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

[Rod]

One question that's never been properly answered is how this disaster came about. For about 20 years Dundee had a great record of value growth under Ned Goodman et al. This culminated in the sale of Dundee Wealth to Bank of Nova Scotia. The BNS shares were sold and the investment spree began under CEO Ned leading to massive misallocation of capital. What happened to Ned?? Was this a case of hubris brought on by a very long record of success? Did Ned lose his marbles??

 

I guess nobody wants to ask this question on conference calls directly to Ned's sons out of fear of being rude. But surely it must be on people's minds. Does anyone have some insight into this question? Ned himself has been very low profile the last few years. Usually he is very outspoken.

[doc75]

One question that's never been properly answered is how this disaster came about. For about 20 years Dundee had a great record of value growth under Ned Goodman et al. This culminated in the sale of Dundee Wealth to Bank of Nova Scotia. The BNS shares were sold and the investment spree began under CEO Ned leading to massive misallocation of capital. What happened to Ned?? Was this a case of hubris brought on by a very long record of success? Did Ned lose his marbles??

 

I guess nobody wants to ask this question on conference calls directly to Ned's sons out of fear of being rude. But surely it must be on people's minds. Does anyone have some insight into this question? Ned himself has been very low profile the last few years. Usually he is very outspoken.

 

I've wondered the same thing. 

 

I'm also curious why that analyst thought that Blue Goose would be sold this year.  Pure speculation, or were there hints at the AGM.

 

We could get see some pretty crazy pricing through the slow summer months if there is no news on the portfolio sales.  This has been the very definition of a falling knife. 

[petec]

My only thought on the Ned issue is that having ploughed my way through the only letter of his that I read (2014 maybe) I thought it was the most arrogant load of twaddle I’d ever read. Expecting people to read 100 pages of your output is bad enough. But it was a diatribe against money printing and made predictions of hyperinflation. Now it’s ok to speculate about that, and allocate 5% of your money to protect yourself, but any more than that and you’re grossly overestimating your likelihood of being right.

 

Please NB that apart from reading the above letter I know practically nothing about Ned so I may be well off the mark.

[Rod]

My only thought on the Ned issue is that having ploughed my way through the only letter of his that I read (2014 maybe) I thought it was the most arrogant load of twaddle I’d ever read. Expecting people to read 100 pages of your output is bad enough. But it was a diatribe against money printing and made predictions of hyperinflation. Now it’s ok to speculate about that, and allocate 5% of your money to protect yourself, but any more than that and you’re grossly overestimating your likelihood of being right.

 

Please NB that apart from reading the above letter I know practically nothing about Ned so I may be well off the mark.

 

I think Ned's letters got more grandiose as time went by. But to be fair, I don't think he ever made any risky bets on extreme scenarios through Dundee. The investments seem to have been made more to benefit from a tail wind of inflation in areas such as real estate and natural resources. The various investments that were made strike me as what you might get if you gave a teenager $1 Billion and asked him to buy some "stuff" he thought would be good. The theme seems to be "investing is easy".

 

It's hard to understand why Dundee thought that they were the right ones to launch an organic food brand (Blue Goose), or invest in oil exploration in Chad. Why did they buy into Union Group when they can't even verify what the company owns anymore? Dundee 360 has never seemed more than a shell that they were writing down almost immediately after buying it. And Parq Vancouver, which could be successful, is a real estate development, something I don't think Dundee has any experience in.

 

Dundee's past successes have been in wealth management and mining. I don't think it's a coincidence that these are the two areas that David and Jonathan Goodman have been focusing the company's future on. At the very least it shows a return to sensible capital allocation.

 

The only notable success in recent years has been the growth and spinoff of Dream Unlimited. When you include the value of that company Dundee's results improve from awful to merely bad.

[Rod]

I feel like the next quarter (post portfolio review) is key; the stock could drift a lot lower with no action or explode on positive action. Personally I'd:

a) sell everything not listed below and buy back liabilities cheap;

b) mature DPM and Parq and sell those (18 month timeframe)

c) focus on maximising option value at DST and United

d) Use the "new" securities business to find new options.

 

Until I see a plan I can't decide whether to get more excited as the price comes down, or not.

 

I would like to see them sell off everything outside of mining and wealth management. Those are the two areas where the Goodmans have expertise and past success. With the money raised they could first redeem the E prefs then launch significant and ongoing buybacks of the B and D prefs as well as the common. Then gradually move into making new investments in the mining sector as well as expand related asset management.

[Cardboard]

Liquidate the whole thing is the best and only logical scenario. I doubt very much they will do that but, that is what should happen if that Jonathan Goodman was smart but, that is Dumbdee remember?

