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

[sculpin]

A favourable mention for the Dundee pref's in Broadview's annual shareholder letter....

http://www.broadviewcapital.ca/wp-content/uploads/December-2015.pdf

 

Positioning and New Ideas for 2016:

 

It is not for lack of trying that we have not materially increased our net exposure of late. We have growing stacks of new files on both our desks. Most definitely there will be wonderful opportunities to make money from recovering stock prices from amongst these piles.

In a previous letter we mentioned Dundee Corp (DC-A), as an example of the sort of things we were looking at as a way to wade into the stock market wreckage and pull out some treasure. So far we have not bought any stock in Dundee as we have been unable to gain confidence that the value of its book is meaningfully higher than the stock price. Admittedly, we are running it through the wringer using brutally conservative assumptions.

 

Our work on the company led us to its balance sheet. The majority of the company’s capital structure, apart from the equity, is preferred shares (or “prefs” as they’re commonly known). This is an asset class of which we have never fully understood the appeal. At the issue price, prefs are inferior to senior debt given the lack of covenants or defined maturity and inferior to equity as you get no real upside. For your trouble you get around 5% or 6% annual return. No thank you.

 

Now with Dundee’s preferred shares being cut in half, we completely understand the appeal. These things are great! We are now owners of all three series of Dundee preferred shares (DC.PR.B, DC.PR.C and DC.PR.D) with yields in the double-digits. While our draconian assumptions have left us undecided as to whether or not the equity of Dundee is a bargain, there is no objective scenario under which the prefs are impaired.

 

The management of Dundee (or more accurately the previous management) has destroyed a great deal of value through poor investments. We are confident that under its new CEO this era has come to an end and the company will cease pouring capital into far-flung resource ventures. In order for the value of the prefs to be called into question, Dundee would have to re-double its previous efforts at chasing a failed dream across the globe. It is our firm belief that this will not happen.

 

We mention this investment(s) to illustrate that a) we are actually doing something even while hidden under a pile of coats and b) investing can follow an unusual path. We started with Dundee’s equity and ended up with the preferred shares as that is where our research took us. Being objective, open- minded and free of investment constraints led us to what we believe will generate a very solid return for our investors. This is not dissimilar to our investments in the distressed convertible debenture space which continues to yield some very compelling opportunities. We think the flexibility we have, both by mandate and by mentality, is a major advantage particularly in more challenging markets.

 

[EricSchleien]

http://finance.yahoo.com/news/euro-pacific-canada-dundee-securities-133000261.html

[sculpin]

Copy/paste from few slides from Broadview presentation at Toronto CFA 2016 Investment Symposium.

 

http://www.broadviewcapital.ca/contact-us/

 

Our base case assumption is that Dundee will deploy an additional $116m

into cash-burning investments and we capitalize corporate expenses at $100m

Net of these assumptions we derive ~$478m of asset value to cover $237m

par value of preference shares

 

Goodman Family, backed by any of their well-heeled partners or friends,

decide they’re done with the public market

 

 If anyone has a contrarian, super-bullish view on commodities or other “hard assets”

Dundee Corp would be as good a play as any

 Prefs face value of $25 comes into play.

 More than 100% upside on Series 2 and 3 Prefs

 

Conclusion

 

 Huge dislocation in small cap stocks and rate reset preferred share

market are causing investors to overlook the risk/reward proposition

 Current dividend yields between 8% and 13%

 Worst case implied IRRs of 10% to 13% plus warrant potential

 Base Case asset coverage 2.0x

 Potential to see upwards of 100% capital appreciation should Dundee

clean up its asset base and prefs trade to 8% yield (Series 2 and 3)

[sculpin]

ACTIVIST OPPORTUNITY

 

I encourage all shareholders on this board to call Lucie Prescot, the CFO, and encourage her to buyback shares. She's very friendly towards shareholders and understands value investing. The more she hears from shareholders encouraging a buyback, the more likely they'll buyback or increase their buybacks this quarter if they are already doing so.

 

Phone: 416.350.3388

 

She returns calls promptly.

