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

[doc75]

I took a pretty good short position this AM. The huge selling pressure from the prefs is likely to hurt the stock dramatically after the exchange takes place. Also, new buyers can buy the prefs at a discount which will lower demand for the shares.

 

I actually think the terminal value for minorities here is zero. Their strategic plan is to invest their incoming funds into merchant bank deals in the junior mining sector. I expect all incoming funds to go to crappy juniors and exec comp. They will probably do a tender after the deal closes, but I bet it's at <$1.

 

Funny.  I have far more faith in their ability to invest in junior miners than I do in their ability to invest in regular operating businesses.  That says a lot.

 

I just finished listening to the call.  Apparently Delonex is doing a very "professional" job of the exploration in Chad, but it  appears we won't hear anything until at least summer (when they meet with Delonex for an overview).  The current TauRx trial (LUCIDITY) is now scheduled for completion in June 2020, and apparently it's now a core holding so it'll just sit there for at least another year.  There was some discussion during the Q&A today about the possibility of selling the TauRx shares in a secondary market.  If that's remotely possible then they'd be idiots not to sell, IMO.    They admit that both TauRx and UHIC are zeros or heroes.  I think TauRx is almost certainly a 0. 

 

They're still working on the Parq refinancing, hoping to announce something by end of April -- not that "hopes" correlate well with reality for this company.  They admit they were overly optimistic and they'll definitely take a bath but believe it's still worth more than current carrying value.

 

The series 5 conversion is expected  to close around May 15.  They were asked where they'd get the cash to do a tender and satisfy their G&A + dividend obligations.  The answer was that they have $100-150m of assets up for sale.  My guess is that sales will be underwhelming and any tender will be modest at best. 

 

 

 

 

 

[doc75]

I share your sentiment.  I had only the Series 2 & 3 preferred but have now exited them all. I wouldn't be surprised if management will screw the Series 2/3 holders next, e.g. suspending the dividends citing cash constraints. Today's pop may be as good as it gets - I could be wrong and overly pessimistic though since with the Series 5 conversion, the 2 and 3 are indeed in a much better position in the capital structure.  OTOH the ice cube is melting very quickly (continuing Parq losses / cash infusion, selling assets below book value, throwing cash at junior miners, G&A, etc.)

 

A very valid concern, IMO, and I think it will keep a pretty tight lid on those pref prices. 

[Cardboard]

I think that you guys are way too pessimistic.

 

The share count goes from 63 million to around 105 million with this conversion. It is significant but, it is far from debentures forced conversion or a restructuring a la Bellatrix today.

 

Balance sheet will see an $82 million reduction in preferred debt and dividend cost goes down by $6.2 million/year. So $130 million is then left in pref B and D or only recourse debt. So 38% of debt is gone without spending a dime of cash. Instead they used stock trading at $1.35 to redeem debt with stock valued at $2.

 

On the call they said that Parq should hopefully be restructured by the end of April with same group who loaned $20 million in September.

 

Also working on 3 sales: 360, CSE and Blue Goose. Apparently that land value at Blue Goose is less than it was but, it did not collapse by half. It was estimated at $100 million prior.

 

Per my notes, cash at holdco on Sept 30 was $26.3 million and public holdings worth $152.3 million. At Dec 31, and prior to completion of sale of Union Group for $14.5 million, cash at holdco was $38 million and public holdings worth $166 million. Since then DPM has gone up around 24%. That is another $31 million.

 

So liquidity is going up, not down. And with this conversion, there is no longer any forced sale which should help DPM being valued properly and their other negotiations.

 

The risk that I don't like is this CRA thing.

 

So no, I don't think it is a good short from now on as you are exposing yourself to potentially very positive news on Delonex which would be significant, the balance sheet got better and liquidity is also getting better.

 

If they had choosen instead to try to repay this preferred in full, then financial risk would have been much higher. I can see the argument about stock market mechanics or preferred holders unloading at any cost but, again people don't throw money away if they see that a return of capital is possible with a little more patience.

 

I also doubt very much that most of these "E" were held by funds mandated to invest in preferreds. These would have been considered too risky by most of these funds. The fact that you did not see a full exercise of that partial redemption for $25 in cash in Q1 2018 is also an indication of poor sophistication.

 

I still think that it is a pretty dumb move as I strongly believe that an extension of at least 60% of the preferred E should have been feasible. So the upside and gap to to value in the stock has certainly decreased but, so is the risk.

 

Cardboard

 

 

[Rod]

I think that you guys are way too pessimistic.

 

The share count goes from 63 million to around 105 million with this conversion. It is significant but, it is far from debentures forced conversion or a restructuring a la Bellatrix today.

 

Balance sheet will see an $82 million reduction in preferred debt and dividend cost goes down by $6.2 million/year. So $130 million is then left in pref B and D or only recourse debt. So 38% of debt is gone without spending a dime of cash. Instead they used stock trading at $1.35 to redeem debt with stock valued at $2.

