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Dumbdee - The Goodmans, The Bad & The Ugly - 30% of NAV bargain?


sculpin
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Anyone want to admit to owning any heavily discounted resource focused conglomerates?

 

Well Dundee Capital (TSX - DC.A) is certainly one as is the once highly regarded Sprott Resource Corp (latest NAV $1.41, SCP mkt price $0.45) which traded at $5.75 back in 2011 when Eric Sprott's rantings on gold & financial cataclysm were more in vogue.

 

For those who believe there is upside in oil, ag and gold these 2 publicly traded vehicles could offer a highly leveraged vehicle to this rebound yet with a substantial margin of safety built in due to their massive discounts to recent net asset values.

 

According to GMP (see below) Dundee Capital has a net asset value of $16.02 as of last quarter yet trades on the TSX currently for a meager $4.90 heavily discounted Canuck bucks. This is about 30% of its calculated NAV.

 

As Broadview Capital writes in their latest November portfolio update...

 

A brutal year for smaller-cap Canadian stocks appears to be culminating in one last horrific tire-fire of a

sell-off. The confluence of tax loss selling, commodities hitting new lows and the disappearance of

liquidity has created a “no bid” environment for huge swaths of the market.

 

It is at this point that one must consider the trade-off between volatility and absolute return.

In plain English, this consideration is expressed as “are you willing to watch as your portfolio falls, perhaps

significantly, if you are confident it will ultimately regain those losses, and more?” As such an example,

we have been watching the equity of Dundee Corporation (DC.a:TSX)2 over the past few months. We

have seen it plummet from the mid-teens a year ago to under $8 two months ago. At that point, it

looked interesting given the potential value of the underlying assets. It’s now under $5. It may

ultimately prove to have been a great deal at $8, but certainly not a better deal than at $5 (or maybe at

$3).

 

Follows is the GMP note on Dundee following the Q3 release....

 

Dundee Corporation BUY

DC.A-TSX

 

November 16, 2015

 

Q3/15 - UHIC impairment lowers NAV

 

Undiscounted NAV of $16.02

 

As of Q3/15, our undiscounted NAV is $16.02 (previously $19.55). The decline

was due predominantly to an asset impairment at United Hydrocarbon

International Corp. (“UHIC”) that reduced the carrying value of the

investment. The carrying value of the investment in Pan African Minerals also

declined materially. Despite our reduced NAV, the discount remains wide, at

~54%. In addition to ongoing uncertainty around UHIC and Pan African, we

also believe the market continues to be cautious on a few of the other

material holding including Blue Goose Capital, Union Group International and

Dundee Securities.

 

UHIC remains the largest individual investment in the portfolio at $227

million or $3.87/share (previously $5.79/share). During the quarter, UHIC

recorded an impairment on its resource properties of $215 million, to reflect

the recoverable amount. As a reminder, UHIC temporarily suspended

operation in Q1/15 in response to pressure on global oil prices. We continue

to believe that some recovery on the investment is likely, although timing

remain uncertain.

 

Maintain BUY – Outlook still positive, optional upside remains

 

The UHIC impairment does not change our positive outlook for DC.A overall.

We believe this had been priced into the stock. In our view, the current share

price may still allow investors to participate in the upside of certain private

investments. We believe the investment portfolio remains diversified and

strategic and we continue to see potential for value through real estate

investments and new product initiatives such as the SPAC.

 

We continue to use DC.A’s carrying values of investments for our

undiscounted NAV. However, we have quantified downside risk for the NAV

by applying various discounts to the portfolio depending on the risk profile of

the investments. Our most conservative calculation, which excludes all

private resource sector investments, still results in shares trading at a ~10%

discount to NAV.

 

Our undiscounted NAV is $16.02 (previously $19.55). We apply a 20%

discount to yield our price target of $13.00 (previously $16.00). Shares

continue to trade below our most conservative NAV estimates. We maintain

our BUY recommendation.

 

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I've also been long Dundee since it got chopped to half book. In addition to its vast collection of resources assets, I also view it as having an option in launching a new financial offering since Goodman's non-compete is now over, which he took the time to mention in the latest AR (if memory serves). Been wrong or early so far, slowly adding more.

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Sculpin did you mean to spell it Dumbdee?!  I like it!

 

I did some work on this a year ago (reading the annual letter was purgatory - some serious hubris there) and am now very interested.  The problem is I found it impossible to value many of the underlying assets so you're rather reliant on accounting/cost basis being accurate.  Thoughts?

