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

[doc75]

Some recent TauRX news:

 

https://www.biospace.com/article/new-study-by-taurx-shows-a-minimum-dose-of-hydromethylthionine-could-slow-cognitive-decline-and-brain-atrophy-in-mild-to-moderate-alzheimer-s-disease/

 

 

[sculpin]

Some recent TauRX news:

 

https://www.biospace.com/article/new-study-by-taurx-shows-a-minimum-dose-of-hydromethylthionine-could-slow-cognitive-decline-and-brain-atrophy-in-mild-to-moderate-alzheimer-s-disease/

 

 

Dundee's holding in TauRX...

 

At September 30, 2019, the Corporation held an approximate 4% interest in TauRx. The Corporation has determined that the fair value of its investment at September 30, 2019 was $41.1 million. In determining the fair value of its interest, the Corporation applied a value per share of US$30.60, the equivalent of a 50% discount to the volume-weighted average price of shares issued from treasury during 2015 and 2016.

[doc75]

Some recent TauRX news:

 

https://www.biospace.com/article/new-study-by-taurx-shows-a-minimum-dose-of-hydromethylthionine-could-slow-cognitive-decline-and-brain-atrophy-in-mild-to-moderate-alzheimer-s-disease/

 

 

Dundee's holding in TauRX...

 

At September 30, 2019, the Corporation held an approximate 4% interest in TauRx. The Corporation has determined that the fair value of its investment at September 30, 2019 was $41.1 million. In determining the fair value of its interest, the Corporation applied a value per share of US$30.60, the equivalent of a 50% discount to the volume-weighted average price of shares issued from treasury during 2015 and 2016.

 

Just to be clear, I'm only sharing the news.  I think TauRX is an eventual zero and I hope they'll be able to sell it into some renewed optimism for this current Phase 3.  TauRX has a history of overstating and hyping the outcomes of their previous trials, so I think there's little reason to put much faith in this latest company PR.  From what I've read, most experts think they're full of sh*t.    See the following overview:

 

https://www.alzforum.org/news/conference-coverage/tau-inhibitor-fails-again-subgroup-analysis-irks-clinicians-ctad

 

You don't even have to be an expert to notice their statistical comparisons are highly suspect.  Fingers crossed for a sale anywhere close to the carrying value. Those 2015/2016 shares were issued prior to the first Phase 3's missing their primary endpoints.

 

 

[doc75]

DPM has been on a tear recently.  At the current DPM price ($6.00), the value of Dundee's investment has increased by approx $55M over end of Q3, or roughly $0.55 per DC.A share.  Taking the DPM stake alone and subtracting the prefs gives a NAV of $0.90 per DC.A share.  The current price of DC.A really speaks to their reputation and perceived quality of other assets.

[petec]

The current price of DC.A really speaks to their reputation and perceived quality of other assets.

 

That - and the fact that DPM is highly volatile. It's been on 3 tears this year and gave back most (but not all) of the first two. Given Dundee seems to have no intention of selling or spinning DPM, it's reasonable that the DC.A share price doesn't immediately reflect what may be a temporary revaluation of DPM*.

 

*I happen to think it will end up being a permanent revaluation, I'm just trying to explain why it might actually be perfectly rational for the market not to immediately reflect DPM's bounce in DC.A's share price.

[doc75]

The current price of DC.A really speaks to their reputation and perceived quality of other assets.

 

That - and the fact that DPM is highly volatile. It's been on 3 tears this year and gave back most (but not all) of the first two. Given Dundee seems to have no intention of selling or spinning DPM, it's reasonable that the DC.A share price doesn't immediately reflect what may be a temporary revaluation of DPM*.

 

*I happen to think it will end up being a permanent revaluation, I'm just trying to explain why it might actually be perfectly rational for the market not to immediately reflect DPM's bounce in DC.A's share price.

