Shooter MacGavin
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Posts posted by Shooter MacGavin
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Is this your way of saying " this is a terrible deal"?
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I have a decent copy (sightly stained, completely legible) well bound hardcover copy of The Great Salad Oil Swindle. I bought it after Todd Combs recommended it saying "it had multiple lessons for shorting" and spotting frauds. Obviously this scandal is the reason that Amex stock fell before Buffett famously bought it for his partnership.
I've been looking for You don't know Jack or Jerry for a while.
It looks like both of these rare out-of-print books sell for around the same price by Amazon's third party resellers. Please PM if you're interested in swapping. Thank you.
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Bought some Hampton DeVille on BNN deal
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I run a small fund but i think it can be possibly be improved with the right partner so that we can combine resources and brains in terms of investment ideas as well as marketing muscle and enhancing our process and credibility.
An ideal partner would be interested in concentrating in long only ideas and would already be running at least ~$10M in AUM and in the NYC tristate area. If you meet the above criteria and are interested in talking/meeting please PM me.
Please note, I'm not interested in hiring anyone. This is strictly about two peers combining forces if it makes sense.
Alternatively, if you're run a fund in NYC and are interested just in meeting up once in a while to talk stocks over coffee, please PM me as well. Just getting different perspectives and getting out of our bubbles would hopefully be mutually beneficial.
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my favorite questions are 1) "what's the best question I can ask you that you haven't been asked"...2) "I'm 21 and out of college, how do i start my own hedge fund?" and from the Chinese admirers 3) "what do you think about investing in China?"..
in case you missed those try any year since at least 2010 - 2018.
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I just need some US PPMs done for a fund. Would like it to be reasonably priced and get it done fast. We have offshore docs and fund entities done through another firm, and though they were good, they're pretty slow to respond. Please Pm if you know of one. Thank you very much.
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I take particular umbrage specifically with funds that are underperforming the market on an unlevered basis, risking investor's capital with high levels of margin (and I make a distinction between margin and leverage overall), throwing up good numbers and receiving the accolades from outside investors who aren't paying attention to this "parlor trick". And it happens ALL the time.
I'm curious what funds do this. I know you don't want to name names, but presumably this info is in their letters and out there.
I don't mean it to sound like the funds/ IM's are being deceptive or anything like that by using margin and they should be "called out". I'm saying when we are trying to evaluate their performance, it's not strictly about how much the fund is up overall. It's easy to forget this point. The question of how much risk was taken is very important too. Unfortunately, the latter isn't as easily discernible to the average investor.
I don't really want to discuss names, because I don't have access to statements, total holdings,hedges and so forth and I haven't gone over these things with a fine-toothed comb so I could easily be wrong (nor do I have any interest in doing that), but it seems to me that some funds with large out-performances are generally only doing so because of sizeable margin.
It also doesn't mean that there's not funds with large outperformances who are using margin that are also highly skilled.
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I think having blanket rules in investing is going to only needlessly hurt one's returns. Things like
1. Dont invest in financials (banks)
2. Dont invest in Tech
3. Dont use leverage, etc.
As investors we accept that majority of the time markets are efficient but can occasionally be inefficient for us to make a profitable investment.
It is generally true that leverage is risky. But if a rare opportunity comes up, say like the banks (BAC, JPM, etc) over the last few years, I would posit that it is less risky to use leverage (use lots of cash + LEAPS, warrants on deeply undervalued businesses) than most conventional portfolios of value investors.
Vinod
Vinod,
I agree wholeheartedly. We should distinguish between margin leverage and the concept of leverage overall. I'll take as much long-term , low cost, non callable leverage as I can get. Margin is where you can get in trouble. You never know when you're going to get called. You could be right on your valuation and still get shellacked.
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If any investment manager is touting his or her fabulous returns without mentioning the margin risk he or she took as a fiduciary of his or her clients or is not comparing him/herself to what the index would've done with the same level of margin, I think people should definitely raise an eyebrow.
Showing great returns with margin is really easy. But it doesn't make it smart.
I'm not opposed to leverage. For example, generally speaking most of what a PE investor is paying for is not for the investment genius of the manager but for the cost of capital arbitrage a PE Firm is able to procure, vs. its investors themselves. Hedge funds have an even lower cost of arbitrage, but its far far riskier because of how quickly it can get called back at the worst time.
You said that this wasn't directed at any manager in particular...noted. I thought I would just clear up the leverage Arlington used on that Berkshire bet...remember, BRKA stock was trading at about $92K when that bet was made and intrinsic value by Allan was calculated at about $190K per A share. He took a 50% leverage position and clearly explained it to all partners in his annual report. He also indicated it was the first time the fund had used leverage, but the upside was very high and the downside reflected fully in the price.
