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

[Rod]

I think they are going to use the conversion option as leverage on the DC.PR.E holders to extend their retraction feature again while keeping the coupon. Maybe they will even throw in a warrant again.

 

Basically, if preferred holders don't agree to terms, they will use their option to pay with shares which will materially hurt the preferred holders. If they agree to extend, they have a shot at getting their cash back in a few years and earning a reasonable return while they wait.

 

Dundee gets the benefit of having access to that capital for a few more years and does not dilute shareholders much.

 

It's a win-win versus paying all cash or diluting shareholders.

 

I wonder if the E shares might start to sell off and reflect the risk of conversion?

[petec]

My key takeaways from the call:

 

- DPM is going well and could be worth significantly more next year. It's big enough to move the needle significantly.

- They're clearly prepared to play hardball with the convertible prefs, which I regard as good news because it dramatically reduces liquidity risk.

- No real details on the portfolio review but the underlying commentary is positive. There's a steer to $100-200m of sales in 2H, not including DPM or UHIC. By definition that means liquifying a material of the undisclosed/private/hard-to-value holdings and if it happens it will harden up BV materially and remove liquidity risk. Interestingly they didn't explicitly exclude selling Parq, although they weren't asked. I think they also said that they have had interest in Blue Goose.

- Delonex drills first Chad well in 2H - potentially also hardens up BV (one way or the other!).

- They are clearly deep in the process of not only refinancing Parq (potentially with PIK flexibility) but also bringing in another capital provider with relevant skills to help ramp the business faster. That would presumably reduce Dundee's % stake but it might increase and harden up the value of the position. That said I don't really understand what skills they need given they have Marriott's support & systems already.

- I found it interesting that they reiterated long term ebitda guidance for Parq despite having written it down due to changes in long term forecasts. I take this to mean there is a chance the writedown is conservative.

 

More generally, I am tentatively impressed by Jonathan Goodman. He's saying most of what I want to hear - but ultimately it's actions that count.

 

On the negative side:

- There was a questioner on the call who seemed convinced that when the convertible prefs were extended, the conversion right was removed or affected. Need to check this.

- The tax thing is new to me and wasn't questioned but could be material.

 

I totally agree with most of the comments on here e.g. about Parq becoming a material risk and the prefs being better than the common here. Sadly I can only get exposure via the common (EU bureaucrats consider me too stupid to buy the prefs, as explained above). I will hold, but have cancelled my planned add.

 

Entirely theoretical exercise but it's quite interesting to work through the impact on the common if they convert the Series 5 prefs and do a tender offer for the others at say $13, paid for by a fire sale of assets below BV. It's surprisingly hard to get serious downside for the common in that scenario, but obviously that assumes the pref holders would sell.

[petec]

At June 30, 2018, the Corporation had operating loss carry forwards of $527,656,000 (December 31, 2017 – $505,195,000) and capital loss carry forwards of $234,396,000 (December 31, 2017 – $231,918,000).

 

Am I right in thinking that these have been written off as assets but could come back if profits/gains are made? And do they disclose how much of these are at the holdco vs, say, Blue Goose?

[doc75]

 

- There was a questioner on the call who seemed convinced that when the convertible prefs were extended, the conversion right was removed or affected. Need to check this.

 

 

I don't know what that guy was smoking. It's as clear as day in the circular.  Look on Sedar for the circular dated Jan 11, 2016 and search for "conversion".

 

[doc75]

Interestingly they didn't explicitly exclude selling Parq, although they weren't asked. I think they also said that they have had interest in Blue Goose.

 

They sold off some of the assets of the Blue Goose fish business, and said their is interest in the remaining parts.  I don't think they indicated any interest in Blue Goose more generally.  They just said that selling down the beef herd will generate some cash and limit the amount of capital that corporate has to send into that sub.

 

 

[petec]

Interestingly they didn't explicitly exclude selling Parq, although they weren't asked. I think they also said that they have had interest in Blue Goose.