 

Yes, I'm sure you're correct to a large extent.  I wouldn't expect DC.A to go by 0.55 due to a 0.55 addition to NAV from a volatile holding.  But  there has been essentially no movement in DC.A even as DPM advances on good operating news (as opposed to a bump in commodity price).  Interesting times.  Or course there's also the large overhang from the preferred conversion.

 

 

 

[sculpin]

Couple of things pushing DPM value up to the current $6 level. Canaccord initiation with $8.50 target. RBC comes out with 2020 outlook & $7.75 price. Peter Imhof, one of the better small cap guys in Canada, recommended it. It is dirt cheap at 3 times EBITDA.

 

DPM Top Pick by AGF

 

Dundee Precious Metals listed as a BNN top pick by Peter Imhof at AGF... nice to see generalist investment managers starting to see good value here. 

 

He added to it after meeting managers. Strong cash flow in recent quarters. They will reach middle or top of their production guidance. Trades at a really cheap valuation (and other metrics) vs. peers--trading at 6x next year's earnings. Expect a strong Q4 with super-strong cash flow, and given their mines are ramping up with good metal grades.

 

 

Canaccord initiates on DPM with $8.50 target

 

Dundee Precious Metals (DPM) – Initiating Coverage with Buy. TP $8.50 (curr. $5.07) 

 

 

DPM is a multi-mine precious metals producer with two operating mines in Bulgaria, a promising gold project in Serbia, and a smelter in Namibia

With Ada Tepe now built and ramped up, DPM is expected to generate substantial FCF from 2020 onward given ~50% overall AISC margins

We forecast a 20% FCF yield for 2020 based on the current share price, with similar yields for 2021 and 2022, and we note that DPM offers the highest FCF yield in our mid-cap precious metals coverage universe

We discuss the company's capital allocation criteria in the body of the report, but note here that we believe management is likely to initiate some form of shareholder return program in 2020 (or earlier)

DPM has substantially de-risked itself in 2019 with Ada Tepe entering commercial production, and we believe the stock will re-rate over 2020 as the market begins to realize this

At the current share price, the company trades at just 2.4x our 2020 EBITDA estimate 0.51x NAV, vs. the peer group averages of 5.1x and 1.21x, respectively

 

RBC Dominion Securities Inc.

 

Mark Mihaljevic, CFA (Analyst) (416) 842-3804 mark.mihaljevic@rbccm.com Wayne Lam, CFA (Analyst) (416) 842-7840 wayne.lam@rbccm.com Cole Chessell, CA, CPA (Associate) (416) 842-4126 cole.chessell@rbccm.com

 

Sector: Precious Minerals & Diamonds - small/ mid capD

 

December 2, 2019

 

Dundee Precious Metals Inc.

 

Reiterate Outperform: Positioned for a strong

2020 following a transition year

 

Our view: We expect DPM shares to outpace peers in 2020 given our

outlook for stronger operational results, improving financials, and an

attractive valuation. We expect investors to focus on operational updates

at Ada Tepe, stronger free cash flow, and the company's capital allocation

strategy. Reiterate Outperform and C$7.50 price target.

 

Key points:

 

Ada Tepe expected to drive a strong 2020

 

We expect DPM to deliver a stronger 2020 given a full year contribution

from Ada Tepe with the operation having reached design throughput

and recoveries in Sep/19, steady output from Chelopech, and no major

shutdowns planned at Tsumeb. This is expected to see ~20% growth in

gold production (265 Koz from 224 Koz) with AISC declining by ~10%

($730/oz from $811/oz). As a result, we forecast the company adding

$180M in net cash to the balance sheet in 2020, up from $37M in 2019

(negative $3M YTD). We believe demonstrating the company's underlying

free cash flow potential can help drive further upside in the shares.

