Multibagger speculative ideas

[Hielko]

How do you get the $30 million number for the assumption of liabilities? I'm reading the purchase agreement and the liabilities they will assume are basically those that arise after closing (so zero at the moment), accounts payable that are listed on Schedule 1.3(b) (seems to be something like $9 mil?) and employee liabilities listed on Schedule 1.3© (but on this schedule no numbers are reported?).

 

Testimony on p7 Doc#235 and listed on p420 Doc#246.

Thanks

[Cardboard]

People were concerned about their upcoming debt maturity but, this indicates support from their lenders as they would never allow that if they were concerned about default or lack of refinancing availability:

 

https://www.stockwatch.com/News/Item.aspx?bid=Z-C%3aBRY-2479698&symbol=BRY&region=C

 

So more solid business right in the middle of the Permian: "I am all the way up!. Nothing can stop me, I am all the way up!"

 

 

Cardboard

[valcont]

People were concerned about their upcoming debt maturity but, this indicates support from their lenders as they would never allow that if they were concerned about default or lack of refinancing availability:

 

https://www.stockwatch.com/News/Item.aspx?bid=Z-C%3aBRY-2479698&symbol=BRY&region=C

 

So more solid business right in the middle of the Permian: "I am all the way up!. Nothing can stop me, I am all the way up!"

 

 

Cardboard

 

How's opening a new servicing facility tied to their ability to refinance? They are not taking on new debt and as long as the covenants are fine , lenders can do little. The concern is if they can refinance the debt and if yes than at what rate.

[Cardboard]

With oil fundamentals finally improving and more importantly drilling steady to increasing (in meters, numbers of wells, number of rigs, well complexity) business is very good for Bri-Chem.

 

If you think about it, the media keeps on saying that shale production is over-taking the world. If that is the case then what should happen to the business of service providers even if oil does not move up significantly in price? My May 31 post seems to be playing as indicated.

 

Already since Q4, pricing increases were implemented and it should continue into the busy fall season in Canada. And for the U.S. it seems that at anything above $45 WTI that the current level of activity should hold.

 

So here you have a net-net of $0.62/share with a nice chunk of shares available for $0.54 with rapidly improving fundamentals, balance sheet getting stronger with positive cash flow and no need to spend much on capex.

 

So you can buy it and make big money when Q2 results are released by August 15 or join the growing chorus on Corner of Whiners that there are no bargains out there or the Corner of Amazon Adorers.  ::)

 

Cardboard 

[mrholty]

I'm not as bullish on Bri-Chem as Cardboard but I am long.  I also like that there has been no discussion of the Q2 results which were out over a week ago. 

 

Overall, The general thesis of revenue growth which leads to profits is still intact.

We expected Q2 to be its weakest Q historically and I expect it to be for 2017.

 

Good:

Revenue growth accelerated in Q2 vs PY as compared to Q1 vs PY.  (Thesis intact)

Salaries have kept in line with historical.  (with new facility in the US was expecting to see this increase materially.

Watch:

I see no evidence of the price increase that management referenced in Q4 2016.  Margins are flat over the past history.

Was expecting to see more work on refinancing the debt.  Note in Q2 states that we should see something shortly.  Hopefully it will be material savings as that would greatly help the bottom line. 

 

 

Don't Like:

SG&A have increased materially as both a % and in $ terms against Q2, Q3, and Q4 2016.

Utilization of assets seem materially better in Canada vs US.  Hopefully this will increase.

 

[sculpin]

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.

 

[cashisking]

it looks like the breakdown of cline ownership among the various marret vehicles was wrong in the writeup - but corrected in the comments... Can you see the other comments? I can only see 2 comments (not a member)

[Yours Truly]

Anyone look into MRS.cve ?

 

It's a 30 million microcap that provides armored gear to law enforcement and the military.  They have received a $400 million 5-year agreement with a foreign government to distribute their products.

 

The market is awaiting the first purchase order to provide some kind of legitimacy to the agreement.

[netnet]

At the current levels, i.e. above cash and liquidation values ex Cline, MAR is a levered bet on met coal, right?

 

 

[valcont]

Anyone look into MRS.cve ?

 

It's a 30 million microcap that provides armored gear to law enforcement and the military.  They have received a $400 million 5-year agreement with a foreign government to distribute their products.

 

The market is awaiting the first purchase order to provide some kind of legitimacy to the agreement.

 

I bought some when I saw the management buying in a PP. I thought it was a joke of a company with funny sounding name and I still have doubts about it. B I did a little research and found out that they actually have a product that was co developed with a government's division. Who knows it might be a pump-n-dump but if the PO materializes then this one will have a big upside.

[mrholty]

Anyone look into MRS.cve ?

 

It's a 30 million microcap that provides armored gear to law enforcement and the military.  They have received a $400 million 5-year agreement with a foreign government to distribute their products.

 

The market is awaiting the first purchase order to provide some kind of legitimacy to the agreement.

 

I bought some when I saw the management buying in a PP. I thought it was a joke of a company with funny sounding name and I still have doubts about it. B I did a little research and found out that they actually have a product that was co developed with a government's division. Who knows it might be a pump-n-dump but if the PO materializes then this one will have a big upside.

