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

[doc75]

DREAM solves the liquidity crunch. They are now very net cash at the holdco and have virtually no recourse debt. There's no liquidity crunch - just a question mark over whether you really want these guys allocating that cash. Judging by the carrying value vs. cost of the investment and equity-accounted portfolios as of q3 they are very good at buying high.

 

I would value a stack of hundreds in my safe deposit box at face value.

 

I would value a stack of hundreds a crazy guy had lit on fire at zero, even if they theoretically belonged to me.

 

I'm not totally sure where Dundee fits on the scale, but their record is pretty bad on some of this stuff.

 

That being said, they do have $2 in retained earnings for every $1 in capital raised. If they would stick to building and selling financial services businesses instead of investing in speculative nonsense this would probably be a great investment.

 

I noticed that both Dundee and Pinetree Capital were principal investors in APIC / Longreach / Petromaroc.  I haven't looked into it but I wonder to what extent they were drinking the Sheldon Inwentash kool-aid.  A bunch of these guys were heroes in the pre-crisis commodities boom and I don't think they learned their lessons from the crisis.

[petec]

 

I would value a stack of hundreds in my safe deposit box at face value.

 

I would value a stack of hundreds a crazy guy had lit on fire at zero, even if they theoretically belonged to me.

 

I'm not totally sure where Dundee fits on the scale, but their record is pretty bad on some of this stuff.

 

 

Agreed. I may have misunderstood the post I was replying to. I thought you were wondering what triggered the most recent share sales, and speculating that it might be a current liquidity issue, which it clearly isn't. That doesn't change the fact that they might create one in the future by being morons!

[Rod]

I'm confused about how the dividend on the Series 3 (DC.PR.D) shares is being calculated. Today the dividends on the three series of preferred shares were declared by press release. The D shares will be getting $0.30637, which is $1.225 annualized. This is a yield of 4.90% on face value of $25. The dividend is supposed to be set at the rate of the 3-month Government of Canada T-bill plus 4.10%. So why is the dividend set as if the T-bill is 0.80%? I see today that it is trading at 1.15%. Does anyone understand this?

 

From the AIF:

 

"The holders of Series 3 Shares are entitled to receive a quarterly floating rate dividend, as and when declared by the board of directors of the Company, equal to the then current three-month Government of Canada Treasury Bill Yield plus 4.10%."

[doc75]

I'm confused about how the dividend on the Series 3 (DC.PR.D) shares is being calculated. Today the dividends on the three series of preferred shares were declared by press release. The D shares will be getting $0.30637, which is $1.225 annualized. This is a yield of 4.90% on face value of $25. The dividend is supposed to be set at the rate of the 3-month Government of Canada T-bill plus 4.10%. So why is the dividend set as if the T-bill is 0.80%? I see today that it is trading at 1.15%. Does anyone understand this?

 

From the AIF:

 

"The holders of Series 3 Shares are entitled to receive a quarterly floating rate dividend, as and when declared by the board of directors of the Company, equal to the then current three-month Government of Canada Treasury Bill Yield plus 4.10%."

 

The language in the AIF is not clear (or even accurate?).  Look at the Series 2 prospectus.  The rate is calculated as follows:

 

- The payment period for the dividend just declared runs from December 31 to March 30, which is 90 days.

 

- The "floating rate calculation date" (FRCD) is 30 days prior to December 31, so December 1

 

- The T-bill rate is the 3-month average yield from the auction immediately prior to the FRCD.  This auction was on Nov 28, with avg yield 0.87.  (see https://www.bankofcanada.ca/rates/interest-rates/t-bill-yields/selected-treasury-bill-yields-10-year-lookup/ )

 

- The dividend paid is then (4.10 + 0.87)/100 * 90/365 * 25 = 0.30637

 

 

[Rod]

I'm confused about how the dividend on the Series 3 (DC.PR.D) shares is being calculated. Today the dividends on the three series of preferred shares were declared by press release. The D shares will be getting $0.30637, which is $1.225 annualized. This is a yield of 4.90% on face value of $25. The dividend is supposed to be set at the rate of the 3-month Government of Canada T-bill plus 4.10%. So why is the dividend set as if the T-bill is 0.80%? I see today that it is trading at 1.15%. Does anyone understand this?

