Chaparral mining is a spin-off of International Minerals after that company was taken over. I purchased shares before the spin, as I discussed here. That article includes an attempt at valuing the company's mineral assets, which is something I'm generally uncomfortable with. However, the company has begun trading at $0.32, below the approximately $0.48 in net cash and current assets the company indicated they will have on their balance sheet. At 66% of NCAV, this is a Benjamin Graham net-net type stock. If the mining assets turn out to have any value or the price of gold increases, there is additional upside past $0.48. Basically, I just look at this as a chance to not lose money with potential upside past the cash value.
Disclosure: Long CHL
Disclaimer: The content contained in this blog represents only the opinions of its author. I may hold long or short positions in securities mentioned in the blog, and no updates to the disclosure above will be made. I may buy or sell securities at any time. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. Read that last line again. Also, this blog is not a solicitation of business. The content herein is intended solely for the entertainment of the reader and the author
Tuesday, 31 December 2013
Saturday, 21 December 2013
2013 Year in Review and Performance
2013 was the first year I wrote this blog, and the experience has been rewarding. In the spirit of people who make predictions everywhere, I thought I'd do a review of the year, what worked, what didn't, and why. I'm going to keep this overview to the company's I profiled directly on the blog. I also write about larger companies and American companies at Seeking Alpha, and have included a few links to that site in various posts, but I'm tracking the performance of those ideas separately.
My first post was about Automodular, when it was trading at $2.95. I argued the probability weighted value was higher, with the main factor in the value being whether the Ford contract was renewed. It wasn't. The stock hit a low of $1.19 after the news, and I bought when I posted again, with a recommendation to buy with a stock price of $1.31. The stock has since recovered to $2.40, so its getting close to my estimated downside case value of $2.55 from my original post. Other bloggers have estimates of value ranging from $2.64 to $2.37. While there are some potential upside catalysts (like a win on the GM lawsuit or a further extension on the Ford plant), I don't see a margin of safety in the stock, and have sold my position.
My next post was on Southern Pacific debentures, when they were trading at $69.50. They're currently trading at $34.70, as the company's wells at their Mackay project have not reached their estimated production capacity. The major drop in the price of the debentures comes as the company's debt to annualized last quarter EBITDA has ballooned out to approximately 17 times. However, the company's Senlac project continues to be a strong producer, and the next phase to restore production there comes on soon. Additionally, they are drilling infill pairs at Mackay, which should allow them to get more of their available steam into the reservoir. Also, conformance in a SAGD reservoir will eventually come with time, so I expect these debentures will eventually pay off at par. I am now long these debentures after recent weakness, and the yield to maturity of 58% is extremely attractive.
My third post was about a very small company trading below its net current asset value, Arrowhead Water. At the time of the post, the company was trading at $0.015. After the company announced a new management team, the stock popped to $0.35, when I added a new post suggesting there wasn't a margin of safety at that price. That was easily the biggest success of the year, except that my limit order never filled, so I never cashed in on the 20 bagger
The next company I profiled was Indigo Books & Music. Trading at $10.79 at the time of my post, it's now trading at $7.67. The company's operating results have been poorer than I expected. However, the main catalyst for the stock price decline was the company cancelling its dividend. This is a puzzling move for a company with a huge amount of cash on its balance sheet. The stock price decline has made the stock much more attractive. The company has current assets of $427 million, against total liabilities of $242 million, and a market cap of $194 million. Thus, the operating business including all the stores, leases, goodwill, and website is selling for an effective $13 million. While operational improvements are possible (for example, the company is starting to sell American Girl dolls, previously unavailable in Canada) the company could liquidate for nearly its current share price, suggesting limited downside from here. This was definitely a situation where my post was early.
The first technology company I posted on was Axia Netmedia. Trading at $1.31 at the time of my post, I identified this as situation where the sum-of-the-parts was at least as valuable as the current stock price, with potential for upside if anything went right. A few things did go well, with Axia selling its Singapore and Spanish businesses, renewing its contract in Alberta, and its French business having significantly improved margins. The shares now trade at $2.35, and the thesis has mostly been realized, although I still hold part of my original position.
