UPDATE: This post is wrong. Please see the updated post.
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writeups – longs
Liberty Ventures: not that interesting at $40
Now that Ventures (see old writeup) is trading, it seems that its price is fair and not particularly undervalued. (I don’t know if I made a mistake as to Venture’s cash balance and how the cash payment on the Motorola debt was handled. Ventures may have ended up with more cash than I thought it would.)
So last time I checked, Ventures had a liquidation value of around $643M. There are roughly 28.6M shares out Ventures outstanding (both A and B, pre-rights offering; the number may be a little off due to buybacks). Ventures at $44.85 gives a market cap of $1.56B. You can divide by 0.9375 to account for the dilution from the rights offering… this gives an adjusted market cap of $1.664B.
The difference between $1.664B and $0.643B can be thought of as the discount on Ventures’ various deferred tax liabilities. That’s a $1021M discount on $2,435M of total deferred tax liabilities. To put it another way, the market is saying that the $2,435M Ventures will have to pay in tax is worth about $1,414M right now. (Or you can say that it is similar to $1,414M in debt with a 8% interest rate due in 7.06 years. Or 6% interest rate debt due in 9.3 years.)
At $20-30 I will probably get interested in Ventures. I guess I am disappointed that it is trading so high. This memo to Liberty Interactive employees suggested a trading price of $20 for LVNTA shares (“20.0 LVNTA Market Price post-distribution”). Damn you efficient markets.
Canadian Orebodies (CVE:CO)
Some notes…
They paid $20k to eResearch to say good things about them
To have eResearch conduct research on the Company on an Annual Continuous Basis, Canadian Orebodies Inc. paid eResearch a fee of $20,000 + HST.
http://www.eresearch.ca/_report/CO_061412-B.pdf
What a waste of money. These shills generate no value for society. (If there is a polite way of saying this, I clearly haven’t thought of it.) Here is Canadian Orebodies’ press release regarding eResearch.
Short version of the rest of this post
I don’t think that this is a good long or a good short. This is a sketchy junior (which makes it a bad long) that has found something vaguely promising (which makes it a bad short). Continue reading
Special situation opportunity: Liberty Ventures
Thesis: Liberty Ventures stock may be undervalued when it starts trading due to its complexity and misleading balance sheet. Ventures has a stated book value of -$1,9871M. After adjusting for the market prices of its investments and its anticipated cash balance, Ventures would have an adjusted book value of around $570M. Making adjustments for its deferred tax liabilities will add a few (to several) million dollars on top of that.
KWG Resources Revisited
What is it worth? I still really don’t know.
Chromite properties in the Ring of Fire area
Data from http://www.mndm.gov.on.ca/mines/ogs/resgeol/rfe/documents/Chromite.pdf
- Black Thor. Owned by Cliff’s. 69.6Mt @ 31.9% Cr2O3.
- Big Daddy. Cliff’s 70% KWG 30%. 39.5Mt @ 39-40% Cr2O3.
- Blackbird. Noront 100%. 11.05Mt @ 34-36% Cr2O3.
- Black Creek. Probe Mines 100%. 8.44Mt @ 40-41% Cr2O3. *Probe’s 2010 NI-43 101 Resource Estimate has higher numbers.
- Black Label. Cliff’s 100%. I haven’t been able to find information on the size or grade of this deposit.
*Note that these figures include Inferred resources. The actual economic tonnage may be a lot lower.
Economics of the deposits
Cliff’s has indicated that it will mine Black Thor first. This probably makes sense. As to which deposit is the most economic, it comes down to various factors:
- Size of the deposit. Mines benefit from economies of scale. A larger mining machine will still require the same number of operators and support personnel.
- Strip ratio. I am guessing that the Black Thor deposit is attractive here as it is larger and wider than the Big Daddy deposit.
