ). In other sectors such as gold service stocks or cybersecurity (Fortinet (FTNT:NASDAQ) may be less obvious.

3. Discover which products or services are essential to those businesses. (essential to the market leaders)

After identifying market leaders, focus on the products that they sell. Determine what is essential to the product or service being sold. Is there something that the market leading companies would not be able to function without? For Microsoft and Alphabet in AI, data, servers, and high-end chips (GPUs). For gold companies, it can be drillers.

4. Research the companies that make those essential products.

Once you discover the essential products or services the market leaders in the trend cannot live without. Find out who is supplying the essential components or services. For AI, one of the key components are GPUs (Graphics Processing Units), which are powerful chips that accelerate graphics rendering and processing. If all the major competitors share the same supplier of an essential component, you know you have found a well-protected supplier.

Another example – If you see foresee a boom in gold demand, drillers are essential to increase existing and find new deposits.

5. Screen your “picks and shovels” stocks for profitable growth.

After identifying a group of essential component or service providers, it is critical to find the most profitable growth companies with strong financial metrics including profitability, a good balance sheets and strong margins relative to its peers. It is not good enough to identify a supplier (for example) to a market leader – they have to be doing it profitably. (or the investment makes little sense)

In the article on Picks and Shovels investing on our website at www.keystocks.com I identify an example stocks that  possesses a solid balance sheet, growth, and peer leading margins.

Is Steel Trading at a Steal?

Trump has continued his constantly shifting tariff levels, on Friday, May 30th, he announced at a steel facility in Pennsylvania that tariffs on Steel and Aluminum will have an increased tariff to 50%, doubling the rate from the prior tariff of 25%, which he set in March. The new tariff will be effective June 4th, assuming nothing changes. I will remind you that in Trump’s first term, he also applied tariffs on steel and aluminum, which lasted about a year.

Now onto how the market reaction, on Monday, US Hot-rolled coiled steel futures have jumped over 15% and the Aluminum Midwest US Premium is up 41%. I will note that the month did rollover, which does impact the change as well but the majority of change will be due to the tariffs.

Shifting to the stock market, Cleveland-Cliffs, CLF on the NYSE  rose over 20% on Monday, but that is still down 20% over the past month. Being one of the biggest winners on the policy shift. Another big mover, Century Aluminum Company CENX on the NASDAQ, up 18% on the day, and roughly 6% on the month.

On the other hand we can look at the negative movements as well, Algoma Steel ASTL on the TSX and NYSE, a Canadian producer, down nearly 7% on the day and 15% on the month. Historically, 60% of Algoma’s production was US bound but, under current pricing and tariffs it would be difficult to see Algoma being competitive in the market. Further, as other producers aren’t shipping into the US, steel prices are declining within Canada, putting further pressure on Canadian producers.

So, does this policy of protectionism on US steel and aluminum make US steel producers an appealing investment? 

As the price of steel and aluminum rises, producers benefit. If prices continue to rise, you will get non-US supply coming back into the market, even with tariffs. As you will get a substantially different American price vs global prices, a regional price discrepancy. And likely if tariffs last, countries will have retaliatory tariffs against US steel and aluminum, making US products less competitive on the global stage.

The US is a net importer of steel and aluminum. US net imports are 13% of consumption for steel and 47% for aluminum. Aluminum is much more dependent on non-US production. In 2018, Trump’s first term tariffs had only 10% on aluminum vs 25% on steel. So, if anywhere, I could see pullbacks on aluminum occurring before steel.

As we’ve seen before with tariffs in general, policy reversal will now be a massive risk for the companies that have seen this jump in price. 

Using Cleveland Cliffs, for example, the company has not been profitable for Q1; the company had revenue of $4.6 billion with an adjusted EBITDA loss of $174 million.  Which would be before the last tariff increase, and most of the quarter being under no tariffs. The point here is that while tariffs may be beneficial to the company, it does not necessarily create a gold rush moment, at least at this time, just a better environment. It is no different than other periods of heightened prices, like during COVID, when producers did have a gold rush.

The company does have significant debt of 7.6 billion, so periods of weakness are especially harsh due to the interest burden.

The other point I want to highlight with Cleveland Cliffs is that the company did acquire Stelco,  a previously publicly traded Canadian steel producer, just last year. Tariffs have caused the company to shift the subsidiary’s focus to 100% Canadian sales. Which is now a much more competitive market compared to the US, as the supply, which was formerly headed to the US, will now remain in Canada.