The next technology company I profiled was a micro cap ISP that uses Axia's SuperNet to provide service to rural Alberta. Trading at $0.085 when I profiled it and set a minimum target price of $0.14, the company's results have improved with operating leverage, and the company now trades at $0.18. With an enterprise value to EBITDA ratio of only ~6.5, the company is still inexpensive.
I mostly spent the summer relaxing and travelling, and only made one post in July, about a net-net called Africo Resources. The company's cash greatly exceeded its stock price at that time of $0.46. The stock price is now down to $0.43, while the net cash per share is now around $0.85. This hasn't been a success so far, but the thesis is still intact. I believe good things generally happen when you buy cash for fifty cents on the dollar, and that's what this situation is.
My next post was on Advent Wireless, a small Rogers dealer that was trading at $1.93. The company is trading up slightly to $2.00, and is still cheap on an earnings basis.
My next couple posts were all on net-nets. King George Financial was trading at $0.375 when I profiled the company, and is now at $0.31. Nothing has really changed, and I'm still holding. Phoscan Resources was trading at $0.28 when I posted, and its last trade was at $0.305. PGNX was profiled at $0.16, and just paid a $0.17 distribution, and now trades at $0.03. That was a 25% gain in under a month, and I wouldn't hold it at that price, as I doubt the liquidation will yield substantial more than three cents per share. Eyelogic was profiled at $0.08 and last traded at $0.10, for another 25% gain. The company's net cash is still dramatically in excess of this price, so I'm still holding. My last exclusive to the blog post so far this year was Karnalyte Resources, which was trading below net cash at $1.38. It's now trading at $1.62.
My main goal when starting this blog was to think through my ideas and become a better investor. I feel like it has helped with that, and doing a look over my posts for the year has led me to a couple of conclusions. My best idea posted by far was one I didn't make any money on personally, and it would have made a material difference if I had. I shouldn't have tried to squeeze the last half cent out of the limit order on my purchase. Missing out on a $20,000 gain in my twenties will keep that lesson fresh. The other errors were mainly of being too early. The Southern Pacific and Indigo ideas weren't bad ideas (I don't think...) but they were definitely too early. Just because something is cheap doesn't mean it can't get cheaper, and a bad business often will. I should have waited for a bigger margin of safety before posting those two ideas.
I've summarized my posts in the table below. I haven't included the interest or dividends earned, except for the liquidating distribution on PGNX. The average return of the ideas was 177%, but the average was dominated by the twenty bagger. If you exclude the best and worst performing ideas, the return drops to a still respectable 25.5%. The S&P TSX was up 8.7% from the time of my first posted idea until today, so that is a pretty respectable market beating result. The companies I selected had more volatility than the market, but on average buying them would have worked out very well.
I will do another yearly review next year around this same time, and will include all my new posts, plus the following that I'm keeping around for another year: Southern Pacific Debentures, Indigo, Axia NetMedia, Platinum Communications, Africo Resources, Advent Wireless, King George Financial, Phoscan Resources, Eyelogic, and Karnalyte.
My first post was about Automodular, when it was trading at $2.95. I argued the probability weighted value was higher, with the main factor in the value being whether the Ford contract was renewed. It wasn't. The stock hit a low of $1.19 after the news, and I bought when I posted again, with a recommendation to buy with a stock price of $1.31. The stock has since recovered to $2.40, so its getting close to my estimated downside case value of $2.55 from my original post. Other bloggers have estimates of value ranging from $2.64 to $2.37. While there are some potential upside catalysts (like a win on the GM lawsuit or a further extension on the Ford plant), I don't see a margin of safety in the stock, and have sold my position.
My next post was on Southern Pacific debentures, when they were trading at $69.50. They're currently trading at $34.70, as the company's wells at their Mackay project have not reached their estimated production capacity. The major drop in the price of the debentures comes as the company's debt to annualized last quarter EBITDA has ballooned out to approximately 17 times. However, the company's Senlac project continues to be a strong producer, and the next phase to restore production there comes on soon. Additionally, they are drilling infill pairs at Mackay, which should allow them to get more of their available steam into the reservoir. Also, conformance in a SAGD reservoir will eventually come with time, so I expect these debentures will eventually pay off at par. I am now long these debentures after recent weakness, and the yield to maturity of 58% is extremely attractive.
