Pinetree Capital (PNP) – Cigar butt situation

Pinetree trades on the Toronto Stock Exchange at around $0.51/share.

Pinetree says that its “net asset value” is around $1.28/share or less as it publishes a NAV calcualtion every month.  This is a big, big discount to NAV.

It’s also in a terrible business and has bad management.  It definitely qualifies as a cigar butt.

What they do

Pinetree invests mainly in junior exploration companies (metals and energy).  As I have written elsewhere on this blog, I hate junior exploration stocks and think that the sector will lose money in aggregate.  The companies typically waste incredible amounts of money trying to mine high net worth individuals (and sometimes institutional investors).

Pinetree takes a “shotgun” approach to juniors as it owns a few hundred stocks (395 according to the latest MD&A on Sedar).  I think that money managers who own hundreds of juniors don’t really know what they’re doing.  If you own hundreds of stocks, you are bound to own typical junior exploration garbage.  (They have pretty websites, pump out deceptive/promotional press releases, overpay the part-time CEO, etc. etc.)

Wait, it gets better!!!

Junior exploration stocks are highly volatile.  So you’d be an idiot to leverage them right?  Well, that’s exactly what Pinetree does.  But apparently margin from your broker is not enough.  Pinetree has convertible debt where the effective interest rate is far higher (somewhere around 10%???) than margin rates.  The amount of leverage/debt is just silly.  In the past, Pinetree borrowed money from the CEO in a related party transaction (this practice does not align the CEO’s interests with the shareholders).

The overall strategy of Pinetree is to grow assets under management so that Sheldon Inwentash can make more money.  The fee structure is similar to the 2 and 20 of a hedge fund.  Mr. Inwentash is rewarded for growing AUM and taking ridiculous amounts of risk.  The convertible debt sort of makes sense for Mr. Inwentash as it raises AUM if the debt is converted.

So yes, this is a nasty cigar butt.

Liquidation value

Most of Pinetree’s assets are in publicly traded juniors.  It owns large stakes (stocks and warrants) in some of these juniors since it participates in many private placements.  Liquidating large stakes may be difficult due to market impact.  Roughly 9% of the assets are in private companies- these may be carried on the books at above market value.  So liquidation value will be less than NAV.

The fee structure is one reason for Pinetree to trade below NAV, much like how many closed-end funds trade at a discount (sometimes those discounts are substantial).  The big picture is that Pinetree “deserves” to trade at a small (e.g. 30%) discount to NAV like TSE:CMP.UN (closed-end fund that trades at a discount; somewhat similar compensation structure).  I think that the current discount is a little too much.

Pinetree has announced a NCIB for its shares in the past but didn’t repurchase many of its shares.  This is unlike similar companies that also trade at a discount to NAV like CMP.UN and Northfield Capital (NFD.A).  This is basically free money that Pinetree is taking a pass on.  Crazy.

Links

Aberdeen (AAB), Pinetree (PNP), Northfield Capital (NFD.A)

EDIT:  Owning the debt may be far more attractive than owning the equity.  Barel Karsan has some good analysis of Pinetree’s debt on his blog.

*Disclosure:  I own a small amount of Pinetree.  I don’t know if it’s a good idea to own awful companies.  I don’t think that owning Pinetree is the greatest idea in the world.  Sometimes investing in bad management will end really badly.

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2 thoughts on “Pinetree Capital (PNP) – Cigar butt situation

  1. Agree with your analysis. Have traded this in the past (profitably, better lucky than good) when I didn’t realize discount from NAV was primarily due to the insane compensation paid to Sheldon. The right thing for company to do is buy shares rather than invest in new companies but given the horrible incentives you see that they continue to invest to grow AUM. At some pt it becomes so cheap that its worth a shot but the compensation is paid in cash and not shares so in theory this could be run into the ground at no cost to current CEO as will have no money concerns at that pt. Only upside I could see is if activist comes in to takeover and removes current management but that doesn’t tend to happen in Canada much.

  2. Pingback: Pinetree Capital (PNP) update | Glenn Chan's Random Notes on Investing

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