 

From the AIF:

 

"The holders of Series 3 Shares are entitled to receive a quarterly floating rate dividend, as and when declared by the board of directors of the Company, equal to the then current three-month Government of Canada Treasury Bill Yield plus 4.10%."

 

The language in the AIF is not clear (or even accurate?).  Look at the Series 2 prospectus.  The rate is calculated as follows:

 

- The payment period for the dividend just declared runs from December 31 to March 30, which is 90 days.

 

- The "floating rate calculation date" (FRCD) is 30 days prior to December 31, so December 1

 

- The T-bill rate is the 3-month average yield from the auction immediately prior to the FRCD.  This auction was on Nov 28, with avg yield 0.87.  (see https://www.bankofcanada.ca/rates/interest-rates/t-bill-yields/selected-treasury-bill-yields-10-year-lookup/ )

 

- The dividend paid is then (4.10 + 0.87)/100 * 90/365 * 25 = 0.30637

 

Well, that explains it. Thank you. Note to future self: "check the prospectus".

[sculpin]

https://www.stockwatch.com/News/Item.aspx?bid=Z-C%3aPMA-2568009&symbol=PMA&region=C

 

$12,000 worth of securites sold which triggers the need for a press release or a cost of around $3,000. Smart!

 

Cardboard

 

They sold the remaining 13.2 million shares today for approx $800k (0.06 per share).

 

As usual with Dundee, I'm curious what triggered the sale, and even more curious what triggered the investment in the first place.

 

I'm certain Dumbee has sold most or all (18.5 million shares) of their position in Diagnos as well following the early warning report on the 8th of April. Good to see them disposing of the garbage spec share positions and realizing some cash. Cleaning up the holdco and reducing it down to a relatively easy to understand businesses should be good in the longer term for the share price vis a vis the NAV discount narrowing. Combined the aforementioned sale & the Diagnos one would have brought in about $2.5mm.

[petec]

 

I'm certain Dumbee has sold most or all (18.5 million shares) of their position in Diagnos as well following the early warning report on the 8th of April.

 

I'm sure I am about to get schooled but why are you certain?

[sculpin]

 

I'm certain Dumbee has sold most or all (18.5 million shares) of their position in Diagnos as well following the early warning report on the 8th of April.

 

I'm sure I am about to get schooled but why are you certain?

 

Probably should have said I'm making an educated guess. Reasons why..

 

Previous EWR position (Petromaroc) was fully sold,

Trading in Diagnos showed substantial sale volume subsequently by the same broker at the same price level that handled the sale resulting in the EWR

 

 

[petec]

Thanks! I'd make the same guess. Here's hoping.

[doc75]

I was just doing some digging on the current state of Tender Choice.  Found this brief article from Jan 28 that may be of interest to some:

 

It’s been almost two months since the massive fire at the Paletta International building in Burlington. The fire marshal’s office has wrapped up their part of the investigation, they don’t know what caused the fire and the building has now been handed over to owner.

 

“We were all in the office and we actually heard and felt a large rumbling coming from the ceiling. A couple of my office staff saw some steel beams come through the wall and the fire alarm went off and about 10 seconds after that we saw smoke coming into our office.” Angelo Paletta, owner.

 

They all got out and within minutes the entire east side of the building was engulfed causing about $10 million in damage. Their tenet, a meat processor called Tender Choice Foods, have since filed for bankruptcy leaving about 150 employees without jobs. Prior to the fire their operating license had been suspended by the Canadian Food Inspection agency for failing to meet requirements relating to building maintenance. There were contractors working there the day it caught fire.

 

We reached out to the parent company of Tender Choice Foods to ask about their employees, their plans going forward and if there was a working sprinkler system, they wouldn’t answer any of our questions instead directing us to with their court appointed receiver Deloitte who weren’t able to answer either.