 

P

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Add Canacord Genuity (CF) to the list. An investment bank trading at tangible book value. Usually a good price if their commodity focused client list picks up.

 

Canaccord also has a rate reset preferred share that is currently trading at $13.00 (with a par value of $25). It is currently yielding over 11% based on its current dividend of $1.44. However this  preferred resets on June 30th 2017 at the Canada 5yr bond rate plus 4.03% which given the current 5yr rate would mean a drop in the dividend to around the $1.20/annum area. Still a pretty good dividend amount if you believe in Canaccord. As well, if CF is taken over by a larger entity these prefs could rerate to a lower dividend yield or be paid off at $25. The symbol on  them is CF.PR.C on TSX.

 

Series C preferred shares:

 

YIELD: Canaccord Genuity Group (formerly Canaccord Financial) Series C preferred shares pay fixed, cumulative, preferential cash dividends payable quarterly, yielding 5.75% annually for the initial period ending June 30, 2017 ("Initial Fixed Rate Period")*

RATING: DBRS has assigned the Series C preferred shares a rating of PFD-3 (low with a negative trend).

CONVERSION DATE: After the initial period ending June 30, 2017, the dividend rate will be reset every five years at the rate equal to the 5-year Government of Canada bond yield plus 4.03%.

CONVERSION OPTION: On September 30, 2017 and on every September 30th every five years after, holders of Series C preferred shares will have the right, at their option, to convert any or all of their shares into an equal number of Cumulative Floating Rate First Preferred Series D shares.

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I've been long this one since about $11. I averaged down at $8 and then I bought the Series 3 (DC.PR.D) preferreds. Overall, it's a relatively large position, about 5% of my portfolio.

 

I view it as a typical Ben Graham cigar butt, especially at today's price. I'm getting energy and mining assets which are already beaten-up for 30 cents on the dollar. Even if the valuation is aggressive, the margin of safety here is huge.

 

Intothebreach mentioned one potential catalyst, which is the company getting back into the wealth management business again in a big way. The other is its real estate division. They have joint ventures to develop a casino on Vancouver's waterfront, along with resorts in Cuba and a big development surrounding the new Olympic site in South Korea. Remember, these guys have history in creating value in real estate through Dundee REIT which was eventually spun off into the Dream family of REITs.

 

Francis Chou owns a bunch of Dundee too, and at higher prices as well. I'm content to hold and collect my ~10% dividend on the preferred. I see a very small chance the whole company goes to zero.

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What about the preferred? Dundee series 3 is trading at 40% of par.

 

Yes the DC.PR.D is a floater yielding 90 day Tbill plus 4.1% trading at $9.60 and currently paying out $1.14 so yield is about 12%. With the amount of assets backing the Company and relatively low level of debt this should be an excellent current yield play and spectacular if you ever believe that short term interest rates will ever rise again.

 

The DC.PR.B is a rate reset preferred which resets at the 5 year bond plus 4.1% on 30 Sep 2019 so there is about 4 years at the current dividend level of $1.42 yielding about 11 % at the current trading price of $13. Another great opportunity if you ask me.

 

 

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I've been long this one since about $11. I averaged down at $8 and then I bought the Series 3 (DC.PR.D) preferreds. Overall, it's a relatively large position, about 5% of my portfolio.

 

I view it as a typical Ben Graham cigar butt, especially at today's price. I'm getting energy and mining assets which are already beaten-up for 30 cents on the dollar. Even if the valuation is aggressive, the margin of safety here is huge.

 

Intothebreach mentioned one potential catalyst, which is the company getting back into the wealth management business again in a big way. The other is its real estate division. They have joint ventures to develop a casino on Vancouver's waterfront, along with resorts in Cuba and a big development surrounding the new Olympic site in South Korea. Remember, these guys have history in creating value in real estate through Dundee REIT which was eventually spun off into the Dream family of REITs.

 

Francis Chou owns a bunch of Dundee too, and at higher prices as well. I'm content to hold and collect my ~10% dividend on the preferred. I see a very small chance the whole company goes to zero.

