Safety In Value

Deep value, special situations, contrarian, fund holdings
Safety In Value
Deep value, special situations, contrarian, fund holdings
Contributor since: 2013
The best place in Calgary to see that (and I agree with you completely) is Westhills/Signal Hill Centre. The Rona is only slightly bigger than a neighbourhood hardware store, the Lowes that's going in where Zellers/Target was will be huge. That will absolutely cannibalize what was probably a very profitable store.
The Nigerian chart looks to me like they pegged the currency to the USD, there's a decoupling effect where the CDS keep going lower and the currency stays the same. Are they burning foreign currency reserves supporting their currency at the current level?
Rona's downside protection is also going down. Since the Target bankruptcy there is more large format real estate available, which hurts their ability to sell themselves. As an example, in Calgary Lowes is taking over 2 ex-target locations. that makes Lowes less likely to try and takeover Rona again, and also puts Rona up against extra competition.
Thanks! I should mention I'm a huge fan of your work!
The front page at http://bit.ly/PmTGM1 indicates there were 25 people alive at the time of trust formation in 1961, which was 54 years ago. I believe all the people selected were children and infants for maximum trust duration, suggesting that they should be in their 50s. It also says they checked a few years ago and all were alive. It seems highly probable to me that at least one of those people would live into their 70s, and very likely 80s or 90s. Since the trust goes for 21 years past the final death, it has lots of time remaining.
Looks like it would have been more profitable to buy and then publish, as opposed to planning to buy after the article came out to be fair to my readers.
Turns out ethics can be expensive!
I'm not a buyer >$5, so I'll see how this one turns out. I'll jump in if the price falls on an extended shutdown, but will miss the upside if Cliffs restarts soon and the price jumps further...
Thanks for your comment, it's always nice to hear from someone local to a company.
I reviewed the lease agreement, and believe that it would survive a bankruptcy, or in the alternative the trust would be able to take possession of the lands/mine. Of course, I am in no way, shape or form a lawyer, so that is absolutely not a legal opinion.
You are correct that production continuing is the big factor here. If the mine shuts down for an extended period, it will likely be possible to purchase units at much lower than today's prices, but as long as we eventually see a commodity recovery it should restart, rewarding those with patience. If you believe the shutdown will be extended, waiting for lower prices is absolutely the right call.
The Cliffs deal doesn't end until all the iron ore is gone.
"The Amendment of Assignment has a duration ending when the reserves of minerals which are the subject of that agreement are exhausted. "
http://bit.ly/PmTGM1
Thanks James. I should have covered that. In all of my scenarios the company ran out of proved reserves prior to the likely end of the trust. The probably reserves will extend out further, so there is additional upside in the future, assuming at least one of those 25 people lives another decade or two, which seems likely.
I think that's a very sensible way to invest. As I mentioned, I'm monitoring it to see if it goes below my conservative valuation.
Silver Bay does ship pellets, 5.3 MM tons in 2014. http://bit.ly/1OiXScf
The price of iron ore in China includes a significant portion of shipping costs to move the iron ore from Australia or Brazil to China. Since Northshore is very close to its customers, the shipping cost is much less. I expect the premium over Chinese prices will continue.
Also, my conservative case assumes a long shut-down prior to the $50 price.
The analysis implicitly assumes that the tonnage is royalty tonnage. As noted, the trust receives royalties on 90% of the first 4MM tons, or 100% if it comes from their land. Historically almost all the ore has been from their land, so this protection hasn't been a factor, although it does ensure Cliffs doesn't have an incentive to mine away from Mesabi land.
Anyone have any thoughts on timing? I have Jan/16 puts. Any thoughts on whether to sell now and try to get a bit of time value, or hold out and hope the collapse happens prior to expiration?
Yep.
An updated article is on tap before the end of the year. We just had our second child, so I've been a bit busy, and prioritized getting content out for my subscription service.
Thanks for the article! Would be interested in hearing your rationale for excluding vehicle financing from the company's EV. If the cars are required for generating the EBITDA, presumably the cost of financing them should be in the EV, no?
I think I've read almost all of your BTU stuff, this could be the best one. Great work.
Apparently not. We'll see, I'm cautiously optimistic (although I voted CPC personally). Once it became apparent a few weeks ago the NDP wasn't winning I felt much better.
Although I think BTU equity is a really bad idea for a long, anyone considering going long BTU should do so with options, or make sure you're getting paid the rebate. The short rebate on BTU at IB is currently 80%+ per year.
If your broker doesn't pass that along, buying calls and selling an equal number of puts gives exactly the same exposure as being long the stock, plus you collect a significant net premium.