 

I also stumbled on the Google Reviews for Tender Choice.  Horrible, and darkly funny:

 

- 1 star:  "Canada's worst job site. ever" . one star

- 1 star: "Do not work here ! The working conditions and the environment at this plant is terrible. The plant manager under pays and insults workers plus the work quite unreasonable, better off working some where else !"

-  5 star: "It's on fire."

 

Blue Goose bought this business in fall 2016.  These guys could make money generating power from the incinerator where they burn the money.  Virtuous cycle.

[gitawa]

Can anyone give me the links to the prospectuses? Thanks

[doc75]

Can anyone give me the links to the prospectuses? Thanks

 

For the preferred?

 

I picked them up from here:

 

https://www.preferredstockchannel.com/symbol/dc.prb.ca/

 

(this is for the B/Ds and there's a link for the A page)

[gitawa]

Got it. thanks.

[doc75]

Wow.  I got filled at $1.99 today.  As usual, my elation at getting a bargain quickly turns to fear that I'm the patsy.

 

Results will be out after market close today. I expect a significant Blue Goose write-down, but haven't seen anything to suggest other calamities. 

[Rod]

Wow.  I got filled at $1.99 today.  As usual, my elation at getting a bargain quickly turns to fear that I'm the patsy.

 

Results will be out after market close today. I expect a significant Blue Goose write-down, but haven't seen anything to suggest other calamities.

 

I beat you by 1 cent--bought a little at $1.98.

 

I don't think the sellers are engaged in any long term thinking here. In fact, I feel that about the market generally. I've seen a lot of stocks that just sit there at very cheap prices and nobody wants them because they don't see any immediate catalyst. In seems to me we are in one of those markets where investors refuse to look more than a few months ahead and want immediate returns. Reminds me of the late 1990s.

[benhacker]

Don't the Series E preferred have a put feature with DC.a at $2?  Does that concern you regarding dilution as a common owner??  I own a tiny slice of the D series preferred, so not following closely.

[doc75]

Wow.  I got filled at $1.99 today.  As usual, my elation at getting a bargain quickly turns to fear that I'm the patsy.

 

Probability that I'm the patsy is increasing every day! ;)

 

Ugly results.  I expected the Blue Goose writeoff. The Union Group impairment was a surprise and I think should be viewed as a permanent loss of capital, despite their commentary about future revaluations.  I must say that, aside from publicly traded securities, I value all of their holdings at a very substantial discount -- but it's still amazing to see them go to zero one by one. 

 

Interesting call today.  An analyst from Intrepid Capital (which has a legacy position in Dundee via its Endurance Fund) challenged Jon Goodman to give any examples where Dundee has actually added value over the past few years,  and openly pushed for liquidation. Not going to happen, although management is embarking on a strategic review of their holdings and was guiding to end of summer as a date by which we should expect to see some disposals. 

 

My other takeaway from the call was that we shouldn't expect too much out of Parq too soon.  They expect EBITDA to be $50-$75 million this year, ramping up to $100 in coming years. But they'll be putting another $20-25 million of capital into the project in the very near term, and will continue paying exorbitant interest during the ramp-up period. 

 

 

[doc75]

Don't the Series E preferred have a put feature with DC.a at $2?  Does that concern you regarding dilution as a common owner??  I own a tiny slice of the D series preferred, so not following closely.

 

As I recall, the put allows Dundee to pay the prefs either in cash or the greater of (1) $2, or (2) 95% of recent trading price. 

 

They're quite aware of the redemption and will raise cash by selling some of their holdings. Or at least that's the plan.  They have a bit of work to do on that front because corporate burn + extra capital deployed to Parq and others will eat through all current cash resources.  So yes the redemption is on my mind but I see a very low chance of them going nuclear with dilution. 

 

 

 

 

 

[Cardboard]

Yes, redemption of these preferreds is very much on their mind for 2019 based on the call today. However, please don't forget that they also have an $80 million unused credit line as to cash availability. It matures at the end of April so we will see the renewal amount but, I would be shocked if it turned out to be zero.