 

Capital allocation to become a focus as free cash flow grows

 

Looking to 2020, we believe the primary focus for investors will transition

from execution at Ada Tepe to its capital allocation strategy. Beyond

reinvesting in brownfields exploration/optimization opportunities, we

expect Dundee to initially focus on de-levering its balance sheet ($14M

repaid on the credit facility in Q3 with $27M outstanding) and building

a strong cash balance (targeting ~$50M). By mid-2020, we believe

DPM could be in a position to begin returning capital to shareholders

(buyback or modest dividend). Note, we do not expect a significant

capital commitment to the Timok gold project in Serbia given the longerdated nature of the asset and focus on optimizing its economics. While

the company recently invested C$10M in INV Metals, we do not expect

strategic investments in the juniors to become a key tenet of its strategy.

 

Constructive outlook supported by attractive valuation

 

We estimate Dundee currently trades at a 2% discount to Junior producer

peers (36% vs. Intermediates) on long-term NAV, relative to an average

discount of 2% over the past year and 21% since the start of 2016

(33% and 37% vs. Intermediates). While the company has closed some

of its historical discount to peers, we believe shares can continue to

re-rate higher over the coming quarters as operational consistency is

demonstrated at Ada Tepe, free cash flow builds, and balance sheet

becomes more robust with potential for return of capital.

 

Reiterate Outperform and C$7.50 price target

 

We reiterate our positive outlook on DPM shares given the company's

improving operational/financial results and attractive valuation. Maintain

C$7.50 target as we have made only modest changes to our forecasts.

[sculpin]

Dundee's DPM Stake Equals Company's Total Enterprise Value - Free Option On Everything Else

 

https://seekingalpha.com/article/4310589-dundees-dpm-stake-equals-companys-total-enterprise-value-free-option-on-everything-else

[EricSchleien]

I'm getting antsy to buy this again at these levels.

 

Who read this seeking alpha article and thinks this is still a BAD investment?

 

Would love to hear the bear case here at these levels/valuation/management. The employee stock purchase plan being putting back into place as well as the CFO taking 50% of his bonus in stock, while not necessarily that meaningful on its own, is something that had me perk up here which also led to me reading this article.

 

https://seekingalpha.com/article/4310589-dundees-dpm-stake-equals-companys-total-enterprise-value-free-option-on-everything-else

 

Would love for someone who genuinely thinks this is a bad investment to share with me their bearish view at these levels.. thanks!

[no_free_lunch]

They have been trading at huge discounts to book for years.  Their stock price and book just keeps dropping. Part of it is the economy but it is also due to horrible capital allocation.  The founder is out and you are investing with his kids who just aren't their father.

[bizaro86]

I'm getting antsy to buy this again at these levels.

 

Who read this seeking alpha article and thinks this is still a BAD investment?

 

Would love to hear the bear case here at these levels/valuation/management. The employee stock purchase plan being putting back into place as well as the CFO taking 50% of his bonus in stock, while not necessarily that meaningful on its own, is something that had me perk up here which also led to me reading this article.

 

https://seekingalpha.com/article/4310589-dundees-dpm-stake-equals-companys-total-enterprise-value-free-option-on-everything-else

 

Would love for someone who genuinely thinks this is a bad investment to share with me their bearish view at these levels.. thanks!

 

If you put $1 MM in cash in a box and then lit the box on fire, I think you'd have a hard time getting someone to pay you NAV of $1 MM for the box.

 

This has been cheap on a nav basis for years, and management keeps incinerating money. Implicit in any thesis that this is cheap seems to be the assumption that "this time it's different." Maybe it is different this time, but that's not a bet I would make.

[no_free_lunch]

I agree bizarro.

 

Eric, go back to the first post of the thread:

 

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.

 

So at $5 it was a steal.  Now it's $1 and it's still a steal.  Eric, why are you ignoring the history on this?

[petec]

Management are no longer incinerating money. They’re actually doing a very good job of clearing up the mess the father left.

 

Whether they will be able to make money in future is another question.

[EricSchleien]

I agree bizarro.