 

Where is it said that they have had success in mining and wealth management? Where are these resounding successes? Barrick, Teck, GoldCorp, Investors Group, banks? They are nowhere near any of these known Canadian companies.

 

All I see is incompetence all around. When you are too dumb to realize that buying your debt for 40 cents on the dollar while you can by selling garbage investment with little to no upside then it only indicate that you are really dumb.

 

Cardboard

[Lakesider]

+1 Cardboard

 

I wonder if there will ever become a point where they decide they have destroyed enough of the Goodman fortune and hand over the reigns.

[doc75]

+1 Cardboard

 

I wonder if there will ever become a point where they decided they have destroyed enough of the Goodman fortune and hand over the reigns.

 

Not a chance, IMO.  This is the huge risk with dual-class share structure.  Do these guys have kids in line to take over? 

 

 

 

[Rod]

Liquidate the whole thing is the best and only logical scenario. I doubt very much they will do that but, that is what should happen if that Jonathan Goodman was smart but, that is Dumbdee remember?

 

Where is it said that they have had success in mining and wealth management? Where are these resounding successes? Barrick, Teck, GoldCorp, Investors Group, banks? They are nowhere near any of these known Canadian companies.

 

All I see is incompetence all around. When you are too dumb to realize that buying your debt for 40 cents on the dollar while you can by selling garbage investment with little to no upside then it only indicate that you are really dumb.

 

Cardboard

 

I would call Dundee Wealth a resounding success.

[LongHaul]

One question that's never been properly answered is how this disaster came about. For about 20 years Dundee had a great record of value growth under Ned Goodman et al. This culminated in the sale of Dundee Wealth to Bank of Nova Scotia. The BNS shares were sold and the investment spree began under CEO Ned leading to massive misallocation of capital. What happened to Ned?? Was this a case of hubris brought on by a very long record of success? Did Ned lose his marbles??

 

I guess nobody wants to ask this question on conference calls directly to Ned's sons out of fear of being rude. But surely it must be on people's minds. Does anyone have some insight into this question? Ned himself has been very low profile the last few years. Usually he is very outspoken.

 

This is a great Question.  At one point it looks like they had a great track record - IIRC in the 2014 annual letter ~18% CAGR in per share value for ~20 years.  Then it all fell off a cliff.  In the ~50 page annual letter it seemed to lack clear insight about the nature of the current operations.  I did see that almost all the major listed businesses were losing money.  They seemed like very risky startups with a lot of assumptions.  New business ventures have a ton of risk as there are many assumptions.  One example was the Blue Goose Organic beef.  It looked like it was losing a ton of money.  I have heard that established cattle ranches sell for .5% cap rates.  Yes that is 1/2 of 1% as everyone wants to be a cowboy after the Westerns came out.  So to go into a risky startup where the payoff might be .5% seems nuts.

 

I did not take a deep dive but noticed a few things.

1.  IIRC there were 400 people in the corporate office.  What is the cost of that $50m per year?  They are still spending $16m per year I believe - which is waaaaay too high.  (I can lose money for a lot less!)

2.  Many investments in risky startups.

3.  Certainty of inflation so put money in gold and other "hedges" like natural resources.  I thought this was faulty thinking as real estate or good businesses would likely be better inflation hedges if bought cheaply.

4.  Perhaps they got luck in a long natural resource/gold boom and the bust was the unluck.

 

 

I passed on investing because if the current CEO is focusing on Junior mining companies, I have read that is  one of the riskiest areas to invest.  Count me out.  Not sure what the odds are Dundee is a 0 but it is a lot more than 0% with this mgmt team in place. 

 

 

 

 

 

 

[doc75]

Yeah I don't think it makes a lot of sense to be a holding company of money-losing businesses.  They have pretty high corporate costs and don't have any money-making assets.  So if things stay the same, then over time they'll just have to keep liquidating assets, in increasing desperation, to pay their salaries.

 

The pivot to junior mining also concerns me.  Seems like a heck of a place to lose money, and I suspect their success in the past had more to do with the huge commodities boom as opposed to innate talent.  In any case, even in the best-case scenario, it will take quite a while before it can overcome the losses elsewhere in the company. 

 

I'm getting antsy to see something done with Blue Goose or any of the other private holdings.  That'll send a message that things really have changed, and also give us some insight as to how much we should be discounting their other assets.

 

[petec]

Junior mining can work very well if you know what you're doing. It's a graveyard for those that don't. I've no issue if they have a good team but I haven't found much on the guys they hired.