 

I think that there is a lot of optionality with this company if managed properly: selling assets or a large portfolio, buying back securities trading at severe discounts, more focus, cost reduction, all of this with a book value of $10.36 for a stock price of $1.87 right now or a 82% discount!

 

Even if assuming some write-offs, value is there and you have to jump in when everyone is rushing out. It feels very uncomfortable or not unlike Fairfax at $87 in 2003 or BAC at $5 in 2011. However, I cannot see how this implodes (at least for a few years) while I could have had with the other two.

 

The message from Intrepid and another analyst was very clear today or to deliver returns and to stick with what they know. It was very blunt and there was some acknowledgement that status quo is not working: expensive, complicated and unprofitable to manage 100 holdings.

 

Jonathan Goodman is correct that there is an opportunity with the development of junior miners. In this world of ETF's and algos, anything small is totally ignored especially after a multi-year bear market for most commodities. An example is Altius Minerals who does specialize in that with some success.

 

If he brings more urgency to liquidate the underperforming and/or unrelated and develops a smart, low capital investment banking operation to develop only the most promising juniors, this could turn out rather well or like dad did.

 

Cardboard

[Rod]

Wow.  I got filled at $1.99 today.  As usual, my elation at getting a bargain quickly turns to fear that I'm the patsy.

 

Probability that I'm the patsy is increasing every day! ;)

 

Ugly results.  I expected the Blue Goose writeoff. The Union Group impairment was a surprise and I think should be viewed as a permanent loss of capital, despite their commentary about future revaluations.  I must say that, aside from publicly traded securities, I value all of their holdings at a very substantial discount -- but it's still amazing to see them go to zero one by one. 

 

Interesting call today.  An analyst from Intrepid Capital (which has a legacy position in Dundee via its Endurance Fund) challenged Jon Goodman to give any examples where Dundee has actually added value over the past few years,  and openly pushed for liquidation. Not going to happen, although management is embarking on a strategic review of their holdings and was guiding to end of summer as a date by which we should expect to see some disposals. 

 

My other takeaway from the call was that we shouldn't expect too much out of Parq too soon.  They expect EBITDA to be $50-$75 million this year, ramping up to $100 in coming years. But they'll be putting another $20-25 million of capital into the project in the very near term, and will continue paying exorbitant interest during the ramp-up period.

 

Dundee was hit pretty hard by natural disasters in 2017: Blue Goose had TWO major fires, one in the Tender Choice plant and the other a major fire in the cattle ranch in BC. Also, Union Group had a dam under construction washed away by floods in Peru. I think that may have had a large impact on Union Group and led directly to the writedown. Throw in a CEO concussion for good measure...

 

If I remember correctly the refinancing of Parq doesn't need to wait until the project has fully ramped. I believe they are planning to do it this year.

[Rod]

Yes, redemption of these preferreds is very much on their mind for 2019 based on the call today. However, please don't forget that they also have an $80 million unused credit line as to cash availability. It matures at the end of April so we will see the renewal amount but, I would be shocked if it turned out to be zero.

 

I think that there is a lot of optionality with this company if managed properly: selling assets or a large portfolio, buying back securities trading at severe discounts, more focus, cost reduction, all of this with a book value of $10.36 for a stock price of $1.87 right now or a 82% discount!

 

Even if assuming some write-offs, value is there and you have to jump in when everyone is rushing out. It feels very uncomfortable or not unlike Fairfax at $87 in 2003 or BAC at $5 in 2011. However, I cannot see how this implodes (at least for a few years) while I could have had with the other two.

 

The message from Intrepid and another analyst was very clear today or to deliver returns and to stick with what they know. It was very blunt and there was some acknowledgement that status quo is not working: expensive, complicated and unprofitable to manage 100 holdings.

 

Jonathan Goodman is correct that there is an opportunity with the development of junior miners. In this world of ETF's and algos, anything small is totally ignored especially after a multi-year bear market for most commodities. An example is Altius Minerals who does specialize in that with some success.