 

In my opinion, Dundee should be the poster child for the abolition of dual class share structures. Take a look at the latest management information circular & note carefully the substantial amounts paid to directors & management to put together such a complicated & poorly performing menagerie of assets. No way would this be trading at 25% of a already much reduced net asset value if there were no multi voting shares....

http://dundeecorp.com/pdf/2015-DC-Circular-FINAL.pdf

 

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I've been long this one since about $11. I averaged down at $8 and then I bought the Series 3 (DC.PR.D) preferreds. Overall, it's a relatively large position, about 5% of my portfolio.

 

I view it as a typical Ben Graham cigar butt, especially at today's price. I'm getting energy and mining assets which are already beaten-up for 30 cents on the dollar. Even if the valuation is aggressive, the margin of safety here is huge.

 

Intothebreach mentioned one potential catalyst, which is the company getting back into the wealth management business again in a big way. The other is its real estate division. They have joint ventures to develop a casino on Vancouver's waterfront, along with resorts in Cuba and a big development surrounding the new Olympic site in South Korea. Remember, these guys have history in creating value in real estate through Dundee REIT which was eventually spun off into the Dream family of REITs.

 

Francis Chou owns a bunch of Dundee too, and at higher prices as well. I'm content to hold and collect my ~10% dividend on the preferred. I see a very small chance the whole company goes to zero.

 

In my opinion, Dundee should be the poster child for the abolition of dual class share structures. Take a look at the latest management information circular & note carefully the substantial amounts paid to directors & management to put together such a complicated & poorly performing menagerie of assets. No way would this be trading at 25% of a already much reduced net asset value if there were no multi voting shares....

http://dundeecorp.com/pdf/2015-DC-Circular-FINAL.pdf

 

 

Yeah, I'll admit there are issues there. There are a whole bunch of issues. The latest is the deal with the Series 4 preferred shares. Potato wrote about it here http://www.holypotato.net/?p=1392 but here's the gist of it.

 

There was a maturity coming up in June, 2016 for the Series 4 prefs. Management pretty much scoffed at it and all but told investors they'd be converting them to a new series of prefs that doesn't come due until 2019. Not only that, but it turns out once you convert to the new Series 5 preferred you'll forfeit any fractional shares you might have gotten from the conversion. I guess they kind of make up for that with a consent fee ($11 for every 100 shares I believe, might be wrong), but still. The whole thing smells a little.

 

Getting back to the common, the fact is you're not picking up assets at 30% of NAV if there aren't some problems. I thought 50% below NAV was a nice discount and then oil blew up. If it wasn't already a big position I'd pick up more, but I tend to get into trouble when I average down more than once.

 

As for the dual voting shares, I agree there are issues when a controlling family can basically do whatever they want. There's no way an activist investor is going to go in and shake things up. If they can't threaten to get the votes to change things, they have no power. But at the same time, the Goodman family owns 11 million out of the 58 million outstanding shares. Ned owns 6 million and the 4 boys own 5 million. Only 3.something million are the multiple voting shares. These guys want the share price to go up just as much as I do.

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The opportunity in certain Dumbdee rate reset preferred shares seems highly compelling. The distasteful goings on with the Pref C shares along with the drop in the market price of the common has people liquidating their positions in 2 classes of DC preferreds either in fear or to take advantage of tax losses by the 24th of December in Canada.

 

Dundee Preferred Series 2 - DC.PR.B - this is a 5 year rate reset at 4.1% above the Canada 5 year bond. Next rate reset is 30 Sep 2019 so a little under 4 years. Current dividend is $1.422 and the prefs are now trading at $11. So the current dividend yield until September 2019 is 13% and the par value of the shares is $25.

 

Dundee Preferred Series 3 - DC.PR.D - this is a floating rate pref  based on the 90 day Tbill plus 4.1%. Current dividend is $1.14 and with the shares now trading at $8.00 the yield on the floater is currently 14.25%. This series gives nice participation for those who believe interest rates will rise one day. As with the previous pref, the par value on these shares is $25. At $8 on the DC.PR.D, a potential $17 per share capital gain is a possibility given the potential for:

 

1. increase in confidence in the business operations and value in Dundee's portfolio

2. change in sentiment towards increased short term interest rates in Canada

3. a potential takeover or privatization of Dundee with these preferreds being redeemed at $25 par.

 

 

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Thanks for the preferred shares info.

 

I have been looking into Dundee mainly because my relative invested in TauRx (methylene blue for Alzheimer), one of Dundee's investment. 