Now going back to your comments on leverage...IB allows 5-1 leverage? If so, that's nuts and I think most investors would still have a losing record doing that, because if they are wrong for any prolonged period, the losses would start to hammer them psychologically. In fact, I think the average investor using leverage would do worse than the average investor not using leverage...and that's because the average investor is average both analytically and psychologically. Cheers!
Sanjeev,
On Arlington, fair enough. I haven't paid much attention to them so I'm admittedly uninformed. The Berkshire repurchase thing was of course a nod to them, so you have a right to clear that up. Personally, if i had been an investor, I wouldn't have been thrilled unless there was a hedge on as well.
On leverage, you're absolutely right. If you have high amounts and/or the wrong kind of leverage, you WILL impair your capital. It's only a matter of time. To invoke Munger - there are three ways to go broke: 'liquor, ladies and leverage'.
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This is directed at the forum, not really at any particular poster, but I would question, in general, if one should applaud an investment manager margining up 5x and then paying himself on the upside. If you want to take that kind of risk/reward trade off, just do it yourself. Lever up with the S&P500 Index. IB will let you borrow up to 4-5x your equity.
I've come across more than a few funds (no specific names mentioned) that post these astronomical returns and I've looked at their letters and the long thesis where they literally haven't outperformed the S&P500 on the majority of their holdings. (One was even short a bunch of FANGs (which has obviously proved to be a terrible idea over the last 5 or 6 years) and they're still posting these incredible returns. And the only way that happens is with a lot of margin.
Yet, if you then see what you yourself could've done instead with an index or Berkshire levered 5X yourself over the past 8 years, you would have a far better record than them and you wouldn't pay them an extraordinary fee. But that doesn't necessarily make it smart unless you were able to hedge the downside at a low cost. Berkshire fell 45% from top to bottom in September 2008 - Feb 2009, so this notion that the stock won't trade below the 1.2x repurchase price is not accurate, in my view. Anything can happen in the markets. You can't know how others behave.
If you simply had a portfolio margin account, and margin'ed 5 to 1, borrowed at 2% and invested in the index earning 14.5% over the last 8 years, you would've had 10x your money and you would be on the cover of barron's, arms folded looking out a window. And it would work like a charm until you have a 1st quarter 18 type event or a 2008 event or a 1987 event or whatever in which case you stand a pretty good chance of getting a margin call and closing out at a huge loss (depending on your particular portfolio of course).
If you want to take that risk for yourself, then by all means. May be a worthwhile gamble. But why pay someone else to gamble for you?
If any investment manager is touting his or her fabulous returns without mentioning the margin risk he or she took as a fiduciary of his or her clients or not are not comparing themselves to what the index would've done on the same margin, I think people should definitely raise an eyebrow.
Showing great returns with margin is really easy. But it doesn't make it smart.
I think that you make some good points but you're generally wrong.
First off IB will not let you do 4 or 5x margin. They enforce Reg T margin which is 1:1. In Canada you're actually allowed to have 2:1 margin but IB still enforces 1:1. Of course you can use derivatives to manage that but it's not straight up margin.
Second, as long as the strategy is communicated clearly to the investors in the fund I don't see any reason why using margin to generate returns should be a problem. If the investors are ok with it and its risks, game on. Similarly on fees. That is a matter between the manager and his clients. If the clients are aware of what they are paying and they're ok with it why should that be an issue.
Thirdly, a lot of what you base your post on is a fallacy. That the people should "do it themselves". Here's the thing: People don't want to do it themselves. So they have other people do it for them. And yes they pay fees for that. It's just how it is.
1) Actually, you're wrong about the margin. I have a portfolio margin account. Lots of people on this board do. But refer to thepupil's post. He's kindly provided the link.
2) Of course. Do whatever you like. It's just a perverse incentive structure rewarding managers for risk-taking over skill with other people's money.
I take particular umbrage specifically with funds that are underperforming the market on an unlevered basis, risking investor's capital with high levels of margin (and I make a distinction between margin and leverage overall), throwing up good numbers and receiving the accolades from outside investors who aren't paying attention to this "parlor trick". And it happens ALL the time.
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This is directed at the forum, not really at any particular poster, but I would question, in general, if one should applaud an investment manager margining up 5x and then paying himself on the upside. If you want to take that kind of risk/reward trade off, just do it yourself. Lever up with the S&P500 Index. IB will let you borrow up to 4-5x your equity.
I've come across more than a few funds (no specific names mentioned) that post these astronomical returns and I've looked at their letters and the their holdings where they literally haven't outperformed the S&P500 on the majority of their holdings. One was even short a bunch of FANGs and Tesla (which has obviously proved to be a terrible idea over the last 5 or 6 years) and they're still posting these incredible returns. And the only way that happens is with a lot of margin.