 

They sold off some of the assets of the Blue Goose fish business, and said their is interest in the remaining parts.  I don't think they indicated any interest in Blue Goose more generally.  They just said that selling down the beef herd will generate some cash and limit the amount of capital that corporate has to send into that sub.

 

Thanks. I'd add that the 2006 land valuation (100m) less BG's liabilities (60) comes to more or less the BV (40, BV is 30) so I won't be surprised if there is interest in the land at a price that allows them to harden and liquify book value.

[sculpin]

At June 30, 2018, the Corporation had operating loss carry forwards of $527,656,000 (December 31, 2017 – $505,195,000) and capital loss carry forwards of $234,396,000 (December 31, 2017 – $231,918,000).

 

Am I right in thinking that these have been written off as assets but could come back if profits/gains are made? And do they disclose how much of these are at the holdco vs, say, Blue Goose?

 

I believe all of these are at the corporate level but could be mistaken. Obviously if/when Dundee rights the ship & gets back to operating profitably and with potential investments that could have capital gains, then these tax loss carry forwards become very valuable allowing them to pay little or no tax on profitability & realized capital gains. The size of these losses could truly become an asset & opens the door in the future where profitable operations/assets could be bought by Dundee & their profits shielded by these TLCF's.

 

Unused business tax losses may be carried back up to three years or carried forward

up to 20 years to offset future tax liabilities of the taxpayer.16 Capital losses may be carried

back three years and carried forward indefinitely.

 

https://www.policyschool.ca/wp-content/uploads/2016/03/corporate-group-taxation.pdf

 

A tax loss carryforward is a "negative profit" for tax purposes. It usually occurs when a company's expenses exceed revenues, making the company unprofitable.

 

HOW IT WORKS (EXAMPLE):

Tax loss carryfowards reduce future tax payments. For example, let's assume Company XYZ has income of $1,000,000 but expenses of $1,300,000. Its net operating loss is $1,000,000 - $1,300,000 = -$300,000.

 

Company XYZ will probably not have to pay taxes that year, because it has negative taxable income. But let's assume that next year, Company XYZ makes a lot more money and records $500,000 of taxable income. Company XYZ pays a corporate tax rate of 30%.

 

Normally, the company would need to pay $500,000 x 30% = $150,000 in taxes. But because it had a tax loss carryforward from last year, it can apply last year's loss to this year's tax bill, reducing it significantly (or even to $0, depending on the jurisdiction Company XYZ is in).

 

Let's assume that Company XYZ can apply the entire -$300,000 tax loss carryforward to this year's tax bill. Instead of owing $500,000 x 30% = $150,000 in taxes, Company XYZ now owes only ($500,000 - $300,000) x 30% = $60,000 in taxes.

 

Similarly, investors can carry forward losses from selling investments and thereby reduce their taxes on future capital gains.

 

WHY IT MATTERS:

 

Tax loss carryforwards create future tax relief for companies and are therefore very valuable. The laws on how tax loss carryforwards apply vary by state, but usually a carryforward from the last two or three years can apply up to the next seven years. After that, the carryforwards expire. There are rules and exceptions for almost any circumstance, so it's best to check with the IRS or a qualified tax accountant when calculating and applying tax loss carryforwards.

 

As mentioned above, tax loss carryforwards are valuable assets in and of themselves. In fact, sometimes companies purchase other companies solely for their tax loss carryforwards.

[Cardboard]

My view is that most of you discount too much the probabilities of refinancing of the "E"s. Hence if you want to do that, you don't stop paying dividends on your existing debt (preferreds). And as one mentioned, if you are looking to do business with other people in the resource sector, you don't do that either.

 

Here is a fact:

 

"In accordance with the terms of the Corporation’s Preference Shares, series 5, holders thereof had the option to redeem up to 17% of their holdings on January 31, 2018 at a price of $25.00 per share.  During the first quarter of 2018, the Corporation paid cash of $7,582,000 to redeem 303,265 Preference Shares, series 5 pursuant to these arrangements."