 

I think a lot of the NAVs are zeroes (o&g reserves in Chad seriously?), and it's a collection of crappy asset (Dundee securities results vs Merrill lol) so I haven't pulled the trigger.  I get about $5.5 in NAV valuing their publicly traded securities + Dundee securities and 360 real estate at book value minus their corporate and dundee energy debt, zeroing everything else.

 

However the preferred look very interesting, I bought some series 3 shares today. 

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Sculpin,

 

I've been eyeing this a bit.  Yes, there's a large discount to NAV.  But if you look at the NAV, there's embedded leverage behind the NAV.  It's a bit easier with the publicly traded positions.  The private companies are very hard to figure out.  I don't think I've seen a company destroy so much value.  It seems like everything that they touch turned into a turd. 

 

With regard to the Canadian resets, I also don't think that $25 par is the right price.  Many of the rate reset prefers trades substantially below $25 after the reset.  Although, larger spreads +4% helps a lot. 

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When a company is mostly investing in commodity related businesses, then its results will look ugly during the down cycle. However, from everything I have read, even if you are to make drastic cuts to their holdings and going as far as using $0 for many, the share price is still trading below NAV.

 

Now we are talking preferred's. So if there is any indication of value left for common shareholders then the preferred's should be trending to par over the long term. The company is obligated to continue paying the dividend at the agreed rate forever. The only way for them to stop that is to buy it back at par, make a sweat offer to holders but, at less than par or to buy them back on the stock market.

 

Regarding the debacle that has happened to preferred's in Canada this year, a lot of that is based on fear. Fear that interest rates will go lower and forever... And even that logic is stupid. If you take a look at a large list of these, the vast majority were trading between $20 and $25 just 9 months ago. So I suppose that back then, and during the prior years, that the dividend yield obtained by investors on these instruments was considered sufficient and attractive enough vs the risk and other income avenues out there?

 

Let me give an example: BCE.PR.H. This floater pays a dividend based on the Canadian Prime Rate fixed by banks. It is at 2.7% currently. So that is the privilege rate that your bank will lend money to you. The lowest rate you can obtain without offering a guarantee such as a home. If you turn around and ask them how much they will give you in interest for your funds without any holding period, it will be in the 0.5% range. So this instrument gives you the same as they charge you as income but, taxed much lower than regular interest.

 

The Bank of Canada has cut twice its rate this year by 0.25% each time. The banks did not fully follow and have cut their Prime Rate by 0.15% each time. The Bank of Canada rate is now 0.5%, so if they cut it to 0% and banks continue their pattern of cutting only by 0.15%, then the absolute low for the bank prime rate is 2.4%. And since banks in the past were cutting by the same percentage as the Bank of Canada (I think it was the first time ever that they didn't), will they follow at all or just cut by 0.10% next time?

 

Based on par of $25, that 2.4% would mean an annual distribution of $0.60. The thing trades at $13.20 for a yield of 4.55% based on that distribution. However, based on the current 2.7%, the distribution is $0.675 for a yield of 5.11%.

 

Where can you get that kind of income or the equivalent in interest of 7%+ after tax with near zero risk of default and with full participation or protection in any increase in interest rates?

 

I mean, even if you believe that interest rates will remain as is for the foreseeable future, isn't this yield way too high vs what you can get from a GIC, treasury bond or other income instrument? And in these you are locked in. Either you will lose value on any increase in interest rates or be forced to hold to maturity.

 

Cardboard

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yeah i think they invested $30.5 million for 1.015 million shares.  Book value was CAD 68 million as of 9/30/2015. 

 

There is about 23.5 million Taurx shares outstanding after latest round of financing.  Latest round of financing was at $60 per share.

 

If they can monetize this sometime in the next year than this will solve any of their liquidity problems.

The owners of TauRx Pharmaceuticals Ltd., which counts Singapore state investment company Temasek and Southeast Asia’s largest casino operator, Genting, as investors, are looking at listing on the Nasdaq Stock Market as early as 2017 in a deal that could value the company at about $15 billion, according to people familiar with the matter.

 

An IPO would provide an avenue for shareholders to exit their investment in TauRx. The firm has raised $350 million to date from the likes of Temasek, the Development Bank of Singapore and the Dundee Corp. of Canada, according to its official website. Genting, a Malaysian casino-to-plantations conglomerate, is the largest shareholder with a total exposure of $120 million.

 

 

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The opportunity in certain Dumbdee rate reset preferred shares seems highly compelling. The distasteful goings on with the Pref C shares along with the drop in the market price of the common has people liquidating their positions in 2 classes of DC preferreds either in fear or to take advantage of tax losses by the 24th of December in Canada.