Yet, if you then see what you yourself could've done instead with an index or Berkshire levered 5X yourself over the past 8 years, you would have a far better record than them and you wouldn't pay them an extraordinary fee. But that doesn't necessarily make it smart unless you were able to hedge the downside at a low cost. Berkshire fell 45% from top to bottom in September 2008 - Feb 2009, so this notion that the stock won't trade below the 1.2x repurchase price is not accurate, in my view. Anything can happen in the markets. You can't know how others behave.
If you simply had a portfolio margin account, and margin'ed 5 to 1, borrowed at 2% and invested in the index earning 14.5% over the last 8 years, you would've had 10x your money and you would be on the cover of barron's, arms folded looking out a window. And it would work like a charm until you have a 1st quarter 18 type event or a 2008 event or a 1987 event or whatever in which case you stand a pretty good chance of getting a margin call and closing out at a huge loss (depending on your particular portfolio of course).
If you want to take that risk for yourself, then by all means. May be a worthwhile gamble. But why pay someone else to gamble for you?
If any investment manager is touting his or her fabulous returns without mentioning the margin risk he or she took as a fiduciary of his or her clients or is not comparing him/herself to what the index would've done with the same level of margin, I think people should definitely raise an eyebrow.
Showing great returns with margin is really easy. But it doesn't make it smart.
I'm not opposed to leverage. For example, generally speaking most of what a PE investor is paying for is not for the investment genius of the manager but for the cost of capital arbitrage a PE Firm is able to procure, vs. its investors themselves. Hedge funds have an even lower cost of arbitrage, but its far far riskier because of how quickly it can get called back at the worst time.
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PATK. Anyone done any work on this name? would love to compare notes.
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hey sculpin. Thank you for posting this from VIC. It's a very interesting idea. I took a little position in MHY. Figured if I was going to making a bet on Cline ultimately, the payoff would be comparable with a quarter of the capital vs MAR. I'm not much of a metals and mining guy but I am wondering about a few things f you or anyone else has some insight. If this mine is not profitable at $140/ton of met coal, would it be profitable to a strategic buyer for any reason? are there cost synergies in mining? If mgmt wasn't able to receive bids during the huge run up in met coal last year, why would they receive bids now? have you ever spoken to the marret or cline management about their outlook for new elk?
thank you very much and thanks for the idea
From VIC - also MHY.UN moving up as public access was a few days ago...
Marret Resource Corp MAR
August 08, 2017 - 3:38pm EST by TheSpiceTrade
2017 2018
Price: 0.37 EPS 0 0
Shares Out. (in M): 18 P/E 0 0
Market Cap (in $M): 7 P/FCF 0 0
Net Debt (in $M): -3 EBIT 0 0
TEV ($): 4 TEV/EBIT 0 0
Description / Catalyst
Messages (2)
Description
Marret Resource Corp. (the “Company” or “MAR”, traded on the TSX) is one of the most asymmetric risk/reward investments I have ever seen in my career. It is small, illiquid, which may make it only suitable for personal accounts, but the return profile is so enticing that it is worth picking up some shares for managers of smaller funds.
Investors can purchase MAR (at C$0.395/shr) below liquidation value today (C$0.463), with your downside completely protected, and upside potential of over 37x your capital invested.
Executive Summary
MAR started off as a publicly traded investment company focused on resource companies, but due to a confluence of factors (changes in tax regime, poor performance, and high percentage of portfolio in illiquid securities) became orphaned and suffered from significant redemptions.
Throughout its downfall, the manager of MAR refused to write-down the value on Cline Mining, which owns a metallurgical coal asset called New Elk Mine in Colorado. This culminated in threats of litigation from activist shareholders, a nasty annual general meeting with press coverage, and the eventual undertaking by the manager to liquidate the portfolio.
Today, MAR is completely orphaned and forgotten with a market cap of just C$7mm. There is approx. C$8.2mm worth of net cash and liquid, publicly traded high yield bonds on the balance sheet. Thus, MAR is currently trading below liquidation value.
Furthermore, MAR still owns approx. 22% of Cline Mining, which underwent a CCAA facilitated debt-for-equity swap.
Met coal prices have rebounded significantly since late 2016. Based on an NPV10 interpolated from the Company’s NI 43-101 feasibility study, Cline is worth C$142mm near the current benchmark met coal price of US$165/ton. At US$200/ton, Cline is worth C$1.16 billion (translates to MAR share price of C$14.91).
The latest disclosure in MAR’s most recent quarterly report suggests that the manager is actively engaged in strategic alternatives for Cline Mining in the current strong met coal environment.
In any case, investors are paying less than nothing for Cline Mining, and thus the investment thesis does not hinge upon a commodity call on met coal or steel markets.