 

Guess how many redeemed their shares? 8.4% vs 17% max. Why?

 

Something similar happened when these were issued to redeem Series 4 if I recall properly. Most of the unhappy got their cash and the rest carried on with better terms.

 

It happens all the time with convertible reaching maturity and when the company cannot easily repay. They get extended for better terms and sometimes a chunk is redeemed.

 

Cardboard

[Rod]

I think Dundee’s strategy with the E’s will depend on how things look for the company next year. If the restructuring has gone well (stop laughing), Dundee may be willing and able to pay off the E’s with cash. Or, more likely, as Safety has pointed out, the E’s will trade at a small premium and the holders won’t bother to redeem them. And Dundee may be happy just to let them continue indefinitely.

 

If things have gone very badly by next summer, Dundee may be happy to convert the E’s into common at $2. If progress is so-so, but not bad enough that the company would want to issue shares at $2, and the stock is still below $2, then Dundee may use Safety’s idea of threatening to convert the shares if E holders don’t support an extension. Of couse the stock may trade at or a little above $2 then things get complicated. The threat of conversion won’t likely work. And E holders may have no desire to continue.

[SafetyinNumbers]

I don't think they will wait until next summer. Last time, the E's were heading towards their June redemption date, they pulled the trigger in November. The timing will probably be similar this time.

 

I also think the stock would have to be well above $2 for the E shareholders to be ok with the outcome of getting all stock as trying to sell ~40m shares, isn't easy.

[Potato]

Two recent blog posts on Dundee from others:

 

https://divestor.com/?p=8229

 

http://prefblog.com/?p=37057

 

I have B & D prefs, and tend to oscillate between excitement at how cheap they are (and look how much there is on the balance sheet behind them!) and a deep fear that the bums will get so enthralled at watching their dumpster fire that it ends in tears for all.

[Rod]

I don't think they will wait until next summer. Last time, the E's were heading towards their June redemption date, they pulled the trigger in November. The timing will probably be similar this time.

 

I also think the stock would have to be well above $2 for the E shareholders to be ok with the outcome of getting all stock as trying to sell ~40m shares, isn't easy.

 

I suppose if the option presented to E holders is to get converted to common and lose almost half their value or get extended with some kind of sweetener then they most likely will take the extension. But I'm not sure what Dundee could do to sweeten the offer much.

 

My question is are we sure that Dundee wouldn't rather convert? Presumably an extension would eliminate the conversion option at $2. I am not sure that Dundee won't take it now instead of losing that option forever. I am no longer an owner of the common, just the B and D, so obviously I would prefer they convert, so maybe that is influencing my judgement!

[petec]

If I was them I would not want to lose the convert option. That would be a deal breaker in a negotiation for me. And I wouldn't accept a lowering of the conversion price (much). Notably they said on the call that in the future they ideally have no liabilities at all so it's possible that future access to the credit/pref markets is not something they care about. Plus, credit markets have short memories these days and I have no doubt Dundee, if it turns its position around, would be given access.

 

So I tend to think renegotiation and conversion are roughly 50:50 probabilities, at least from my outside vantage point.

 

Obviously conversion is great for the other prefs. Whether conversion is good for the common depends entirely on your estimate of BVPS. In my base case, NAV is low enough that conversion is accretive to common BVPS. I'm being pretty punitive with some of the more opaque values (generally allowing for half of BV and in some cases nothing, including for UHIC which could easily be a zero) so my NAV is $81m. Conversion adds $83m, doubling the NAV but "only" adding two-thirds to the share count.

 

My base case has NAVPS at $1.38 and converted NAVPS at $1.66. Obviously conversion takes away some of the upside but it's still anything up to 5x on my bull NAVPS (with the major needle-movers being DPM rerating, Parq turning out OK, and UHIC producing oil). So, I kinda like the idea of converting. It leaves me with great upside and lower risk. But conversion would create a massive overhang in the shares. I can see a huge opportunity developing in the common over the next few months, and if that happens I'll buy more (depending on newsflow).

