SafetyinNumbers

What do you think of his analysis of BRK vs FFH and why he chooses BRK?

Can you outline the growth rates for the last three acquisitions?

The fires and floods will definitely have an impact on Q3. Fairfax might benefit from not having as much exposure to Canada vs a company like Intact Financial. It’s also pretty clear, FFH shareholders care a lot more about cat losses than IFC shareholders. IFC is expected to lose ~4%+ more of its book value than expected in cat losses in Q3 based on their pre announcement and the stock is flat. I thought there would have been some expectation of a secondary but nothing yet.

I think this perspective ignores context and the balance sheet but that’s what makes a market.

Insured values are probably relatively small. I think FFH only owns 35% of it too so presumably losses will hit next quarter if it’s material or not.

Is there any way that could be material?

If we are lucky and this continues, is it fair to assume Fairfax will have a lot of reserves released in Q3?

I’m sure you looked at a sample of press releases when they made changes to S&P/TSX 60 after a quarterly index review and noticed they announce the S&P/TSX Composite changes in the same press release. I don’t think I have ever seen them announce that they weren’t going to make any changes. If you have an example, please share.

S&P/TSX 60 decided not to kick out AQN so no change to the index. A reprieve for those still adding including the company.

I think probably just like Stelco, their partners including management were ready to sell and so they are moving on instead of buying them out.

FFH has a volatile ROE but I think the risk is now more to the upside than the downside given the solid investment income. Run rate for investment income is >$100/sh on a pre-tax basis. As a result, it’s hard for ROE to fall below 10% on a FTM period. It’s a 40% position for me so I obviously think it’s a fat pitch. The surprising part is how few people can see it.

Fair to say you own FFH already? On a look through basis, it’s hard to beat its float to market cap ratio.

There is nothing quite like price insensitive buying to help with price discovery. It would be interesting to know how much liquidity will be provided by retail shareholders when FFH goes in. Entry does seem inevitable but not necessarily September although I think the odds are better than 50-50. Two notes : think Gauthier is from Scotia not BMO and the article suggests GOOS is getting kicked out because it trades more in NY but it’s actually because its float cap is under 2.5bps. There is no such rule for the 60 but 20bps has been the rule of thumb. AQN closed at 19bp on Friday but they increased the float a reasonable amount since the last measurement period so it might bounce back above 20bp. But it’s still just a rule of thumb.

I’m on the board of Sailfish Royalty FISH.V. We have an effective royalty on Mako’s production in Nicaragua. Our major asset though is a royalty on Spring Valley, a development project in Nevada, where the operator is currently attempting to get approval for construction.

Seems like Nicaragua expansion won’t happen until after Guyana is online. Total production should be > 100k when Guyana is up and running. I would expect more M&A. Mako could be the target or the acquirer depending on relative valuation to the counterparty.

It’s the reason most of the street doesn’t think FFH goes in too. I showed a couple of them that financials were more overweight in March 2022 when IFC went in (at a slightly lower weighting in the index than FFH is now) they shrug their shoulders. Seems like an important precedent to me.

We’ll find out Sept 6 after the close if FFH is going into the 60. I think the odds are 50-50. I think the street is less than 25% so I don’t think there is much prepositioning. Given the weight keeps going up, I think it’s inevitable but the street doesn’t think that long term. I assume sellers will be catalyst driven hedge funds and retail investors who have oversized positions. What does everyone else think?

Agreed on Akiba’s reasoning and transparency. Wexford Capital’s effective control position is also a big reason why I’m willing to own as much as I do. They created Diamond Back Energy FANG and listed it back in 2012 and it’s compounded at 20%+ since. What I didn’t expect is that the stock would still be trading almost 25% below where they LAST raised money in 2020 to build the mine in the first place. Wexford bought the majority of that issue at C$4.00 and just recently added 500k shares at C$3.50. The multiple contraction is pretty astounding especially in the context of the gold price moving up almost 40% since then, the mine being built and cheaply acquiring a high return project in what might be one of the best mining jurisdictions in the world. The best case scenario is that MKO’s shareholder base can attract a few more investors that think long term and give the BOD a low cost of capital to grow accretively. The number and quality of opportunities grow exponentially once the currency is rerated. That can potentially happen with a GDXJ addition. It’s got the market cap but doesn’t trade enough because it’s so far away from intrinsic value.

I bought some Mako the last few days too. It’s my second biggest position after Fairfax but that’s probably way too big for most people. If one doesn’t have any gold exposure it’s worth a look as it’s professionally run unlike a lot of other gold miners that are run by promoters. They have a producing mine in Nicaragua with high free cash flow and it can be invested at high returns investing in another scalable project in Guyana following their recent acquisition of Goldsource. Mako will keep doing accretive deals whether as the target or the buyer in order to increase production, cash flow and liquidity. Liquidity is the holy grail for gold stocks because it means admission to GDXJ and other sector ETFs which will force price indifferent buying which is needed when the shareholder base is mainly value generalists who don’t like buying on upticks.

I have been buying Strathcona Resources SCR.TO. It’s 91% controlled by Waterous Fund. Fairfax happens to be one of the LPs and I calculated their position is ~14.5m shares although that might be net of performance fees. It’s an oil sands play trading at ~60% of NAV and growing production 5%+/yr. At US$80 oil it has a ~14% FCF yield. They just initiated their inaugural dividend at $0.25/q and plan to return the rest of the FCF as special dividends or via buybacks. Despite having a $6b+ market cap it’s not in the S&P/TSX Composite. They can increase the float by issuing shares for an acquisition or by passing through shares to their LP holders. I expect them to choose the latter. While there may be some flow back from liquidity seeking LPs, I expect value centric holders like Fairfax will simply hold on to their shares. Given the low valuation, high dividend yield and tight float, the index add could have an outsized impact. I think the stock is cheap because it’s not in the benchmark, is not very liquid and the fear of secondaries from Waterous all of which have nothing to do with intrinsic value and will be solved sooner rather than later.

The mechanics are interesting and help explain why consensus estimates are way too low on any FTM period. Eurobank for example trades at ~6x earnings but our carrying value is lower than the market value so the earnings yield boosts returns of the non-fixed income portfolio disproportionately especially given its size.

They had a bond investment that was reorganized into equity during bankruptcy in 2019.

It’s equity accounted for since FFH owns more than 20% and less than 50%. FFH increases the carrying value by its share of earnings every quarter. The trading price in the illiquid OTC trading market isn’t relevant.

You don’t get me right.