Business History
Marret Resource Corp. is a publicly traded investment company whose primary business is investing in public and private debt securities in a broad range of natural resource sectors.
The manager of MAR, the publicly traded investment company, is Marret Asset Management Inc. (“Marret Asset Management”), a Toronto based fixed income money manager who was acquired by CI Financial in Corp. in September 2013.
MAR was originally envisioned as a closed-end fund with permanent capital that Marret Asset Management could invest and earn fees from. MAR entered into a management services agreement with Marret Asset Management in Dec. 2010 and raised C$75 million in equity capital in 2011.
At the same time, Marret Asset management introduced three other publicly traded investment funds, these being Marret High Yield Strategies Fund (“MHY”), Marret Investment Grade Bond Fund (“MIG”), and Marret Multi Strategy Income Fund (“MMF”). In total, Marret Asset Management raised over a billion dollars for its publicly traded investment vehicles.
Over the next few years, each of publicly traded investment companies ended up in trouble due to a combination of:
Change in tax regime – on March 21, 2013 the Canadian Minister of Finance announced new anti-avoidance measures on “character conversion transactions” whereby funds converted income into capital gains by using forward purchase derivatives with a counterparty to obtain exposure to an underlying reference portfolio. MHY, MIG, and MMF were engaged in these character conversion transactions and marketing the tax advantageous nature of their income based investments. With this announcement, they were no longer allowed to enter into new contracts after their existing derivatives rolled off.
Poor performance – all of the publicly traded Marret investment companies suffered from poor performance to varying degrees in 2011-2012. For example, MHY had a return of 1.4% in 2011 and 3.2% in 2012 (compared to the Merrill Lynch U.S. High Yield Master II Index which had a return of 16.2% in 2012).
Cline Mining – unfortunately, the publicly traded Marret investment companies made one of their largest investments ever at exactly the wrong time to a metallurgical coal company called Cline Mining. As performance weakened, the manager refused to mark down their level three assets. I will get into this into the next section of this report.
Trading at a discount to NAV – as a result of the street’s skepticism around Cline Mining and NAV calculations, they began to trade at a significant discount to NAV.
Significant redemptions – This all culminated in significant redemptions in 2013. MHY received redemptions for 31.2mm units, representing 44% of units outstanding.
Cline Mining – the Straw That Broke the Camel’s Back
In Q4 2011, several Marret vehicles (those being MAR, MHY, and MMF) participated as a syndicate and provided Cline Mining Corp. (“Cline”) with $50 million of Senior Secured Bonds. Cline is a metallurgical coal exploration and production company, headquartered in Toronto, Ontario with its key asset, the New Elk Mine, located in Colorado.
Cline focused on New Elk and brought it to production in December 2010, right at the beginning of a protracted downturn in global met coal markets. For context, met coal prices dropped from almost $330/ton to under $100/ton in 2014.
By July 2012, Cline had largely suspended mining operations at New Elk in order to reduce costs. This suspension was intended to be temporary at the time, with the mine put on care-and-maintenance, in anticipation of an eventual recovery in met coal prices.
The New Elk coal mine originally opened in 1951 and was operated by a number of owners until 1989, after which it lay dormant until acquisition by Cline. The mine has all necessary permits to mine and produce coal and to transport to nearby rail-loading facilities, as well as all environmental permits. This is important, as this is not a greenfield project, with development and execution risk. This mine has been operating for decades and has developed infrastructure nearby. Furthermore, Cline invested a significant amount of capital into the mine to bring it back to operating status, only to have met coal prices drop just as the mine made its first deliveries.
In December 2014, Cline filed for CCAA protection (the Canadian equivalent of Chapter 11). At the time, the Marret group of funds were owed over $110 million in principal and accrued interest. All court materials can be found here: http://cfcanada.fticonsulting.com/cline/
In the Application Record, it was disclosed that Moelis & Co. was hired to run a sales process for Cline in April 2014, which was unsuccessful. The reasons given for the failure of the process was the low met coal price, negative outlook on steel at the time, and glut of met coal assets for sale including Cliffs Natural Resources, Patriot Coal, SunCoke Energy, Mechel OAO, Walter Energy, and James River Coal.
Sparks to fly at Marret Shareholder meeting: “I will be there screaming”
Despite the distress that Cline Mining faced, Marret Asset Management refused to take significant mark downs on the value of the debt that they held. In Q4 of 2014, after Cline had filed for CCAA protection, MAR, MHY, and MMF took just a ~25% write-down on the value of the Cline bonds it held.