- Grade of the deposit. All of these deposits will have some ore that is relatively high grade (>40% Cr2O3) as well as lower grade ore. The high grade ore can be shipped directly to a ferrochrome processing facility or smelter without any processing at the mine site. Lower grade ore will need to be processed at the mine site to increase the concentration of chromite (as transportation costs of the product is very high). Processing costs will be higher than normal as Cliffs will be using diesel generators to power the processing plant (more expensive than grid electricity). The lower grade ore will obviously be marginal though it should be possible to turn it into a concentrate product that can be sold profitably.
I don’t think that there is enough information to determine which deposit is the “highest grade”. Using a higher cutoff value will increase the overall grade (and vice versa). - Impurities in the ore (e.g. silicon, sulfur, etc.). I can’t find much information here. I’m pretty sure the companies themselves do have such information (they are probably assaying their drill core for impurities)… they just don’t bother reporting this information publicly.
- Distance to processing facilities.
Black Thor will probably be mined first. This makes the other deposits (e.g. Big Daddy) have a lower present value as they won’t be mined until the future.
Black Thor will likely be mined with a combination of 2 mining methods: open pit and underground mining. In open pit mining, costs increase as you go deeper and deeper as more waste rock has to be moved aside / the strip ratio increases. Eventually you hit a point where it makes sense to switch over to a cheap form of underground mining (e.g. Cliffs is thinking of blasthole stoping). The cost of underground mining should be relatively steady after the initial capital costs.
What I think will happen is this: Cliffs will mine Black Thor as an open pit, then it will start mining Big daddy as an open pit. Eventually (at least 10-15+ years from now) both will be mined with an underground method. Cliffs may also be interested in Probe’s deposit (it sits between Black Thor and Big Daddy). Maybe Cliffs will mine it too as an open pit operation before switching to underground mining at Black Thor. However, Cliffs hasn’t shown much interest in Probe as it has not done a private placement with Probe nor has it tried to acquire Probe (unlike KWG and Spider).
Size of the mine
A larger mine will have lower operating costs due to economies of scale. And there is a lot of chromite in the region that could support a very large operation. However, the overall size of the chromite deposit is so huge that Cliffs would risk flooding local markets and therefore getting a lower price for its chromite. (As transportation costs to the customer are very high, I would expect chromite to be somewhat of a local market.) Cliffs has to determine what mine size would be appropriate based on its expectations of the elasticity of chromite prices to supply, inflation, the appropriate discount rate, etc.
In 2010, the USGS reported worldwide chromite ore production to be 23.7 million metric tons. Cliffs has indicated that it may produce “up to” 2.3 million metric tons of concentrate per year. This would be roughly 10% of the world chromite supply. (Technically you have to normalize the figures for the different grades between Cliffs’ concentrate and the USGS assuming 45% Cr2O3.) If Cliffs mines at half the rate, then it might only account for 5% of world supply.
There is also the risk of a competitor opening a chromite mine, thus increasing local supply and driving costs down. When Cliffs bought out Spider Resources, it became the operator of the project and didn’t have to worry about a combined Spider+KWG becoming one of its competitors in the region.
History
Cliffs bought out Freewest after a bidding war with Noront. At the time, Noront was trying to use its shares (which were worth a lot at the time) to buy out Freewest. After Noront’s share price fell and Cliffs sweetened its offer, Cliffs eventually won out. (Some of the press releases in that bidding war were a little acrimonious between the two parties.)
This gave Cliffs 100% ownership of Black Thor and Black Label.
Later on, Cliffs offered 13cents/share for Spider or KWG. Spider and KWG decided to merge instead. Cliffs ultimately won the bidding war by offering 19 cents/share for Spider. Subsequently Cliffs took a stake in KWG via private placement but it did not try to buy the entire company.
Option agreement between KWG and Cliffs (formerly Freewest)
As it currently stands, KWG has a 30% stake in the Big Daddy deposit. Since Cliffs bought Spider, it then took control of the joint venture. This puts KWG in a bad spot. As I understand it, Cliffs doesn’t have to bring the deposit to production. Or it can start production at Big Daddy and then decide to stop it. If Cliffs decides to mine Black Thor over Big Daddy, then it takes a small hit financially while its JV partner would take a huge hit financially. So Cliffs could hold its JV partner hostage.