 

Dundee should be buying back their prefs at these prices (>half off sale). Oil & some of their holdings will most likely rebound strongly at some point in the not so distant future.

[Cardboard]

Some monetization on the way:

 

http://www.stockwatch.com/News/Item.aspx?bid=Z-C%3aDC-2349361&symbol=DC&region=C

 

Cardboard

[sculpin]

No kidding - share price went from $13 to about $5.

"Last year was a challenging one for our company. Nevertheless, we have taken steps to improve liquidity, lower our costs and develop our wealth management business," said David Goodman, Chief Executive Officer of the Corporation.

Still they are estimating that year end value of the Company's assets are over $15 - not bad for a stock trading at only $6. Assuming one believes their valuation methodology...

 

The Corporation is reporting a marked-to-market value per share of approximately $15.45 at December 31, 2015, reflective of the underlying trading prices of its portfolio of securities, and after changes in the carried value of its investment in United Hydrocarbon.

 

http://finance.yahoo.com/news/dundee-corporation-reports-2015-fourth-231334407.html

 

Still believe the preferreds are the best way to play Dundee Corp.

 

[sculpin]

From Seeking Alpha. Interesting comment from Safety...

 

http://seekingalpha.com/article/3965298-therapy-focus-private-companies-alzheimers-spotlight#comment-72020750

 

Safety in Numbers, Contributor

 

Comments (92) |Following |Send Message

 

Thanks for this article. I have a position in Dundee Corp ($DDEJF) common (DC.A:TSX) and preferred (DC.PR.D:TSX) and it offers interesting exposure to TauRx as they own a 4% position in the company which they valued at C$78m at year end or C$1.34 out of a stated C$15.45 NAV and a ~C$6.03 share price.

 

There has been some press suggesting an IPO of TauRX on the back of good data at values that are multiples of the current implied valuation on Dundee's balance sheet (i.e. more than the current market cap or EV of Dundee!). All this liquidity might do wonders for the market's perception of Dundee and not only increase the NAV significantly but also reduce the discount to NAV it trades at resulting in huge upside.

 

For example, this article in the WSJ (http://on.wsj.com/1qWK97o) speculates on a US$15bn IPO for TauRX which would be worth about ~C$13 to Dundee. This would take its stated NAV to about C$27 and perhaps a more traditional NAV discount of 30-40% would take the share price to somewhere between~C$16-19 vs the C$6.03 now.

 

[SafetyinNumbers]

Thanks for posting my SA comment Sculpin. I didn't know this thread existed until just now.

 

I own way more of the preferred (DC.PR.D) than the common as I too think it's a safer way to play Dundee in general but the catalyst is pretty compelling so I added some common since January.

 

I think that if this catalyst comes through we'll see some sort of tender offer for the preferred with the additional liquidity. I had a chance to chat with the CEO in January and came away thinking if the management team had its way they would prefer not to have the preferred or any debt left at the holding company. Obviously, this was my view so maybe he was just agreeing with me to make me go away!

[sculpin]

I have about an equal weighting in both the 5yr reset and the T-Bill floater. Surprised the yields are as high as they are with the amount of assets underlying Dundee and such a small amount of debt ahead of us in the capital structure. A monetization like you speak of in Taurx would lay any financial distress worries to rest and should see the DC prefs trade at much lower yields. How low? Perhaps 6% - this would imply a $23 price on the DC.PR.B (currently $13.50) and about $19 on the DC.PR.D (currently $12). These would be enormous capital gains to go with the healthy dividend income.

 

I like the fact that I will get the $1.42 annually (about 10.5% preferred dividend yield at $13.50) from the DC.PR.B until it resets in September 2019 - hopefully the 5 year bond yield is higher by then.

 

Dundee Securities Series 2 (DC.PR.B) $1.422 30 Sep 19 5YR + 4.1%

 

I like the floater as the current yield is quite high for this type of security and it gives nice protection from a pick up in interest rates at the short end of the curve. It is currently yielding about 9.5% at $12.