 

I see the common is down 11% today. Has anyone seen any news or are we just seeing (more) capitulation?

 

[Rod]

I can’t see the E’s voting to extend if the $2 conversion remains. What’s the benefit to them? And I have a hard time seeing Dundee give up the conversion option.

[petec]

I can’t see the E’s voting to extend if the $2 conversion remains. What’s the benefit to them? And I have a hard time seeing Dundee give up the conversion option.

 

Agreed.

[SafetyinNumbers]

I can’t see the E’s voting to extend if the $2 conversion remains. What’s the benefit to them? And I have a hard time seeing Dundee give up the conversion option.

 

Well it’s a few more years of dividend payments and perhaps a chance at par again. A potential loss later versus a certain loss now, I suppose.

[Cardboard]

It is interesting that the "E"'s only finally woke up to the danger ahead over the last 4 or 5 trading sessions. What were they thinking about?

 

Looking at the shit show at Aimia, where dividends have been suspended for a while (still cummulate), it just shows the potential with the Dundee "B" and "D" preferreds with any improvement at the company. These are in a way, with no conversion into stock possible, much safer than the "E"'s on some stampede liquidation.

 

Dividends have still been declared for September and with the number of assets held, no debt, why not continue? And even if they are cut (they accumulate unless I am mistaken), we have Aimia to look as an example of how bad it can get. For the Aimia "B"'s, I see for example $7.32 as the low but, it did not stay there long.

 

Cardboard

[sculpin]

Canaccord has moved 2.2 million shares over last 2 days at $1.12...

 

33 Canaccord  2,156,290 2,415,044 1.12  2,201,548 2,466,186 1.12  -45,258 51,142

 

Capitulation by a long term holder, while the new investor believes they might be getting a bargain. At this point hinges on the outcome of the advanced discussions on Parq as sellers are betting it has negative future worth to DC.

[Rod]

Canaccord has moved 2.2 million shares over last 2 days at $1.12...

 

33 Canaccord  2,156,290 2,415,044 1.12  2,201,548 2,466,186 1.12  -45,258 51,142

 

Capitulation by a long term holder, while the new investor believes they might be getting a bargain. At this point hinges on the outcome of the advanced discussions on Parq as sellers are betting it has negative future worth to DC.

 

Maybe it was Ned Goodman! I’m only half joking—he received a deferred share grant of 2 million shares earlier this month.

[sculpin]

The Parq complex would be very attractive to various Asian hotel & gaming groups looking to expand their gaming empire from Macau or Hong Kong to North America. Companies such as Galaxy Entertainment, Sands China or Melco Resorts have multi billion market caps and access to financing at much lower costs than the high yield debt that is hobbling Parq at the current time.

 

With regard to Canada’s hotel sector, it’s experiencing its own boom. Case in point: in early March, Vancouver’s Rosewood Hotel Georgia set a new record in Canada when Hong-Kong-based Able Shine Enterprises and Magnificent Hotel Investments Ltd. purchased the property from Delta Land Development Ltd. for $145 million. It surpassed the Four Seasons Hotel Toronto deal by nabbing the country’s highest recorded price per key at $929,000 per room. Another significant off-shore deal took place late last fall as APA Group of Japan finalized plans to buy Vancouver-based Coast Hotels for $210 million through a share purchase agreement with Okabe Co. Ltd. of Tokyo, bringing the brand’s 36 properties into its stable.

 

In January, Leadon Investment Inc., a private investor group with ties to Hong Kong, inked a deal to buy British Columbia Investment Management Corporation (bcIMC)’s hospitality arm for more than $1 billion, becoming the new owner of Silver Birch Hotels & Resorts.