 

 

[doc75]

Junior mining can work very well if you know what you're doing. It's a graveyard for those that don't. I've no issue if they have a good team but I haven't found much on the guys they hired.

 

The guys they hired all came from Primary Capital.  Three of them worked for Dundee Securities up to around 2010, before heading to Primary.  The fourth is a young'un.

 

http://www.dundeesecurities.com/

 

So these guys are a known entity for Dundee.

[petec]

Thanks. Do you have a view on whether they are any good?

 

It's interesting they've chosen to come back. That alone might say something.

[doc75]

Thanks. Do you have a view on whether they are any good?

 

It's interesting they've chosen to come back. That alone might say something.

 

No, not a clue. You'd imagine Dundee wouldn't hire them back if they weren't capable.  It bodes well that none of them is a Goodman.

 

[Lakesider]

Might be a dumb question... But,

 

What happens when a company cant pay the maturity for cumulative preference shares? I'm guessing that they just owe the money to the holders as they would with a dividend? Preventing the commons from receiving payments until obligation is met?

 

Thanks

[Rod]

Might be a dumb question... But,

 

What happens when a company cant pay the maturity for cumulative preference shares? I'm guessing that they just owe the money to the holders as they would with a dividend? Preventing the commons from receiving payments until obligation is met?

 

Thanks

 

I think in a case where the preferred has matured it needs to be paid off or extended by a vote. Otherwise the company would be taken into bankruptcy.

[SafetyinNumbers]

Might be a dumb question... But,

 

What happens when a company cant pay the maturity for cumulative preference shares? I'm guessing that they just owe the money to the holders as they would with a dividend? Preventing the commons from receiving payments until obligation is met?

 

Thanks

 

Also, the DC.PR.E, don’t “mature”. It’s just that holders are allowed to force the company to buy them back. If history is any guide, not every holder will do so.

 

I think in a case where the preferred has matured it needs to be paid off or extended by a vote. Otherwise the company would be taken into bankruptcy.

[petec]

Thanks. Do you have a view on whether they are any good?

 

It's interesting they've chosen to come back. That alone might say something.

 

No, not a clue. You'd imagine Dundee wouldn't hire them back if they weren't capable.  It bodes well that none of them is a Goodman.

 

True. But then I wouldn't have imagined that they'd have done half of what they've done over the years so sadly my imagination is not a good analytical tool ;)

[petec]

Might be a dumb question... But,

 

What happens when a company cant pay the maturity for cumulative preference shares? I'm guessing that they just owe the money to the holders as they would with a dividend? Preventing the commons from receiving payments until obligation is met?

 

Thanks

 

I think in a case where the preferred has matured it needs to be paid off or extended by a vote. Otherwise the company would be taken into bankruptcy.

 

I think the prefs also become voters in a default situation which could be interesting.

[SafetyinNumbers]

Wouldn’t they just pay with common priced at $2 in that scenario? Lots of new shares issued but cash is saved and no default.

[sculpin]

Wouldn’t they just pay with common priced at $2 in that scenario? Lots of new shares issued but cash is saved and no default.

 

Right now value of their holdings in Dundee Precious Metals = $109 million while Series 5 prefs liability = $90mm. Kind of premature to be discussing default but then again with DC's luck & general competence there is always need to worry about mine catastrophes, nationalization or anything else that can sink a junior gold miner.

 

 

Latest article I can find on TaurX of which I believe Dumbdee has a 4% stake (hopefully they have not put any more in on subsequent financings)....

 

Casino-Backed Startup Eyes Alzheimer's Cure Worth $2.5 Billion

By Joyce Koh  and Livia Yap

 

March 1, 2018, 8:24 PM EST

*TauRx will look at options including IPO if trial successful

 

*Big pharmaceutical companies have exited or failed in field

 

It hasn’t found a cure for Alzheimer’s disease and doesn’t have any drugs on the market. Yet, TauRx Pharmaceuticals Ltd. says the company’s worth about $2.5 billion as it embarks on its latest trial funded by shareholders including casino operator Genting Bhd.

 

If the trial proves successful, the Singapore-based company plans to apply to European and U.S. regulators for conditional or accelerated approval of its drug, TauRx Deputy Chairman Tay Siew Choon said in an interview in the city-state last month. It will also need to raise about $150 million to conduct a more comprehensive phase III trial, though at that point, it would evaluate options including an initial public offering or sale.