Thanks. Not sure why I thought VFF was soil instead of hydroponic. In the article I mentioned I don't see LNDC as a compelling short even though I do believe it is currently overvalued, primarily due to a lack of catalyst. Do you see a catalyst on the short side? The biggest potential short catalyst I could see would be something where they finally have to face reality on the Windsett valuation, instead of recent history where they mark up its valuation every year. That will eventually be an issue and hit their earnings. Any other thoughts?
I'm aware of VFF (I'm actually long VFF, no LNDC position), but I'm not allowed to mention <100MM comps under Seeking Alpha's microcap policy, which is why I started a service talking microcaps. http://bit.ly/1O4lYdg
One difference is that Windsett appears to be mostly hydroponic, whereas I believe VFF is mostly soil grown (still in greenhouses).
My only assessment was that the company isn't a buy, I'd be interested in the salad division if they did a spin off.
Risk reward is a function of the expected value of the position and the current price. As I mentioned in the article, the delays allow Hebei an out if they want one, and I specifically called out the price drop in Platinum. That lowers the probability of the deal going through. On the other hand, the regulatory approval increases the probability.
The current price is absolutely a relevant consideration, especially as it starts getting close to the value of the remaining cash on the balance sheet. If the price is below the weighted average (probability of each outcome * value of each outcome) then there is value in a position. I would never weight something like this where outcomes are binary as a huge position, instead I would try and have lots of independent positive expected value ideas.
The biggest benefit to Harrington being in the name is the discipline they'll enforce once the deal is either closed or not closed. Having the current capital and any deal proceeds returned to shareholders is much better than having management "re-invest" them in a new business and/or continuing management salaries.
Thanks for commenting!
Personally, I sold enough to cover my cost basis in the whole position, so the ~30% of shares I have left represent my profits on the trade. Even if it goes to zero (unlikely for a company with a huge cash balance and no debt) it would be break-even at worst.
Ultimately, this article is update for those who are in the position currently and who might consider starting a new position. While this is certainly a position with risk, the risk-reward ratio is better at a lower price, especially with the regulatory uncertainty removed.
None yet, but I'm quite confident I'll be able to pick which one of the left-of-centre parties has a chance closer to the election, so I'd bet against the other one as the election gets closer to the date.
Personally, I think the most likely outcome is a conservative minority, but "anyone but conservative" strategic voting could push that the other way.
I don't follow politics as closely as others, but my brother has a polling company and my family is comprised of political junkies, so I tend to pick this stuff up by osmosis.
I'm talking long term intrinsic value. You are of course correct that the equity has option value here.
Logically, if fair value for the unsecureds is $0.50, then fair value for the equity is $0.
That's possible, but I don't think its likely because I don't think the bondholders have enough imagination either. I don't believe that proposal would get enough support to pass. If it did, I'd be happy, but I don't think its likely.
Sounds like we have a similar view to the debt (I'm long senior unsecured with a cost basis of $278/1000). Depending on what strike and when you bought those options though, I may have sold them to you. I sold a bunch of 2017 calls at the beginning of September when the stock jumped, and bought them all back earlier this week. If the stock gets back over $2.00 that would make me very happy as I could put the hedge back on. I'm not usually a bond guy, except for distressed situations.
Disappointing that predict-it doesn't take wagers on the Canadian political race from Canadians. Anyone know of a prediction market running on Canadian politics that does?
I don't think "fail" is the right word here. The bondholders could easily end up with a good return even in the case of Chapter 11 or a restructuring. This is especially true of the second lien holders, who have priority of recovery over the unsecured debt. I think the unsecureds are a buy here, because its a huge gain if the company makes it, and there should still be a return even in a Chp 11 situation.
Edit: Also, I'm not sure "with" or "against" Mike makes sense. I appreciate his analysis and respect his conviction. I have a similar position (I hedged by selling calls when it ran up recently) My position was disclosed to the subscribers to my service (http://bit.ly/1O4lYdg). The profits from the short call position have covered the recent losses in the bonds, and I would probably buy puts/sell calls/short the equity if the stock ran up again without the bonds following.
There is almost always money to be made when the stock and bond markets disagree.
The second lien's are almost certainly a better bet than the unsecureds at current prices. However, the second liens are 144a only, which means individual investors can't buy them.
Interesting idea. I think the average distressed debt holder is much too cynical to give up interest now for potential convertible upside later. I'm also not totally sold that the hedgie types who own this stuff would convert and sell into a price rise. I think its much more likely they'd short the company themselves into a price rise, hedge with the converts, and keep the downside protection of the bond position. (At least that's what I'd do :) )
The debt holders don't care what happens to the equity, and at this point Glenn Kellow can't do anything without their say-so, so I don't think equity interests will be a factor here. If the company wants debtholders to give something up in exchange for equity upside, the conversion price (and dilution) won't be at $1.50/share (due to cynical nature of debt holders mentioned above) it'll be lower, in my opinion.