 

“Last year was our peak of interest, because there were a few transactions where foreign groups wanted to buy bulk and have a platform for further expansion in North America, so they’re buying one-off portfolios,” explains McLuskie. They also don’t want to waste time on smaller assets. “The challenge is they don’t want to come here for a $10-million deal. It’s not worth it for such a small transaction, so they’re looking for larger deals where it makes sense to save money and they are looking for key markets and larger site sizes.”

 

https://www.hoteliermagazine.com/canadas-hotel-market-good-value-foreign-investors/

[Rod]

The Parq complex would be very attractive to various Asian hotel & gaming groups looking to expand their gaming empire from Macau or Hong Kong to North America. Companies such as Galaxy Entertainment, Sands China or Melco Resorts have multi billion market caps and access to financing at much lower costs than the high yield debt that is hobbling Parq at the current time.

 

With regard to Canada’s hotel sector, it’s experiencing its own boom. Case in point: in early March, Vancouver’s Rosewood Hotel Georgia set a new record in Canada when Hong-Kong-based Able Shine Enterprises and Magnificent Hotel Investments Ltd. purchased the property from Delta Land Development Ltd. for $145 million. It surpassed the Four Seasons Hotel Toronto deal by nabbing the country’s highest recorded price per key at $929,000 per room. Another significant off-shore deal took place late last fall as APA Group of Japan finalized plans to buy Vancouver-based Coast Hotels for $210 million through a share purchase agreement with Okabe Co. Ltd. of Tokyo, bringing the brand’s 36 properties into its stable.

 

In January, Leadon Investment Inc., a private investor group with ties to Hong Kong, inked a deal to buy British Columbia Investment Management Corporation (bcIMC)’s hospitality arm for more than $1 billion, becoming the new owner of Silver Birch Hotels & Resorts.

 

“Last year was our peak of interest, because there were a few transactions where foreign groups wanted to buy bulk and have a platform for further expansion in North America, so they’re buying one-off portfolios,” explains McLuskie. They also don’t want to waste time on smaller assets. “The challenge is they don’t want to come here for a $10-million deal. It’s not worth it for such a small transaction, so they’re looking for larger deals where it makes sense to save money and they are looking for key markets and larger site sizes.”

 

https://www.hoteliermagazine.com/canadas-hotel-market-good-value-foreign-investors/

 

That's useful info. It's hard to believe they couldn't sell these two hotels for a high price in the current market. If they did they could pay off most of the high cost debt and that might leave them at least in a break-even position on the remainder of the project. Then they could ramp that up over time. Hopefully, they can arrange a sale or equivalent transaction in the next couple months.

[gokou3]

Additional research from JLL on Nov 2017:

http://www.jll.ca/canada/en-ca/Research/CAN-Vancouver-Hotel-Market-Report-2017-JLL.pdf

 

As one of the highest barriers to entry markets in North America, Vancouver has seen subdued supply growth over the past five

years. With the outstanding lodging fundamentals, development activity has accelerated.  Three new luxury hotels have opened

in the downtown area, including the 147-room Trump Hotel Vancouver, the 329-room JW Marriott Parq Vancouver and the 188-

room Autograph Collection the Douglas, the latter two projects anchor the $600 million Parq Vancouver mega-entertainment

complex. Additionally, the 202-room Exchange Hotel by Executive Hotels & Resorts is under construction and will be located in

the new Exchange Tower. The hotel is set to open in the Summer of 2018. In total, these four new hotels add 866 new rooms to the

Vancouver lodging market.

To offset the new luxury offerings, the 357-room Empire Landmark Hotel and the 199-room Coast Plaza Hotel have closed, with

a total of 556 rooms that have exited the market and will be converted to alternate uses. The trend of room supply leaving the

market on the low end of the ADR and quality spectrum whilst being replaced by newer luxury five-star hotel product, has recently

been seen in Canadian markets like Toronto. The flight-to-quality in Toronto resulted in a significant ADR push in the upper-

upscale market, with second and third tier hotels following suit, collectively lifting previous rate ceilings in the market.