(The worst case scenario is if Big Daddy isn’t mined at all, or if Cliffs decides to mine it after Black Thor has been exhausted.)
The other problem that KWG faces is that it would need to put up its share of capital if Big Daddy goes into production. If it doesn’t, its interest will eventually be watered down to a 0.5% NSR on base metals. (Thus its 30% stake in Big Daddy would be worth far less than the 1% royalty it held on Big Daddy, Black Thor, and Black Label.)
In a way, KWG and Cliffs are frenemies. It makes sense for them to co-operate and at other times they end up in disputes with each other.
Trying to get back in the game
KWG is in a dispute with Cliffs over whether Cliffs has the right to build a road to the chromite deposits. I am not a lawyer so I do not know where KWG stands.
KWG also has staked railroad claims and performed engineering studies on how much a railroad to the deposit would cost. I honestly don’t know enough about the economics of a railroad versus an all-season road to know whether or not KWG’s railroad scheme makes sense.
Cliffs has indicated that the economics of a railroad doesn’t make sense. So ultimately I don’t think a railroad will be built as they are considered to be in the “driver’s seat” in the transportation route to the chromite deposits.
KWG has a presentation on its website that provides some numbers on the relative costs between a railroad and a road. Adjusting their figures for a mining rate of 12kt/day instead of 10kt/day and the ore being concentrated to 60% of its original weight, the railroad would save around $84M/year. At a discount rate of 0% (and ignoring savings from flowthrough shares and possible cheap financing from the Canadian government), the mine life would need to be 23.74 years to recoup the investment on a railroad. At a mining rate of 12kt/day the mine life might only be 13.7 years. I don’t think that there is enough tonnage in the Ring of Fire area to justify a railroad. There is a really small chance that KWG obtains really favorable financing for the railroad that might justify its economics.
Mine life
Certainly I think that the mine life will be much longer than Cliff’s lets on. 6,000 – 12,000 tonnes/day of ore X 330 days = 1.98 – 3.96 Mt/year.
Black Thor – 69.6Mt (@25% cutoff, which may be too low)
Big Daddy – 39.5Mt
Mine life could be potentially 13.7 to 27.5+ years. (Technically not all of those tonnes will ultimately be mined offset by any expansion in reserves.)
Value of KWG’s assets
Its main assets are:
- 30% stake in Big Daddy.
- Cash. $13.5M in cash, $16.3M in current assets.
- Railroad assets. Likely worth 0 if it is unsuccessful in its claim against Cliffs.
#1 is the hardest to value especially when KWG’s PEA is wildly off (it estimated $900M for the railroad which now costs $2B) and therefore I don’t really trust it. Regardless, the deposits will generate billions in revenue. If you don’t think that Cliffs will chase a profit margin of less than 10%, then the implied NPV of KWG’s 30% stake in Big Daddy would likely be something very very high. Ultimately I think that if Cliffs does offer to buyout KWG, it will be in the ballpark of 13 cents/share (its original offering price for KWG). Since the original buyout offer, the 30% Big Daddy stake is worth more now whereas the $13.5M in cash would be worth less than the 1% royalty that KWG used to hold.
That’s a big if.
Cliffs might let KWG flail in the wind for a few years and KWG will bleed a little from all of its overhead costs. Cliffs could mine at 6,000tpd so it will be several years minimum before it makes sense for it to start mining Big Daddy as an open pit. It doesn’t have to buy out KWG… so they will have the advantage in negotiations. KWG’s only alternative is to firesale itself to a senior miner with deep pockets or to somehow raise a huge amount of equity to maintain its 30% stake.
QXM/XING: I am probably wrong
Originally my thesis for investing in these related stocks were:
- It’s undervalued. (Unless it is a fraud.)
- Insiders will try to inflate earnings and to promote the stock.
I am probably wrong on both counts. As far as promoting the stock goes, investor communication has been terrible (e.g. website not updated in ages) and insiders have not responded to Shah Capital Management’s letter to the board.