 

Dundee Preferred Series 2 - DC.PR.B - this is a 5 year rate reset at 4.1% above the Canada 5 year bond. Next rate reset is 30 Sep 2019 so a little under 4 years. Current dividend is $1.422 and the prefs are now trading at $11. So the current dividend yield until September 2019 is 13% and the par value of the shares is $25.

 

Dundee Preferred Series 3 - DC.PR.D - this is a floating rate pref  based on the 90 day Tbill plus 4.1%. Current dividend is $1.14 and with the shares now trading at $8.00 the yield on the floater is currently 14.25%. This series gives nice participation for those who believe interest rates will rise one day. As with the previous pref, the par value on these shares is $25. At $8 on the DC.PR.D, a potential $17 per share capital gain is a possibility given the potential for:

 

1. increase in confidence in the business operations and value in Dundee's portfolio

2. change in sentiment towards increased short term interest rates in Canada

3. a potential takeover or privatization of Dundee with these preferreds being redeemed at $25 par.

 

Excellent YTD return on both of these preferreds with the DC.PR.B up 14.8% and the DC.PR.D up 16.6%. This is especially impressive given that the BMO LADDERED PREF SHARE IDX ETF is down 7.3% since the beginning of the year. Both these preferreds have further to run given how badly they fell due to tax loss & grudge selling in 2015. Any return to some positive sentiment in the overall Canadian preferred share market would definitely help as well.

 

 

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Excellent YTD return on both of these preferreds with the DC.PR.B up 14.8% and the DC.PR.D up 16.6%.

 

Sculpin, thanks again for pointing us out toward Dundee's preferred shares. I bought in big time, and it's fun to have something going up when pretty much everything is begin dragged with the market.

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Hi sculpin, thank you for your posts. I'm just curious about your return last year since your stock picks have performed very well. If it's ok with you, can you tell us about your last year return and how do you normally size your bets on cases like Dundee?

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Hi sculpin, thank you for your posts. I'm just curious about your return last year since your stock picks have performed very well. If it's ok with you, can you tell us about your last year return and how do you normally size your bets on cases like Dundee?

 

Not a great return in 2015. Only 1.4% - too much energy holdings. Perhaps 2016 will be better with an eventual turnaround in oil and natural gas prices looking to happen sometime this year. I have no set % size allocations. I tend to accumulate positions as they drop and reduce them as they begin to get expensive - the opposite of what most traders will tell you.

 

I see the Series 4 preferred holders persistence has paid off.....

 

The Financial Post reports in its Friday, Jan. 8, edition that holders of Dundee's Series 4 preferred shares, who responded negatively to an initial proposal, have emerged victorious. The Post's Barry Critchley writes that the pref holders won because Dundee listened and changed a plan that seemed destined to be shot down at a meeting originally scheduled for Jan. 7. Put it down as a victory for shareholders and common sense, a victory reflected by the market's reaction: the prefs shares rose by 15 per cent Thursday on the news. Chief executive officer David Goodman says, "We have consulted and we responded with what we think is a win-win solution." However, the outcome -- offering better terms to the holders of the outstanding $107.04 million prefs -- raises an obvious question. How out of touch were those involved with the original proposal that seemed, through consent payments, to consider the interests of the investment advisers more than the interests of the owners of the securities. Originally, Dundee said it had received "substantial support" from representatives of "significant" holders of the prefs. Dundee's new proposal will be voted on at a Jan. 28 meeting.

 

http://business.financialpost.com/news/fp-street/dundee-corp-listened-and-responded-with-better-proposal-on-amending-its-preferred-shares

 

 

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I am long the series 4.  Got pretty lucky with the timing.  I actually bought @$17.xx before they announced the amendment proposal, thought it was shitty but was able to sell at breakeven.  Later, the market agreed with me on the shittiness of the deal and the price dropped drastically.  I decided to buy again in mid-Dec at $14 and on the EOD the price fell to $13 (ouch).  However, at $14 I figured the YTM is 14%+ which is even higher than their perpetual issues.  Beats me why I didn't buy a lot more than I did.

 

Anyways, enough bragging (rest of my portfolio went down the drain today).  Here's a pretty good blog on pref shares and this article discusses the amended proposal.  The author still recommends to vote NO.

 

http://prefblog.com/?p=31896

 

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