 

Eric, go back to the first post of the thread:

 

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.

 

So at $5 it was a steal.  Now it's $1 and it's still a steal.  Eric, why are you ignoring the history on this?

 

I have. I owned this. One of my worst investments of all time. Basically getting the itch again to invest and looking to have others talk me out of it :)

[Lakesider]

The safety here is the value of DPM. The value of DPM is tied to gold prices..

 

 

[bizaro86]

Management are no longer incinerating money. They’re actually doing a very good job of clearing up the mess the father left.

 

Whether they will be able to make money in future is another question.

 

If you think the management change will mean that shareholders realize anything close to NAV (ie things are different this time) then this is absolutely a great deal.

[petec]

Management are no longer incinerating money. They’re actually doing a very good job of clearing up the mess the father left.

 

Whether they will be able to make money in future is another question.

 

If you think the management change will mean that shareholders realize anything close to NAV (ie things are different this time) then this is absolutely a great deal.

 

I think it is fairly clear that NAV is hardening. I looked at this years ago and found it unfathomable. I came back to it 18 months ago and have followed in some detail since. My confidence that the core assets are fairly- or under-valued on the balance sheet is rising, which underpins the downside. If NAVPS stops shrinking there is a decent chance of a rerating. If it grows there is an excellent chance. And then there’s the blue-sky option on Chad working out. Risk/reward seems sound to me.

 

My hope is a few more assets get sold and the pref buyback is substantial.

[no_free_lunch]

Management are no longer incinerating money. They’re actually doing a very good job of clearing up the mess the father left.

 

Whether they will be able to make money in future is another question.

 

If you think the management change will mean that shareholders realize anything close to NAV (ie things are different this time) then this is absolutely a great deal.

 

Management change happened about 5 years ago.

 

I really haven't been keeping track of it so I don't intend to counter petec in the details. I have just seen this investment evaporate before my eyes.  I got in at $18 and it was trading at a big discount then too.  I continue to hold out of sheer stubborness but I don't have much confidence in management at this point.

[doc75]

 

Management change happened about 5 years ago.

 

I really haven't been keeping track of it so I don't intend to counter petec in the details. I have just seen this investment evaporate before my eyes.  I got in at $18 and it was trading at a big discount then too.  I continue to hold out of sheer stubborness but I don't have much confidence in management at this point.

 

Management change happened approx. 2 years ago.  As Petec says, the NAV has objectively been hardening.  The risk lies in their pivot back toward the resource sector and their ultimate reliance on commodity prices. 

[bizaro86]

 

Management change happened about 5 years ago.

 

I really haven't been keeping track of it so I don't intend to counter petec in the details. I have just seen this investment evaporate before my eyes.  I got in at $18 and it was trading at a big discount then too.  I continue to hold out of sheer stubborness but I don't have much confidence in management at this point.

 

Management change happened approx. 2 years ago.  As Petec says, the NAV has objectively been hardening.  The risk lies in their pivot back toward the resource sector and their ultimate reliance on commodity prices.

 

And management skill in making investments in a crappy industry. If the hardened NAV was likely to get paid out to shareholders thatd be one thing. But they're going to invest it in a portfolio of junior miners. Imo that deserves a discount to nav, as it's likely a value destructive strategy.

[petec]

It may well be value destructive. But, resources is where they made their money before father got ego and spread into a lot of other junk. (The 2014 annual letter is an epic ego trip that put me off investing then.)

 

If they’re right (see latest call) that they have an edge on deep due diligence in a sector (junior miners) that is totally bombed out, then it *might* not be value destructive.

 

But also, they’re not putting a lot of capital there. They’re recycling capital within that space. But they’re also buying back prefs. And from these levels they may also be able to write up assets like Parq and Android.