 

I wouldn't say the market is in a wait and see issue.  The stock went up 5x on the news from $.05 to $.25.  Even if it is real they really have no manufacturing as their only facility is 22k square feet.

[sculpin]

At the current levels, i.e. above cash and liquidation values ex Cline, MAR is a levered bet on met coal, right?

 

Yes it is totally a bet that Marret will be able to monetize its investment in Cline. At least the future is looking brighter for both met & thermal coal after so many poor years....

 

Turning to coal,  Macquarie said coking coal prices will also remain elevated for longer than it previously anticipated.

 

The bank revised its near-term coking coal price forecasts by 32% and 40% in the first and second quarters of next year, respectively, to $185 and $175 a tonne. It said the upgrades were based on Chinese restocking demand and tight coking coal supply.

 

“With the potential for voluntary supply restraint by major Chinese metallurgical coal producers, ongoing supply issues, Chinese port inventories remaining low, high land-borne logistics costs in China, and the potential for an accelerated rate of capacity closures in calendar year 2018, it is possible that metallurgical coal prices can sustain above long-run marginal costs for some time,” BHP's Balhuizen was quoted in The Australian.

 

http://www.mining.com/macquarie-says-iron-ore-coal-prices-remain-strong-2018/

 

Coal inventories at Australia’s three largest electricity providers -- AGL Energy Ltd., Origin Energy Ltd. and CLP Holdings Ltd.’s EnergyAustralia -- have shrunk over winter as they use more of the fuel to compensate for natural gas shortages. The closure of the Hazelwood coal-fired power plant in Victoria state also put further pressure on the nation’s remaining generators to produce more power, eating through their stockpiles at a faster pace.

 

Against this backdrop, the power producers have struggled to get sufficient supplies as they compete with overseas buyers for lower-quality coal that was once considered too poor to export. Miners in Australia can command higher prices for coal known as high ash in China, South Korea and India.

 

https://www.bloomberg.com/amp/news/articles/2017-09-27/now-one-of-the-world-s-energy-powerhouses-has-a-coal-squeeze

[Guest Schwab711]

SNCR

[valcont]

 

I wouldn't say the market is in a wait and see issue.  The stock went up 5x on the news from $.05 to $.25.  Even if it is real they really have no manufacturing as their only facility is 22k square feet.

 

Well it still is only a $20m mkt cap company. The PO is either there or its a complete fraud. If the PO is legit than $400m rev over five years doesn't justify $20m cap. Even the distributor will advance $20m if they get the $50m PO in the first year. I got interested because of the PP. This one was  private and the participants usually have access to lot more material than whats available in the public realm. Even the management participated and bought around $100k. On the other side , you have 10m warrants at a strike of .15 expiring at the end of the year. Who knows may be this is a set up to cash them out as discussed in other sites.

 

I'm taking writser approach and putting in 3% so I don't have to dig deeper.

[writser]

My approach is 'not digging deeper'? Thanks, I guess :P. FWIW I would never buy MRS. Everything screams pump and dump.

[valcont]

My approach is 'not digging deeper'? Thanks, I guess :P. FWIW I would never buy MRS. Everything screams pump and dump.

 

haha sorry buddy, I take it back. Didn't mean that you throw darts. I meant taking small positions where the probability of success is positive overall. And I probably started with the wrong stock.

[Guest Schwab711]

My approach is 'not digging deeper'? Thanks, I guess :P. FWIW I would never buy MRS. Everything screams pump and dump.

 

Maybe they are an improvement on the original :)

http://www.rollingstone.com/politics/news/the-stoner-arms-dealers-20110316

[doc75]

FWIW I would never buy MRS. Everything screams pump and dump.

 

Does it ever.  I suppose there's some chance it's legit, but this has more red flags than a Russian military parade.

 

Read the recent press releases, particularly this one trumpeting their engagement of "Mediatech Capital Partners":

 

http://missionready.ca/mission-ready-retains-mediatech-capital-partners-to-facilitate-global-growth-initiatives/

 

Sure sounds impressive.  Then enjoy Mediatech's website:

 

http://mediatechcapital.com/

 

 

 

 

 

[sculpin]

SINGAPORE (Reuters) - Southeast Asia and India are set to pick up the slack and drive global coal demand through 2040 as China cuts use of the fossil fuel to fight pollution, forecasts from the International Energy Agency and Wood Mackenzie show.

 

India and Southeast Asia will account for the bulk of increased coal use in the decades ahead as they rely on one of the cheapest sources of power to supply electricity, although pollution concerns have delayed some projects.

 

"Coal maintains a strong foothold in (Southeast Asia's) projected consumption, not only because it is markedly cheaper than natural gas, but also because coal projects are in many cases easier to pursue as they do not require the capital-intensive infrastructure associated with gas," the International Energy Agency said this week in its outlook for Southeast Asia.

 

Some 100 gigawatts (GW) of new coal-fired capacity is expected to be built in Southeast Asia by 2040, boosting the total installed capacity to 160 GW, the agency said. Forty percent of the new capacity will be in Indonesia, it said.