 

Over the next few years, muted supply growth is anticipated in Downtown Vancouver, as Smith Travel Research (“STR”) reports

no announced hotels in the development pipeline as of October 2017. As demand continues to soar in Vancouver, the flight-to-

quality shift in the sector remains, coupled with major renovations expected in a number of upper-upscale hotels in the city, it is

anticipated that rates will continue their positive trajectory, with no signs of slowing down in the near term.

[gokou3]

Another one:

http://www.cbre.ca/AssetLibrary/CBREHotels-AccomdationOutlook-Presentation.pdf

 

 

[LesPaul]

Through it's holding in Union Group, Dundee indirectly owns 16M shares of ICC Labs (ICC-X), a Cannabis producer in Uruguay. I think it's worth watching because ICC has recently moved up from $1 to $1.70 as it seems to be catching the cannabis wave. At the current price it's worth about 50 cents per Dundee share, or roughly 20% of the market cap. I guess a best case scenario would be that ICC shoots up to $5 or so on a take over or continuation of the bubble, and Union Group sells. Dundee's share of that value would be about $1.40 per share, more than half the current market cap, a not inconsiderable amount.

 

Thanks for noticing that and letting us know

 

A Uruguayan news source has reported that Aurora is in talks to acquire the ICC business. Haven't seen anything from a Canadian source yet.

 

https://www.busqueda.com.uy/nota/una-empresa-productora-de-la-marihuana-oficial-negocia-su-venta-la-principal-compania-de

 

No idea of the legitimacy of the article or report, only thought it might be interesting for Dundee followers.

[sculpin]

Through it's holding in Union Group, Dundee indirectly owns 16M shares of ICC Labs (ICC-X), a Cannabis producer in Uruguay. I think it's worth watching because ICC has recently moved up from $1 to $1.70 as it seems to be catching the cannabis wave. At the current price it's worth about 50 cents per Dundee share, or roughly 20% of the market cap. I guess a best case scenario would be that ICC shoots up to $5 or so on a take over or continuation of the bubble, and Union Group sells. Dundee's share of that value would be about $1.40 per share, more than half the current market cap, a not inconsiderable amount.

 

Thanks for noticing that and letting us know

 

A Uruguayan news source has reported that Aurora is in talks to acquire the ICC business. Haven't seen anything from a Canadian source yet.

 

https://www.busqueda.com.uy/nota/una-empresa-productora-de-la-marihuana-oficial-negocia-su-venta-la-principal-compania-de

 

No idea of the legitimacy of the article or report, only thought it might be interesting for Dundee followers.

 

Thanks the ICC shares are up 17% today on heavy volume...press release from ICC Labs...

 

 

ICC Labs notes media report on potential transaction

 

2018-08-23 15:34 ET - News Release

Shares issued 137,600,910

ICC Close 2018-08-22 C$ 1.49

 

 

Mr. Alejandro Antalich reports

 

ICC RESPONDS TO MEDIA REPORTS

 

ICC Labs Inc. is aware of a recent Spanish language media report speculating as to a potential transaction involving the acquisition of the company. The policy of the company is not to comment on rumors or speculation in the marketplace or any potential transaction unless, and until, a binding legal agreement to effect that transaction has been signed.

 

However, in response to a request from the Investment Industry Regulatory Organization of Canada, the company confirms that it engages from time to time in discussions with other industry players regarding various alternatives. There can be no assurance that the company will enter into any transaction or take any other corporate action as a result of any such discussions. ICC does not intend to make any further comment on this matter except as may be required by applicable securities laws.

 

About ICC Labs Inc.

 

ICC Labs is a fully licensed producer and distributor of medicinal cannabinoid extracts, recreational cannabis and industrial hemp products in Uruguay as well as a fully licensed producer of medicinal cannabis in Colombia. The company has active operations in Uruguay and is focused on becoming the worldwide leading producer of cannabinoid extracts, giving support and promoting responsible use for medicinal purposes, backed by scientific research and innovation, while following strict compliance with standards for quality and safety.