 

Dundee Securities Series 3 (DC.PR.D) $1.14 Floating 90Day + 4.1%

[SafetyinNumbers]

I agree on the yields and think the Canaccord pref are in the same boat and their balance sheet is mostly cash that exceeds the preferred outstanding at par!

 

I'm sure you know this sculpin but for the benefit of the thread, I believe the DC.PR.D are better than the DC.PR.B if your holding period is to the reset date of September 2019 (or longer) as the issues are interconvertible at every reset date. If you factor in the capital gains on the D's (all else being equal) you get an overall return that exceeds the B's by a couple percent and its a little more tax efficient.

[sculpin]

NAV holding well & should get help from commodity rebound. From GMP....

 

Dundee Corporation1 BUY

DC.A-TSX

 

Last:C$6.10

 

May 16, 2016

 

Target: C$12.00

 

Q1/16 – NAV slightly lower

 

Our Q1/16 undiscounted NAV/sh. is $15.29 (previously $15.77). Our NAV was

slightly lower q/q as gains in publicly traded investments were more than

offset by lower cash at the corporate level and a small decline in the carrying

value of United Hydrocarbon, which we believe may have been FX related.

The discount to NAV remains wide at ~60%. We believe that some investors

may be continuing to apply deep discounts to certain private investments.

 

Key updates on private investments

 

United Hydrocarbon (UHIC), a privately held oil and gas development and

production company focused on the Republic of Chad, suspended drilling

operations in early 2015 due to lower oil prices. Per DC.A management, UHIC

requires ~US$1 million/monthly to maintain existing properties. Management

continues to pursue a joint venture partner to restart operations when oil

prices become more favourable.

 

TauRX Pharmaceuticals is a privately held neuroscience company focused on

the development of drugs for Alzheimer’s disease. We continue to take a

cautious approach as we await results from phase III clinical trials. We expect

trial results to be available in Q3/16.

 

We believe management is using Goodman & Company, Investment Council

Inc. as a platform to build out a wealth management business. In our view,

good progress was made during the quarter, with AUM increasing to $187

million from $88 million last quarter. On the call, management noted they are

pursuing acquisitions to add immediate scale. Both AUM and distribution

acquisitions are being considered. We believe a larger deal may result in the

business being carved out into a publicly traded vehicle. As a reminder, DC.A

completed the sale of substantially all assets of Dundee Goodman Private

Wealth subsequent to the end of the quarter. Management anticipates that

deal will free up ~$40 million in liquidity, much of which will be re-allocated

to support growing the wealth management business.

Maintain BUY – NAV discount remains wide

 

Our undiscounted NAV is $15.29 (previously $15.77). We apply a 20%

discount to yield our price target of $12.00 (unchanged). Shares remain well

below even our most conservative NAV estimates (see figure 1 on page 3).

We maintain our BUY rating.

[SafetyinNumbers]

Good size move today, up 12.5%, ahead of the AGM on Monday afternoon.

 

Is anyone attending?

[gr33ngi4nt]

A really big move... can't find any news that would explain it. Are we expecting something at the AGM? Thanks in advance.

[SafetyinNumbers]

I don't think so.

 

I'm sure they will highlight the NAV north of $15 and of course they have a decent amount of gold and oil investments which have rallied in the past few months and weren't really reflected in the stock price.

 

I have also heard that TauRX will put out its phase III results on July 27 in Toronto during the Alzheimer's conference being held that week.

 

If you missed it or are taking profits on DC.A you might want to buy the preferred, DC.PR.D instead. Big yield and a chance for credit spread to decline as NAV discount closes.

[SafetyinNumbers]

I decided to get exposure to this TauRx catalyst on July 27 by buying the August 9 calls.

 

I'm not much of an option buyer as usually I have no idea when the market will begin to appreciate the value that I see. However, with this being a potentially giant under the radar catalyst, I figured the downside in the equity on a negative result might be bigger than the premium paid.

 

I continue to own the Class D prefs as well.

 

Anyone else involved?

 

 

[sculpin]

I decided to get exposure to this TauRx catalyst on July 27 by buying the August 9 calls.