 

By then, around half of the power plants will use either supercritical or ultra-supercritical technology, raising efficiency to 38 percent from 33 percent now, the IEA said, but still below international standards.

 

Southeast Asia will become a net coal importer by 2040 as production slips to about 375 million tonnes of coal equivalent (mtce), while demand rises 3.7 percent yearly to 387 mtce, the agency said.

 

Vietnam, which recently overtook Thailand as the second-largest coal consumer in Southeast Asia, will become the largest regional importer by 2040, the IEA said.

 

Wood Mackenzie expects Southeast Asia's thermal coal imports to more than double to 226 million tonnes by 2035, up from 85 million tonnes currently.

 

Imports into South Asia, which includes India, Bangladesh and Pakistan, will rise to 284 million tonnes, up 72 percent during the same period, a forecast from the consultancy shows.

 

In contrast, North Asia's imports will drop 14 percent to 274 million tonnes, with China's intake falling about 40 percent to 103 million tonnes, according to Wood Mackenzie.

 

"Coal is still the most affordable technology in power generation, although we are seeing some push back in coal development," Kiah Wei Giam, principal analyst of coal/gas markets at Wood Mackenzie, said at the Singapore International Energy Week.

 

Still, he said coal's demand outlook remains bright until at least 2025, unless renewables and batteries become cost-competitive.

 

Public opposition has delayed coal-fired power projects in Thailand, Myanmar and the Philippines.

 

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.

[Cardboard]

$55 WTI and financing renewals without dilution (larger ABL too for growth) means the beginning of the ascent to $2+ for Bri-Chem!  ;D

 

http://www.stockwatch.com/News/Item.aspx?bid=Z-C%3aBRY-2523472&symbol=BRY&region=C

 

Cardboard

[valuedontlie]

Walter Investment Management (WAC)...

 

WAC is a mortgage servicer/originator (NSM, OCN) going through an out-of-court restructuring for prepackaged BK filing. These were never great public companies and are highly levered, WAC will remain highly levered even if it completes a restructuring.

 

Long story short:

1. Senior notes would get new $250m senior note + 73% of new equity

2. Converts and common equity would share: 27% of new equity + warrants @ $325m & $500m in equity value (similar to TDW setup)

 

Latest presentation calls for EBITDA of $184m in 2018 and $280m in 2019 mostly from cost cuts (accuracy is debatable). Net debt would be ~$1.2bn and share count would be 270m.

 

If equity value were $180m (7.5x EBITDA), common would be worth $0.67/share + warrants (vs. $0.43/share current price).

 

Obviously lots of hair, $1.2bn in debt would mean 6.5x leverage. Term loan and senior lenders have already OKed the restructuring, not sure if they need approval from converts (which are admittedly getting screwed in this deal).

 

Welcome any thoughts...

[Sharad]

$55 WTI and financing renewals without dilution (larger ABL too for growth) means the beginning of the ascent to $2+ for Bri-Chem!  ;D

 

http://www.stockwatch.com/News/Item.aspx?bid=Z-C%3aBRY-2523472&symbol=BRY&region=C

 

Cardboard

 

I hope you're right, Cardboard. I also think you should strongly review TSX:CET, again. I would imagine the billionaire brothers from Texas (Wilks Brothers LLC) know a thing or two about the oil markets, and they continue to accumulate shares (http://www.newswire.ca/news-releases/wilks-brothers-llc-acquires-common-shares-of-cathedral-energy-services-ltd-653691783.html), even though they are causing the price of the stock to rise by themselves. I know it's small potatoes to them, but I don't think anyone in their right mind would push a stock price up by themselves unless they see plenty more upside. Cathedral, currently sporting a $75m CAD market cap, should be worth at least $110m CAD (just to reach book value), and likely a lot more, as they are now showing signs of profitability and market share capture. Should oil maintain its footing, I'd think this company still has a chance for a significant gain from here.

[sculpin]

Bri-Chem...

 

https://seekingalpha.com/instablog/379412-darren-mccammon/5067564-brichem-refinance-increase-earnings-50-percent

 

 

[sbalsam]

From the Marret Resources Q3 MD&A:

 

Cline Mining Update

 

Met coal prices remain well supported, but have drifted below the $200 level and settled around $175/tonne.

China’s steel industry continues to be robust, but information on whether they will continue to restrict the

number of production days on Chinese met coal mines is vague. The overall situation in China remains

positive for the value of the New Elk mine. Discussions with potential Asian purchasers, while active, have not

progressed to the point where a sale is imminent. The process is continuing without progress on setbacks at

this point.

 

The NAV remains at $.90 with $.45 attributable to Cline and $.45 principally to cash and other liquid securities.

 

Steve

 

[clutch]

Bri-Chem...

 

https://seekingalpha.com/instablog/379412-darren-mccammon/5067564-brichem-refinance-increase-earnings-50-percent

 

http://www.brichem.com/uploads/files/Documents/Press_releases/2017/PR2017-12ThirdQuarterResult.pdf

 

Earnings are out. EBITDA 2.3m well over this author's estimate of 1.3-1.7m.