The point being that even a company like Cleveland Cliffs has a direct drawback from tariffs. Albeit the overall tariff impact is positive, as the majority of the company’s production is US-based. The scenario, even within the company, is not black and white but a little bit gray.

And just simply to wrap this up I would simply state: Do not invest in a company due to a policy; invest in a company that can be great no matter the environment. 

YSOT Pyrogenesis (PYR:TSX) – Viewer Request

PyroGenesis designs, develops, manufactures, and commercializes plasma processes and systems in Canada. It offers:

• DROSRITE, a process for enhancing metal recovery (aluminum and zinc industries).
• PUREVAP, a process to produce high purity metallurgical and solar grade silicon from quartz; and PUREVAP Nano Silicon Reactor, which is designed to transform silicon for use in lithium-ion batteries.
• Plasma torches for replacing fossil fuel burners.
• Plasma arc waste destruction systems for waste destruction.
• And the company also provides engineering and manufacturing expertise.

We have covered Pyrogenisis on the podcast back in September 2021 at a price of $5.33, in October 2022 and June 2023 at a price of slightly above $1.00, and about one year ago in July 2024 when the stock traded in the $0.70 range.

And again today the stock is trading at about $0.53, but was as low as $0.43 over the past few months..

So the stock just keeps trending lower essentially given its weak fundamentals, and every time I concluded that the company “had potential” but to us the business had yet to validate its business model as it continued to lack profitability, cash flow or even adjusted EBITDA…. And struggled to maintain any sort of revenue growth..

So let’s first look at the financials to see if the company has fundamentally improved from a year ago when I covered it last…

• Revenue was down 14% to about $3.0M.
• Net Loss was $(4.3) million or a loss of ($0.02) per share, compared to a loss of $(4.4) million or $(0.02) per share in Q1 2024.
• The company still isn’t able to produce positive Adj. EBITDA…. losing $(3.0) million in Q1 2025, compared to a loss of $(3.2) million last year.
• And cash flow from operations was also a loss of $(2.0) million compared to a loss of $(2.8) million for the same period last year.
• SOOOOO, the company continues to burn through cash…. And looking at the balance sheet, its cash balance is now $224K with debt and leases of $9.2 million providing a net debt position of approximately $8.9M.

Given the business is burning cash.. how has it been keeping the lights on????

Well, as you can see, the company had a net cash position of $23 million in Q1 2021… which was certainly intriguing to us, but over the years, the company has moved into a net debt position. So the company has been draining its cash balance, has been taking on more debt, and has been issuing more share. Now up to 190 million common shares outstanding… adding about 11 million shares since I covered the stock last..

And as I have been saying every time – which has come to be true – given the dwindling cash balance, debt on the balance sheet and lack of profitability, the company will need to issue shares once again to keep the lights on.

Looking at the company’s backlog, as at May 2025 it was $52.0M which is “expected to be recognized over a maximum of 3 years”, and this up from just $28.1M in May of 2024 but from its all-time-high of $54.4M in Q3 2024. So It is obviously good that backlog is increasing, but I do not believe the growth in backlog is an immediate inflection point for the business. But it is certainly something to continue to monitor.

And because of the lack of Net Income, EBITDA and cash flow, we can only value the stock from revenue, which right now it trades with a trailing P/S multiple of about 6.7x, which is down from about 10x a year ago.… led by the declining share price.

The last time I covered the stock I referenced a few Youtube comments that stated “by avoiding the stock while it continues to burn cash, WE WILL HAVE MISSED THE MAJOR INITIAL RUN”… and that “we should analyze the company’s qualitative factors more in-depth”…. BUT in hindsight, the fundamentals are what have mattered, and people who got in at $1.00 or God forbid at higher prices, took on the risk which we are trying to mitigate.

So to conclude:

• At this point… the risk continues to outweigh the potential reward for an investment. And we would continue to classify the stock as speculative given it continues to lose money, now has a net debt position and will need to service its debt (while it remains cash flow negative), and will likely continue diluting shareholders to keep the lights on.
• The recent backlog growth is positive and something to keep an eye on.
• If the company can increase scale and move toward profitability, we would be more interested – but for now we continue to monitor.
• And I am going to leave you with a quote which I have heard Ryan saying lately – which I believe comes from Warren Buffett or Charlie Munger so don’t credit Ryan for it – but I believe it sums up a stock like this quite well. As we could look at the qualitative factors of a company until we are blue in the face, but “Fundamentals are like Gravity”.