My third post was about a very small company trading below its net current asset value, Arrowhead Water. At the time of the post, the company was trading at $0.015. After the company announced a new management team, the stock popped to $0.35, when I added a new post suggesting there wasn't a margin of safety at that price. That was easily the biggest success of the year, except that my limit order never filled, so I never cashed in on the 20 bagger
The next company I profiled was Indigo Books & Music. Trading at $10.79 at the time of my post, it's now trading at $7.67. The company's operating results have been poorer than I expected. However, the main catalyst for the stock price decline was the company cancelling its dividend. This is a puzzling move for a company with a huge amount of cash on its balance sheet. The stock price decline has made the stock much more attractive. The company has current assets of $427 million, against total liabilities of $242 million, and a market cap of $194 million. Thus, the operating business including all the stores, leases, goodwill, and website is selling for an effective $13 million. While operational improvements are possible (for example, the company is starting to sell American Girl dolls, previously unavailable in Canada) the company could liquidate for nearly its current share price, suggesting limited downside from here. This was definitely a situation where my post was early.
The first technology company I posted on was Axia Netmedia. Trading at $1.31 at the time of my post, I identified this as situation where the sum-of-the-parts was at least as valuable as the current stock price, with potential for upside if anything went right. A few things did go well, with Axia selling its Singapore and Spanish businesses, renewing its contract in Alberta, and its French business having significantly improved margins. The shares now trade at $2.35, and the thesis has mostly been realized, although I still hold part of my original position.
The next technology company I profiled was a micro cap ISP that uses Axia's SuperNet to provide service to rural Alberta. Trading at $0.085 when I profiled it and set a minimum target price of $0.14, the company's results have improved with operating leverage, and the company now trades at $0.18. With an enterprise value to EBITDA ratio of only ~6.5, the company is still inexpensive.
I mostly spent the summer relaxing and travelling, and only made one post in July, about a net-net called Africo Resources. The company's cash greatly exceeded its stock price at that time of $0.46. The stock price is now down to $0.43, while the net cash per share is now around $0.85. This hasn't been a success so far, but the thesis is still intact. I believe good things generally happen when you buy cash for fifty cents on the dollar, and that's what this situation is.
My next post was on Advent Wireless, a small Rogers dealer that was trading at $1.93. The company is trading up slightly to $2.00, and is still cheap on an earnings basis.
My next couple posts were all on net-nets. King George Financial was trading at $0.375 when I profiled the company, and is now at $0.31. Nothing has really changed, and I'm still holding. Phoscan Resources was trading at $0.28 when I posted, and its last trade was at $0.305. PGNX was profiled at $0.16, and just paid a $0.17 distribution, and now trades at $0.03. That was a 25% gain in under a month, and I wouldn't hold it at that price, as I doubt the liquidation will yield substantial more than three cents per share. Eyelogic was profiled at $0.08 and last traded at $0.10, for another 25% gain. The company's net cash is still dramatically in excess of this price, so I'm still holding. My last exclusive to the blog post so far this year was Karnalyte Resources, which was trading below net cash at $1.38. It's now trading at $1.62.
My main goal when starting this blog was to think through my ideas and become a better investor. I feel like it has helped with that, and doing a look over my posts for the year has led me to a couple of conclusions. My best idea posted by far was one I didn't make any money on personally, and it would have made a material difference if I had. I shouldn't have tried to squeeze the last half cent out of the limit order on my purchase. Missing out on a $20,000 gain in my twenties will keep that lesson fresh. The other errors were mainly of being too early. The Southern Pacific and Indigo ideas weren't bad ideas (I don't think...) but they were definitely too early. Just because something is cheap doesn't mean it can't get cheaper, and a bad business often will. I should have waited for a bigger margin of safety before posting those two ideas.
I've summarized my posts in the table below. I haven't included the interest or dividends earned, except for the liquidating distribution on PGNX. The average return of the ideas was 177%, but the average was dominated by the twenty bagger. If you exclude the best and worst performing ideas, the return drops to a still respectable 25.5%. The S&P TSX was up 8.7% from the time of my first posted idea until today, so that is a pretty respectable market beating result. The companies I selected had more volatility than the market, but on average buying them would have worked out very well.