 

 

TauRx is pressing ahead in a field that has seen many of the largest pharmaceutical players from Pfizer Inc. to Axovant Sciences Ltd. exit or fail. Just last month, Merck & Co. said it will end a trial of its most advanced Alzheimer’s drug while Biogen Inc.’s shares tumbled after saying it was making changes to its trial. TauRx disappointed investors in 2016 when it said its LMTX drug failed to meet a primary goal of slowing the rate of disease progression when taken in combination with other Alzheimer’s drugs.

 

“We have consistently seen that our theory works, and there’s no reason to give it up,” said Tay. “Shareholders’ support and faith in us has not weakened.”

 

On top of a $71 million rights issue in October to fund the current trial, TauRx had already raised more than $500 million since 2002, according to Tay. The last financing round in 2016 valued the company at about $2.5 billion, he said. Billionaire Lim Kok Thay’s Genting invested $112 million in TauRx in 2012, becoming its biggest shareholder with about a 20 percent stake.

 

TauRx has been recruiting patients since November for the current trial, where it plans to test its drug on 200 patients with mild Alzheimer’s disease who aren’t taking any other medication. The results are expected in early 2019.

 

https://www.bloomberg.com/news/articles/2018-03-02/casino-backed-startup-eyeing-alzheimer-s-cure-worth-2-5-billion

 

[Lakesider]

Wouldn’t they just pay with common priced at $2 in that scenario? Lots of new shares issued but cash is saved and no default.

 

I wasn't sure of the answer so I asked my CFA tutor, who seemed to think that the preference shares would likely just be converted to common at maturity. So no bankruptcy fears.

[sculpin]

What is to be expected from the Parq operations?

 

Initially management gave guidance to GMP that Parq could do the following financially after a 12 month ramp period - should be the end of the ramp late this Fall...

 

Management has provided their financial expectations for Parq, which are subject to an

estimated 12-month ramp up period. Parq is on track to open in the fall of 2017.

 

 $75-$100 million EBITDA

 60-70% from casino activities

 10-15% from hotel activities

 15-30% from other services (food/beverage, parking etc.)

 

At the end of the first quarter they stated 2018 would look like this...

 

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.

 

So the contribution from the casino seems to be about 10% below in the overall results of the facility. It will be interesting to see if this is further adjusted in the Aug/Sep after experiencing the height of the tourist season in Vancouver (June - Aug). Potential value of Parq to Dundee using a simplistic valuation model of expected 2018 results is as follows ( On a fully converted basis, the Corporation holds a 45.9% interest in Parq Vancouver, while Paragon Gaming Inc. owns a 21.9% fully converted interest, and PBC owns a 32.2% fully converted interest)....

 

                EBITDA high    EBITDA low

 

              $75mm            $50mm

 

                10X                10X

 

EV              $750mm          $500mm

 

Debt          $550mm          $550mm

 

Equity        $200mm          ($50mm)

 

46% DC      $92mm            $0

 

At the upper end of the range value comes in at $90 million to Dundee using $75mm in EBITDA while Parq is owned by the debt holders at the lower end. Hopefully, upon full ramp in 2019, Parq can achieve the initial expected results resulting in a floor valuation to Dundee of $90mm & upside to a $200mm valuation with $100mm in EBITDA & possibly a much better financing arrangement.

 

As well, perhaps higher value & substantial financial breathing room could be extracted by selling the hotel operations in what is a strong Vancouver market - an example per room valuation multiple for the hotels would be $425,000 per room average over both the Douglas & Marriot's 517 guest rooms gives a valuation of $220mm just to the hotels & their expected approximate 15% - 25%  contribution to Parq EBITDA.

 

https://www.statista.com/statistics/496256/vancouver-downtown-value-per-hotel-room/

 

http://dailyhive.com/vancouver/interim-hotel-rooms-development-policy-vancouver-shortage

 

Vancouver’s tourism sector growth has been experiencing year-over-year records with overnight visitation, but this is not reflected in the city’s hotel accommodations capacity. A new report by the City of Vancouver states the municipality saw a net loss of 1,105 hotel rooms between 2008 and 2018, with the gains in the years leading to the 2010 Winter Olympics now lost.

 

 

 

[SafetyinNumbers]

Wouldn’t they just pay with common priced at $2 in that scenario? Lots of new shares issued but cash is saved and no default.

 

I wasn't sure of the answer so I asked my CFA tutor, who seemed to think that the preference shares would likely just be converted to common at maturity. So no bankruptcy fears.

 

With the stock at $1.50, that means the DC.PR.E would be worth $18.75 in that scenario and with that class trading ~C$24, it shows very little concern on the part of those preferred holders. In addition, if they did issue ~41m shares to pay for those preferred, the stock would likely be under significant pressure which would take the stock even lower meaning $18.75 is generous.