[petec]

I fact, I would go so far as to say that management hasn’t put a foot wrong since Jonathan took over. They’ve started clearing out the junk without panicking; they’ve reduced liabilities including taking tough decisions to dilute equity; they’ve shaped a future direction that makes sense (although it requires excellent execution); they’ve brought partners into assets that needed them (Parq); and they’ve cut costs.

[no_free_lunch]

 

Management change happened about 5 years ago.

 

I really haven't been keeping track of it so I don't intend to counter petec in the details. I have just seen this investment evaporate before my eyes.  I got in at $18 and it was trading at a big discount then too.  I continue to hold out of sheer stubborness but I don't have much confidence in management at this point.

 

Management change happened approx. 2 years ago.  As Petec says, the NAV has objectively been hardening.  The risk lies in their pivot back toward the resource sector and their ultimate reliance on commodity prices. 

 

Are you sure?  Maybe something changed but Ned Goodman stepped down 5 years ago.  This was from 2015.

 

This was the more serious, aspirational side of Mr. Goodman. At 51, he came back to head Dundee nearly a year ago, after a stint at Bank of Nova Scotia. He had been head of Scotiabank's global asset management, after the bank had bought Dundee Wealth where Mr. Goodman had been president and CEO.

 

He originally joined Dundee, the company created by his father, Ned, as a partner, vice-president and portfolio manager in 1994. He went on to become CEO and president of Dynamic Funds in 2001, before heading Dynamic's parent Dundee Wealth in 2007.

 

Under his new leadership, Dundee Corp. is trying to become more transparent to investors in terms of explaining its various holdings in numerous business sectors, from agriculture and real estate to oil and gas. The aim is also to organize the company in a way "that maximizes profitability in finding common objectives" between Dundee's various divisions.

[petec]

 

Management change happened about 5 years ago.

 

I really haven't been keeping track of it so I don't intend to counter petec in the details. I have just seen this investment evaporate before my eyes.  I got in at $18 and it was trading at a big discount then too.  I continue to hold out of sheer stubborness but I don't have much confidence in management at this point.

 

Management change happened approx. 2 years ago.  As Petec says, the NAV has objectively been hardening.  The risk lies in their pivot back toward the resource sector and their ultimate reliance on commodity prices. 

 

Are you sure?  Maybe something changed but Ned Goodman stepped down 5 years ago.  This was from 2015.

 

This was the more serious, aspirational side of Mr. Goodman. At 51, he came back to head Dundee nearly a year ago, after a stint at Bank of Nova Scotia. He had been head of Scotiabank's global asset management, after the bank had bought Dundee Wealth where Mr. Goodman had been president and CEO.

 

He originally joined Dundee, the company created by his father, Ned, as a partner, vice-president and portfolio manager in 1994. He went on to become CEO and president of Dynamic Funds in 2001, before heading Dynamic's parent Dundee Wealth in 2007.

 

Under his new leadership, Dundee Corp. is trying to become more transparent to investors in terms of explaining its various holdings in numerous business sectors, from agriculture and real estate to oil and gas. The aim is also to organize the company in a way "that maximizes profitability in finding common objectives" between Dundee's various divisions.

 

Which Mr Goodman does that refer to? Mark handed over to Jonathan c. 2 years ago.

[no_free_lunch]

That was Mark Goodman, who took it over after his father Ned Goodman retired.  Ned was brilliant from what I can tell, he built the business and gave shareholders something like 15-16% per year.  I didn't realize there was a second handoff, but you are still with a new management team.

 

It has been awhile but I was under the impression that Ned built the business up using financial services.  He ultimately sold that business to one of the big banks.  I am okay with the home building as it's a traditional business and you are competing against smaller operators but where is the evidence that they are exceptional resource investors?  Isn't that where they blew up the company?  Seriously, this company has been an incinerator of capital, I would not invest more without really understanding what they are buying and feeling like the odds are tipped towards me.  In the past you had Ned's reputation but what is there now?  $30 -> $1.  My perspective is, prove it and then maybe I think about it.