I will do another yearly review next year around this same time, and will include all my new posts, plus the following that I'm keeping around for another year: Southern Pacific Debentures, Indigo, Axia NetMedia, Platinum Communications, Africo Resources, Advent Wireless, King George Financial, Phoscan Resources, Eyelogic, and Karnalyte.
Wednesday, 4 December 2013
Karnalyte Resources Inc (TSX:KRN) $1.38
Karnalyte Resources is a junior with a development ready potash project in Saskatchewan. That description accounts for the company's current low price, as the potash industry has been recently rocked. Events include the breakup of a Russian/Belorussian cartel that culminated in the arrest of one of the CEOs involved, subsidies in India for non-potash fertilizer hurting demand, and huge layoffs at existing producing mines as the current producers try to support the price by reducing supply. The potash producing companies enjoyed super-normal profits in the 2006-2008 timeframe as they kept the price propped up through their cartels, but that has now come home to roost, as prices have come well down from their peaks. Additionally, players throughout the industry expanded supply capacity during the high price periods, and much of that capacity is now idle, which will likely mute future price gains.
Karnalyte had approximately $52 million of cash on its balance sheet, against $2.5 million of liabilities, leaving a net current asset value (NCAV) for the company of $49.5 million. With a current market capitalization of $37.9 million, the company is trading at 76% of NCAV. When the company reported its Q3 2013 results it indicated the following "the Company does not expect to spend further material amounts on Capital or Intangible Assets until further financing is available."
Thus, we should expect to see a minimal cash burn until either the potash space improves enough to make the project feasible or the company is liquidated for its cash by either management or an activist/competitor.
Disclosure: Long KRN
Disclaimer: The content contained in this blog represents only the opinions of its author. I may hold long or short positions in securities mentioned in the blog, and no updates to the disclosure above will be made. I may buy or sell securities at any time. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. Read that last line again. Also, this blog is not a solicitation of business. The content herein is intended solely for the entertainment of the reader and the author
Karnalyte had approximately $52 million of cash on its balance sheet, against $2.5 million of liabilities, leaving a net current asset value (NCAV) for the company of $49.5 million. With a current market capitalization of $37.9 million, the company is trading at 76% of NCAV. When the company reported its Q3 2013 results it indicated the following "the Company does not expect to spend further material amounts on Capital or Intangible Assets until further financing is available."
Thus, we should expect to see a minimal cash burn until either the potash space improves enough to make the project feasible or the company is liquidated for its cash by either management or an activist/competitor.
Disclosure: Long KRN
Disclaimer: The content contained in this blog represents only the opinions of its author. I may hold long or short positions in securities mentioned in the blog, and no updates to the disclosure above will be made. I may buy or sell securities at any time. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. Read that last line again. Also, this blog is not a solicitation of business. The content herein is intended solely for the entertainment of the reader and the author
Sunday, 1 December 2013
International Minerals - A Takeover Arbitrage Play
International Minerals is getting taken over, and buyers at the current price are getting cash and shares in a spin-co. The spin-co is being valued at less than the cash it will have on hand, but it also has valuable mining assets. I did a complete write-up, permanently available here: http://seekingalpha.com/article/1870071-international-minerals-a-takeover-arbitrage-play
Disclosure: No Position
Disclaimer: The content contained in this blog represents only the opinions of its author. I may hold long or short positions in securities mentioned in the blog, and no updates to the disclosure above will be made. I may buy or sell securities at any time. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. Read that last line again. Also, this blog is not a solicitation of business. The content herein is intended solely for the entertainment of the reader and the author
Disclosure: No Position
Disclaimer: The content contained in this blog represents only the opinions of its author. I may hold long or short positions in securities mentioned in the blog, and no updates to the disclosure above will be made. I may buy or sell securities at any time. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. Read that last line again. Also, this blog is not a solicitation of business. The content herein is intended solely for the entertainment of the reader and the author
Subscribe to:
Posts (Atom)