As a result of these aggressive manager marks, the street began to significantly doubt the NAV of MAR/MHY/MMF, taking down the trading prices of each of these entities, as shown below:
Vehicle NAV/shr Share Price Discount to NAV Cline as % of NAV
MMF 9.07 8.36 -8% 7.1%
MAR 4.51 3.16 -30% 10.3%
MHY 0.99 0.115 -88% 81.0%
MHY traded at the biggest discount to NAV, given that 81% of its portfolio consisted of Cline Mining, and the remaining 19% consisted of Mobilicity bonds, a wireless new entrant that also filed for CCAA protection (and interestingly enough ended up with a full recovery upon a sale of the business to Telus).
Heading into 2015 Annual General Meeting, shareholders of MAR were not happy:
“What puzzles holders is that Cline has been delisted from the TSX for about 18 months, and is now in the process of going through a complicated restructuring. Determining fair value is a challenge. In a recent update, Marret said Cline “has sufficient liquidity to continue for at least two more years and Cline is looking at various avenues, including surplus equipment sales, to extend this period.
But given the uncertainty, ‘the entire NAV of Cline should be written off,’ noted one holder, who also wants other changes, including a substantial issuer bid.”
Excerpted from an article written in the Financial Post about this annual general meeting, anticipating screaming shareholders: http://business.financialpost.com/news/fp-street/sparks-to-fly-at-marret-shareholder-meeting-i-will-be-there-screaming/wcm/ca55bbe9-7bc1-4414-9a1d-38699f31618a
Outcome
In April 2015, the Board of MAR announced that it was reviewing various alternatives to deal with the significant trading price discount to NAV and provide liquidity to shareholders. In June 2015, the Company proposed a plan to return capital to shareholders on two redemption dates. The first redemption date in July 2015 received $45mm of redemptions (approx. 51% of the shares outstanding).
MAR underwent a second redemption event in October 2015 received another $18mm of redemptions. Over time, MAR, MHY, and MMF became orphaned stocks, with dwindling Net Asset Values and little to no interest.
In July 2015, Cline Mining completed a CCAA plan of compromise and arrangement with a debt-for-equity swap. As a result, MAR, MHY, and MMI ended up owning 100% of the equity of Cline, with a significantly de-levered balance sheet.
My estimate of the ownership interest in Cline Mining is as follows (based on their pre-petition ownership of the secured bonds):
MMF: 5%
MAR: 22%
MHY: 73%
Opportunity Today
Today, MAR’s NAV is C$0.912/shr and it trades for C$0.395. MAR slowly transformed into a micro-cap stock, with very little liquidity and attracting no new investors. There are plenty of reasons not to pay MAR any attention:
Lack of liquidity – the entire market cap of MAR is under C$7mm.
Boring – the share price has done nothing for years.
Negative stigma – MAR was tainted as an investment holding company with questions swirling around the manager’s mark on Cline. There was no compelling reason to get involved and take any accounting risk.
(Note: the investment thesis is similar for MHY, which has a NAV of C$0.725/shr and trades for C$0.11, but is even less liquid with a total market cap of ~$2mm)
This lack of investor attention and negative stigma, has created a very interesting investment opportunity with one of the most asymmetric return profiles I have ever seen.
The lack of investor attention on MAR/MHY is particularly interesting in the context of current met coal prices. Unlike many futures traded commodities, met coal is priced off of contract settlements, mainly into China which is the world’s largest steel producer. These are hard to track unless you have access to Bloomberg data, but one can look at Teck Resource’s May 2017 investor presentation for a chart of historical met coal prices http://www.teck.com/media/20170516_BofAML-Conference.pdf
If you look at page 54 of the Teck Resources slide deck, you will see that met coal prices have staged a significant comeback starting in the second half of 2016. In fact, benchmark prices were US$285/ton in Q1 2017. This was due to many factors including Cyclone Debbie which heavily impacted coal production and shipment in the Queensland state of Australia in March 2017. In fact, Chinese purchasers of coal turned to the US and other coal producing regions to fill the shortfall in supply in the aftermath of the cyclone (http://www.cnbc.com/2017/04/04/after-cyclone-debbie-china-replaces-australian-coal-with-us-cargoes.html).
Met coal prices have retraced from March 2017 levels, but spot prices are still above US$160/ton.
NPV Analysis of New Elk Mine
The New Elk Mine had a NI 43-101 feasibility study released in 2012, where the coal product was described as low-sulphur, medium-to-high fluidity, high vol B coking coal and deemed suitable for export. The only downside of the mine is that it is landlocked in Colorado, and thus receives a lower net price per ton after adjusting for trucking, rail, and ocean freight costs to reach end customers (typically in Asia). However, the DCF analysis within the NI 43-101 takes all of this into consideration.
New Elk’s cost structure on a run-rate basis is as follows:
On-site costs (mining, prep & loading, truck+rail) of US$40/ton
Off-site costs (royalties, taxes, sales commission) of US$15/ton
Ocean-freight differential of US$30/ton
This gives a total operating cost of approximately US$85/ton, after which you should add on another US$10/ton for capex, taking breakeven benchmark met coal price to $US$100/ton (before cost of capital + time value of money considerations).