 

I'm not much of an option buyer as usually I have no idea when the market will begin to appreciate the value that I see. However, with this being a potentially giant under the radar catalyst, I figured the downside in the equity on a negative result might be bigger than the premium paid.

 

I continue to own the Class D prefs as well.

 

Anyone else involved?

 

Interesting - are you certain TauRX comes out on that date?

 

Rebound in golds should be helping NAV as well. Own some GMP preferreds as well based on the catalyst that they will sell RichardsonGMP for some good sized dollars.

[bskptkl]

http://taurx.com/clinical-trials/

 

[SafetyinNumbers]

Thanks bskptkl.

 

It's interesting how much press Genting is getting on this. They are a much bigger company with a bigger stake but its much more relevant to DC because of the relative size of the stake to market cap.

 

http://www.theedgemarkets.com/my/article/all-eyes-gentings-taurx-wager

 

 

[bskptkl]

Thanks bskptkl.

 

It's interesting how much press Genting is getting on this. They are a much bigger company with a bigger stake but its much more relevant to DC because of the relative size of the stake to market cap.

 

http://www.theedgemarkets.com/my/article/all-eyes-gentings-taurx-wager

They're paying a pr hack for publicity methinks.

[SafetyinNumbers]

Yeah maybe.

 

I don't know anything about Malaysian equity markets. I would assume $30bn market caps makes it one of the biggest companies there so maybe some big fish small pond effect.

[bbarberayr]

I personally don't trust Dundee ever since they did something back in around 2007 which showed me that their interest was in management compensation, not helping customers.

 

What happened is they had a gold fund which held share in multiple companies.  They then signed an agreement extending the management contract for several years.  A few months later they decided to sell the shares and buy an operating mine and become an operating company, which was fine, but they were also required to pay out the management contract of about $30 million dollars. 

 

I immediately sold and have never bought or invested with Dundee since.

[sculpin]

I personally don't trust Dundee ever since they did something back in around 2007 which showed me that their interest was in management compensation, not helping customers.

 

What happened is they had a gold fund which held share in multiple companies.  They then signed an agreement extending the management contract for several years.  A few months later they decided to sell the shares and buy an operating mine and become an operating company, which was fine, but they were also required to pay out the management contract of about $30 million dollars. 

 

I immediately sold and have never bought or invested with Dundee since.

 

Yes there are definitely some warts on this Toad but that is one of the reasons that a value investor can buy:

 

1.Fairly well backed preferred shares in a time of NIRP yielding >10% currently and 50% to 60% of par,

2. DC common trading between 30% and 60% of NAV over the last few months.

 

Management self interest may at some point align with all shareholders such that the purchase at these levels has paid off extremely well.

 

 

 

[SafetyinNumbers]

I personally don't trust Dundee ever since they did something back in around 2007 which showed me that their interest was in management compensation, not helping customers.

 

What happened is they had a gold fund which held share in multiple companies.  They then signed an agreement extending the management contract for several years.  A few months later they decided to sell the shares and buy an operating mine and become an operating company, which was fine, but they were also required to pay out the management contract of about $30 million dollars. 

 

I immediately sold and have never bought or invested with Dundee since.

 

I think that was the formation of DPM you are referring to back in 2004. I believe they did pay out the management contract in stock but it went to Dundee Corp the parent and not to the management directly (although they own a lot of Dundee Corp). That doesn't make it better if you were a DPM shareholder but an important distinction if you are investing in Dundee Corp.

[SafetyinNumbers]

Apparently Dundee Acquisition is close to a deal. This could be worth 50 cents to NAV.

 

http://www.theglobeandmail.com/report-on-business/streetwise/closing-in-on-a-deal-to-break-spacs-silence/article30998140/

 

TAUrx catalyst is next week as well. Could be a big week!

[sculpin]

Dundee (TSX-DC.A):

·        Stock may trade down today.  They own about 5% of Taurx.  TauRx (private) has a Phase 3 Alzheimer's drug candidate (a new class in development) that missed its primary endpoint = failed trial

·        Should come as no surprise as 99% of Alzheimer's drugs in development have failed