 

If he brings more urgency to liquidate the underperforming and/or unrelated and develops a smart, low capital investment banking operation to develop only the most promising juniors, this could turn out rather well or like dad did.

 

Cardboard

 

I certainly got the impression that Jonathan is going to be more aggressive on the restructuring front than David was. Agree with you about lots of opportunities to create value. The upside versus downside on this stock is very attractive.

[sculpin]

GMP...

 

 

Equity Research

 

Dundee Corporation BUY

DC.A-TSX

Last: C$1.98

Target: C$6.40

 

Q4/17 – Eventful quarter, key progress made

 

 

Undiscounted NAV $8.00

 

Dundee Corp. (DC.A-TSX) reported its Q4/17 results on March 28th, after the market closed. Our NAV was of $8.00 versus $9.19 previously, was lower q/q largely due to a write-down at Blue Goose and at Cambridge Medical Funding. The discount to NAV increased to ~75%, up from 67% q/q.

 

Notable events

 

A catastrophic fire at the facilities of Blue Goose Pure Foods Ltd. (“BGPF”), a subsidiary, rendered the facilities inoperative, catapulting BGPF into receivership as BGPF did not have any recourse. As a result, the net assets of BGPF were derecognized and an associated loss of $22.6 million was recognized.

 

Cambridge has indicated it will no longer acquire any further medical receivables as a result of an investigation by Californian authorities into excessive and improper medical billings, effectively raising concerns on collectability. As a result, the investment in Cambridge was deemed fully impaired, resulting in a loss of $8.5 million.

 

Parq guidance

 

Management has given guidance for 2018 and expects to generate EBITDA of $50 to $75 million and in excess when operations are fully ramped up. As a result of expected increases in customer traffic and slot utilization rates, 50% to 60% of EBITDA is expected to be generated through casino operations while the remainder is from hotel operations and beverage services. To fund operations, we note, the casino requires a capital injection of $25 million between the ownership group.

 

Maintain BUY – Strategic review

 

In our view, management has made some progress towards meeting key objectives, which included streamlining their corporate cash needs. Annual corporate level cash needs (interest, dividends, op. expenses, capital) are now ~$59 million as management continues to streamline operations. Net cash at the corporate level was ~$40.5 million exiting the quarter. Our NAV is now $8.00 (previously $9.19). The discount to NAV increased to ~75%. We apply a 20% discount to yield our target of $6.40 (previously $8.00). We maintain our BUY rating. See Figure 1 for our NAV sensitivity analysis.

[ADcure]

With cash on hand of about 40M and annual needs of about 59M, how long do you think till they hit zero, seriously?

Thanks for your thoughts

[Rod]

With cash on hand of about 40M and annual needs of about 59M, how long do you think till they hit zero, seriously?

Thanks for your thoughts

 

Costs are way lower than 59M. I think that number includes capital investment into Parq Vancouver

[Cardboard]

United Hydrocarbons at $72 Brent is becoming highly valuable to this company.

 

Now, I can see why people would not want to touch the stock but, what about the preferreds B and D now yielding over 12% and selling at 45% of par?

 

Here is a thought. The preferred E could be exchanged for stock next year at whatever the stock is trading at that point.

 

Not the plan but, if that was to happen, the only debt left for this company would be the preferred B and D which is overall $130 million at par.

 

Book value is $10.36 per share or $610 million and this assumes that the preferred E or $90 million are redeemed for cash. If they are not, then there is $700 million to honour the preferreds B and D.

 

So you are talking years of cash burn and for most of investments to be written off to zero to get par on these in trouble.

 

Dundee Corp. right now, looks to me like a margin account (debt are the preferreds) that has a bunch of stocks deep in the red and the holder is unwilling to let them go or waiting for things to turn.

 

The new guy has said that 100 positions is way too many and wants to cleanup. If that happens then liquidity has to dramatically increase which should certainly alleviate fears around the preferreds.

 

Makes any sense?

 

Cardboard