Here’s where the math gets interesting:
At a benchmark price of US$160/ton – New Elk has a NPV10 of C$0.
At a benchmark price of US$165/ton – New Elk has a NPV10 of C$142mm.
At a benchmark price of US$170/ton – New Elk has an NPV10 of C$288mm.
At a benchmark price of US$200/ton – New Elk has an NPV10 of C$1.16 billion!
See the below table for the corresponding share prices of MAR and MHY depending on the benchmark met coal price you pick:
Entity US$150/ton $160/ton $165/ton $170/ton $200/ton
MAR C$0.46/shr $0.46/shr $2.23/shr $4.04/shr $14.91/shr
MHY C$0.01/shr $0.01/shr $2.82/shr $5.71/shr $23.00/shr
Note that MAR has a floor price of C$0.46/shr, even if Cline Mining is worth zero because it holds C$0.32/shr in cash and C$0.14/shr in other liquid, publicly traded, high yield bonds.
MHY on the other hand, owns significantly more of Cline Mining (estimated 73%), but holds practically nothing else of value which means that your downside is a loss of all capital.
Here is the return profile from their current share prices:
Entity US$150/ton $160/ton $165/ton $170/ton $200/ton
MAR 17% 17% 465% 923% 3674%
MHY -91% -91% 2468% 5089% 20811%
Investors should note that MAR current trades (albeit very thinly) at C$0.395/shr, which is less than the value of the cash + liquid securities (excluding Cline) that it holds on hand. In other words, you are paying less than nothing for a met coal mine that is fully permitted, fully developed, was recently producing, and could be worth over a billion dollars!
Marret is Actively Pursing Strategic Alternatives for Cline
Here is an excerpt from MAR’s latest quarterly report:
Cline Mining Update
Metallurgical coal prices have been stable above $150/tonne and spiked again, well above $200, as Cyclone Debbie disrupted production in Australia for several weeks. There have been a couple of IPO’s of restructured coal companies, which indicates the sector can now attract equity capital. The Manager continues to explore the best long term solution for the Cline assets as the quality of the proposals are improving. There is concern about weak iron ore and steel prices in China, but so far met coal prices are solid. The Manager sees this resurgence in coal prices as a window of opportunity, and is actively pursuing solutions.
Marret Asset Management would love more than anything to fetch a “good” price for Cline resulting in a “par recovery” for their initial bond investment, thus saving them face and allowing them to stand tall behind their dubious manager mark over the years. This single asset is preventing the liquidation of MAR and MHY. In the case of MAR, Marret Asset Management has stopped receiving fees on the remaining assets due to the issues around the marked value of Cline, so there is no incentive for them to hold on to this asset.
Conclusion
MAR and MHY are two stocks with the most interesting and asymmetric risk/reward profiles I have ever seen. The traded price of MAR is below net cash + liquidation value, and you get Cline Mining and the New Elk Mine for free. Based on current met coal prices, Cline could be worth over C$140mm. If the strength in met coal prices continues and it heads towards US$200/ton, Cline could be worth upwards of a billion dollars. The Marret investment vehicles are heading for wind up and are looking to sell their last illiquid investment. A large strategic can purchase Cline for a fraction of its NPV value and significantly add to their reserves/production without much cost. If this were to happen, an investor in Cline could receive many multiples of their invested capital
Recently, new evidence of the resurgence of the met coal industry can be seen in an interesting article here: http://canAadafreepress.com/article/for-the-first-time-in-six-years-a-new-american-coal-mine-has-opened
A new met coal mine has opened in the US, the first time in the last six years. Why develop a greenfield project, with all of the execution and development risk, when you can get New Elk Mine for free?
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
MAR trades below net asset value of cash + liquid securities, plus you get a free option on the New Elk Mine.
MAR's latest quarterly report states that there is "a window of opportunity" in pursuing strategic alternatives for the New Elk Mine.
Realization of the NAV discount (excluding New Elk) gives a 17% return. Realization of any value for the New Elk Mine could result in multiples of your capital.
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ok. Thats a good idea. thanks
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Yeah IB didn't let me. I forget what they had told me about it at the time. Maybe something like you need to be an Indian citizen but I don't remember.
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Hi,
I know this has been asked before so I apologize but I can't find the answer. How does a US person invest in India? I mean directly, not through Matthews India or Fairfax India etc. Is there an online broker that can help facilitate that process? I would like to get this setup for myself personally and for my fund. Any help would be greatly appreciated, I haven't really found an easy answer online. Thank you for your help. :)
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competition is always prevalent but it's a big market. Visa and Mastercard's clients are financial institutions and they do all the marketing. Financial institutions are incentivized to get people to use credit for payments and the providers of credit are banks.