As far as undervaluation goes, the stock will likely ultimately be a zero if insiders are intent on stealing (almost) everything. The mining companies that were merged into XING may be a fraud considering Riu Lin Wu’s history with Real Gold (see posts on chinaminingblog.com). QXM hasn’t released new models of cell phones in a long time and there is little information on what happened to its VEVA stores. I don’t believe that QXM has a cell phone business that is really operational right now.
So unfortunately for my net worth, I was incredibly wrong on these stocks. Perhaps there is some residual value in these companies from cash that hasn’t been misappropriated yet. I suppose I will find out when these companies undergo forensic audits.
Aberdeen (AAB), Pinetree (PNP), Northfield Capital (NFD.A)
All three companies hold mining/resource stocks and (likely) trade below the liquidation value of their assets. All three are buying back stock. Of the three companies, I like Northfield the best. Management-wise, Northfield is clearly the best. G&A is the lowest, insiders aren’t paid ridiculous salaries, and Robert Cudney (the CEO) has an incredible track record (compounding at over 20% AFTER tax). While Northfield doesn’t necessarily trade at the biggest discount to its assets, superior management suggests that it is the stock to own. It is the one-foot hurdle.
Aberdeen: Too hard to figure out. In addition to owning stocks in junior mining companies, they own warrants on them (because they originally bought the stock + warrants in a private placement) as well as loans, royalties, performance shares, and private companies. They may be valuing their royalties too high, but I am not entirely sure because I haven’t looked into the expected mine life of the mines underlying the royalties. And, the investments in private companies and the performance shares and the loans are hard to figure out. But personally I don’t really like to see loans to their private companies since the loans may be propping up otherwise dead companies.
I don’t understand the dividend as it reduces the value of insiders’ options. Not only that, insiders would make more money if the dividend wasn’t there. With more assets under management, they have an excuse to charge higher salaries. They also have more capital to invest in companies owned by Aberdeen… insiders serve on the board of directors of these companies and get to collect fees again. I’m confused by the dividend especially since Aberdeen’s presentation claims that they want more assets under management.
As a business model, Aberdeen seems to expose shareholders to a set of fees at the Aberdeen level and are hit again with fees in the stocks that Aberdeen owns (Stan Barti, the CEO of Aberdeen, is on the board of most of those companies). Perhaps it is not surprising that Aberdeen come to market around 2007 at 80 cents (80 cents bought you a share and a warrant) and still trades below 80 cents. And for some reason, the CEO was selling in January 2012.
Pinetree: Pinetree has a “shotgun” approach and invests in a large number of junior miners and junior resource stocks. Most of these companies are on the TSX Venture exchange and are highly volatile. A sane person would not go past 100% leverage. Pinetree… does. This is why Pinetree’s portfolio crashed in 2011 and why they had negative retained earnings at the end of that year.
Management charges high fees and G&A is rather high. If G&A were 0 historically then retained earnings would actually be positive. So far, insiders have made money and shareholders haven’t really made money.
Northfield: Of the three, Northfield by and far has the best investment track record and has lower G&A.
Historically, there hasn’t been a lot of transparency (e.g. stocks weren’t market to market and management didn’t really help investors understand that) while the CEO was simultaneously buying boatloads of stock on the open market. The CEO no longer buys Northfield shares (he does personally buy shares in other companies which are more liquid) and the annual report does mention non-GAAP Net Asset Value, which highlights Northfield’s undervaluation.
Historically Northfield invested in private companies (wine, glass, environmental products, etc.). Northfield is getting out of that and the only private business it is involved in is an unprofitable winery.
Northfield has almost always been undervalued and trading below liquidation value (theoretical liquidation value anyways… a lot of its holdings are in illiquid smallcap/microcap stocks). Northfield stock is extremely illiquid and there are entire months where no trades occur.
Disclosure: Long Pinetree (only 200 shares currently), long Northfield (a lot more so than Pinetree). Figuring out Aberdeen is not worth my time.