I suspect there will be multiple acceptance points at vendors and multiple payment mechanisms in India.
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thank you everyone for your responses. I need to do more work on it. They do have great assets.
My thinking is that I wouldn't pay 1.3x or 1.4x NAV to buy in a mutual fund or an ETF for example unless I thought the book was very conservatively stated and/or I thought the upside was far higher in spite of the 40% premium.
I would for Berkshire or Markel because I'm valuing their earnings separately and adding it to their liquid investments.
The book value also accrues for the ultimate performance fee so that's a plus from the point of view of a new buyer.
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To the Fairfax India Investors,
I just recently started doing work on this. I wanted to get your opinion on something.
I really like the idea of buying into a company that has a strong board and good investors partaking in a really fast growing region of the world. But why do they focus on change in book value as a proxy for their success? You don't see Markel or Berkshire or others focus on change in book value for their private businesses. I know in general they have focused on it for the insurance side and MKL still does for the insurance operations because the majority of it is still liquid and marked to market, but for the private pieces they do not really emphasize that. Certainly you don't see them do a level 3 valuation for the private businesses. You see them disclose earnings.
Fairfax India do a subpar job of disclosing earnings trends for their private businesses, so you have to trust their internal valuation. But the way they value stuff - at first glance - is so incredibly subjective and for them to reward themselves based on this is really odd.
As an example of why it could be goofy, Let's assume I bought 100% of GM stock at 6x earnings ($6.00 per share/ $36 dollar stock). And then I turn around and say using a 10% discount rate , i value it at $60. Well, that may be fair, but something seems a bit off about that to me. Isn't that some of what's going on at Fairfax India? They're buying both public and private businesses, but then they're re-valuing upwards the private businesses..which may be justified by improved earnings power, increased capital retained and an increased business outlook, but it also may be a valuation arbitrage.
The stock is now trading at a 35-40% premium to book value, which already bakes in some of the upside from the private businesses because the investments are getting valued upwards on their books. They may have great assets but it seems like not a great buy.
Just trying to get your food for thought. Thank you.
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thank you for the link!
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To the Fairfax India Investors,
I just recently started doing work on this. I wanted to get your opinion on something.
I really like the idea of buying into a company that has a strong board and good investors partaking in a really fast growing region of the world. But why do they focus on change in book value as a proxy for their success? You don't see Markel or Berkshire or others focus on change in book value for their private businesses. I know in general they have focused on it for the insurance side and MKL still does for the insurance operations because the majority of it is still liquid and marked to market, but for the private pieces they do not really emphasize that. Certainly you don't see them do a level 3 valuation for the private businesses. You see them disclose earnings.
Fairfax India do a subpar job of disclosing earnings trends for their private businesses, so you have to trust their internal valuation. But the way they value stuff - at first glance - is so incredibly subjective and for them to reward themselves based on this is really odd.
As an example of why it could be goofy, Let's assume I bought 100% of GM stock at 6x earnings ($6.00 per share/ $36 dollar stock). And then I turn around and say using a 10% discount rate , i value it at $60. Well, that may be fair, but something seems a bit off about that to me. Isn't that some of what's going on at Fairfax India? They're buying both public and private businesses, but then they're re-valuing upwards the private businesses..which may be justified by improved earnings power, increased capital retained and an increased business outlook, but it also may be a valuation arbitrage.
The stock is now trading at a 35-40% premium to book value, which already bakes in some of the upside from the private businesses because the investments are getting valued upwards on their books. They may have great assets but it seems like not a great buy.
Just trying to get your food for thought. Thank you.
I would actually say they are being too conservative in their valuation. for example, in case of BIAL their DCF assumes a growth of 3% or something like that. i think thats the case for almost all the private holdings where they have assumed such low single digit growth rates.
they may sound right in NA, but in india (where i invest), this way below par. inflation itself is 6-7%. on average 10% is the starting point and finding companies growing at 15%+ in not difficult. for example IIFL is growing 30%+ and thats not extra-ordinary ..par for the course in this sector for well managed companies.
BIAL has been growning passenger traffic at 20%+ and i have travelling via that airport for ages. that part of the city is expanding the land around airport is going to far more valuable in the future.
that does not mean the stock is fairly priced or something like that ..just that these companies have very good growth opportunities ahead of them
ok that's helpful. thank you. Do you believe that at 1.35x book per share, that this stock is still worth kicking the tires on at this point? It has all the makings of a really good investment potentially...
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To the Fairfax India Investors,
I just recently started doing work on this. I wanted to get your opinion on something.
I really like the idea of buying into a company that has a strong board and good investors partaking in a really fast growing region of the world. But why do they focus on change in book value as a proxy for their success? You don't see Markel or Berkshire or others focus on change in book value for their private businesses. I know in general they have focused on it for the insurance side and MKL still does for the insurance operations because the majority of it is still liquid and marked to market, but for the private pieces they do not really emphasize that. Certainly you don't see them do a level 3 valuation for the private businesses. You see them disclose earnings.
Fairfax India do a subpar job of disclosing earnings trends for their private businesses, so you have to trust their internal valuation. But the way they value stuff - at first glance - is so incredibly subjective and for them to reward themselves based on this is really odd.
As an example of why it could be goofy, Let's assume I bought 100% of GM stock at 6x earnings ($6.00 per share/ $36 dollar stock). And then I turn around and say using a 10% discount rate , i value it at $60. Well, that may be fair, but something seems a bit off about that to me. Isn't that some of what's going on at Fairfax India? They're buying both public and private businesses, but then they're re-valuing upwards the private businesses..which may be justified by improved earnings power, increased capital retained and an increased business outlook, but it also may be a valuation arbitrage.
The stock is now trading at a 35-40% premium to book value, which already bakes in some of the upside from the private businesses because the investments are getting valued upwards on their books. They may have great assets but it seems like not a great buy.
Just trying to get your food for thought. Thank you.
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With all due respect, I don't think your rules would be useful to you. I'm using examples at extremes to make the point:
Let's say you have a company that has EV/EBITDA of 6x but its levered and the company's interest charges and depreciation (or maintenance capex) is consuming 100% of EBITDA. Then an EV/EBITDA of is 6 equal to P/E of infinity. Or in other words, the company, with its current capital structure is not adding any value to shareholders. If no changes can occur to the cost structure, the shares of this company are worth zero.
Now let's say you have a company that has a recurring annuity stream of a software license with an EV/EBITDA of 6x, fully funded by equity, and has no capital requirements. In this case, an EV/EBITDA of 6x is more like a P/E of 12.5x with taxes being the only leakage from EBITDA.
This is why you can't compare EV/EBITDA of a capex heavy company to an EV/EBITDA of a software company. But you certainly can compare their multiple on economic earnings.
At the end of the day, the EV/Rev, EV/EBITDA, EV/eyeballs multiples are a shortcut to a multiple on "economic" or "run rate" earnings.
Now let's say you had two companies trading at 10x. The first was able to reinvest 100% of the economic earnings at 20% incremental returns on capital. The second reinvested 100% of economic earnings at 5%.
Well, Is 10x cheap for both? Not really. The first company will make you 2.5x your money in 5 years (20% IRR), assuming the multiple is flat. The second will make you 1.2x your money (5% IRR). Therefore, you can't generalize and say 10x earnings is cheap. 10x is not cheap if companies are reinvesting at low rates of return. 20x earnings is extremely cheap if companies are investing at very high rates of return.
Let's complicate this further. 10x may be cheap if a company is reinvesting at 1%, but it has $100B of excess cash or real estate that isn't factored into the stock price. But it may only be cheap if shareholders have a way to force management to either do something useful with those excess assets or distribute it, hopefully in a tax efficient manner.
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Hi,
I'm in discussions with an investor and we are trying to launch an offshore fund. I've spoken to a few lawyers and administrators, but was wondering if anyone could recommend any vendors (tax advisors, fund setup lawyers, administrators) they've used in the past. I'm based in tri-state area and would love to work with someone who is familiar with NY tax /registration requirements as well. Any recommendations, please PM me. Thank you in advance for your help.
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Depends on the state. Definitely consult an attorney experienced in the field before you get going, or talk to RIA in a BOX. There is much more to getting started than meets the eye. Generally, though, you will have to register as an RIA or you will be limited on what type of investors you can accept. If you are planning on accepting any friends and family, then in nearly all cases you will have to register as an RIA, with the primary exception to mention being NY state.
thanks. Yes, I'm in discussions with attorneys at the moment. Besides cost, what's the disadvantage of setting up a fund structure instead?
KKR: Omaha on the Hudson
in General Discussion
Posted
The accounting here is very confusing and the filings/IR don't seem to help. But maybe it's because I'm new to the PE / Asset manager industry.
Is the realized performance fee income they show in their investor deck and filings net of what has previously already been accrued and expensed (unrealized carry assets and accrued liabilities on the balance sheet?). Or do they need give 40% away on the realized portion in comp? I would think the former since they have a large accrual expense for carry every period that sits on the balance sheet.
Also what is the purpose of the after-tax distributable earnings? That doesn't seem to be a useful "earnings" metric to me. The "realized income" as a revenue item seems a bit confusing to me. Isn' that just a gain on sale? How do the earnings from their PE investments flow through the P&L? Is that through the "realized income" section?
Help! Thank you.