 

On the call they said that Parq should hopefully be restructured by the end of April with same group who loaned $20 million in September.

 

Also working on 3 sales: 360, CSE and Blue Goose. Apparently that land value at Blue Goose is less than it was but, it did not collapse by half. It was estimated at $100 million prior.

 

Per my notes, cash at holdco on Sept 30 was $26.3 million and public holdings worth $152.3 million. At Dec 31, and prior to completion of sale of Union Group for $14.5 million, cash at holdco was $38 million and public holdings worth $166 million. Since then DPM has gone up around 24%. That is another $31 million.

 

So liquidity is going up, not down. And with this conversion, there is no longer any forced sale which should help DPM being valued properly and their other negotiations.

 

The risk that I don't like is this CRA thing.

 

So no, I don't think it is a good short from now on as you are exposing yourself to potentially very positive news on Delonex which would be significant, the balance sheet got better and liquidity is also getting better.

 

If they had choosen instead to try to repay this preferred in full, then financial risk would have been much higher. I can see the argument about stock market mechanics or preferred holders unloading at any cost but, again people don't throw money away if they see that a return of capital is possible with a little more patience.

 

I also doubt very much that most of these "E" were held by funds mandated to invest in preferreds. These would have been considered too risky by most of these funds. The fact that you did not see a full exercise of that partial redemption for $25 in cash in Q1 2018 is also an indication of poor sophistication.

 

I still think that it is a pretty dumb move as I strongly believe that an extension of at least 60% of the preferred E should have been feasible. So the upside and gap to to value in the stock has certainly decreased but, so is the risk.

 

Cardboard

 

I think Cardboard's analysis here is pretty much spot on. One of the risks that concerned me was that they would keep putting money into Parq, but on the call they seemed to be saying that they haven't put money in in months and won't in the future. Blue Goose appears near a sale of the cattle assets and ongoing losses seem to be minor now. I'm optimistic that the company starts to improve from here and starts to build equity. Long term I see increasing equity giving more and more support to the B/D prefs and their prices moving up over time. Right now, just taking publicly traded assets, Android at $23M, loan to Eight Capital at $15M, cash of $38M less preferreds, you get about $1.50 per share of equity. Now add upside optionality to that, principally Chad and money salvaged from sales of smaller private assets, and the value of tax losses.

 

At this point you have to judge whether the new investments they make in the mining sector will be wise or not. I tend to think they will be decent because the sector is so bombed out and Jonathan Goodman has the mining background to do it well. They will be fishing where the fish are. The stock may well trade lower due to selling pressure from the converted stock, but I believe that will produce a very good buying opportunity. For now I'm heavily invested in the B/D prefs.

[Cardboard]

Failed to mention that what is left in "debt" or preferreds B and D is $130 million of financing/capital with no repayment schedule, ever, costing around 5.7% or $7.4 million/year.

 

All they have to do is to pay that amount each year and they can keep that for as long as they want. It is not bad at all financing terms. No covenant, no bank review, etc.

 

And if they ever have a decent amount of excess cash I am about certain that they could still buy back a fair amount of these on the open market at a good discount to par based on how others are trading on the market with better credit rating.

 

Cardboard

[bizaro86]

If you're going to value it as a sum-of-the-parts you should take an NPV of the cost of their management team/G&A out. A collection of investments that comes with a cost in perpetuity along with it is worth less than the value of those investments.

 

I'm not that concerned about "good news" risk in the short term. While I think the terminal value here is more likely to be zero than a double from here, I don't think their incentives are to release any good news now. I do think they'll do a tender for some of the common at some point here, probably not until the post-exchange capitulation. So it doesn't make sense for them to talk up the stock until then.

 

You can analyze all their actions with "what is the best for the Goodman's" and you'll come to the right conclusion 100% of the time, and if they are going to do a buyback (to keep their stake up) a lower price in the interim is better for them.

 

Earlier in the thread folks were asking why there was no management buying if management thought it was cheap, and the answer is they knew this was coming. As mentioned, trading $1.35 in stock (or $1.15, or less...) when you can get $2 in prefs in exchange for it is a good deal, but you wouldn't want to put your capital in front of the dilution.

 

I think its likely there will be a buying opportunity, but probably not until after the exchange offer shares have cleared. 

[gokou3]

I notice Ned Goodman transferred his stakes to a trust just a couple days before the bloodbath:

 

https://www.canadianinsider.com/node/7?menu_tickersearch=DC+%7C+Dundee

 

Wonder if anyone knows the rationale / benefit for the Goodman for this transfer?

[Rod]

If you're going to value it as a sum-of-the-parts you should take an NPV of the cost of their management team/G&A out. A collection of investments that comes with a cost in perpetuity along with it is worth less than the value of those investments.

 

I'm not that concerned about "good news" risk in the short term. While I think the terminal value here is more likely to be zero than a double from here, I don't think their incentives are to release any good news now. I do think they'll do a tender for some of the common at some point here, probably not until the post-exchange capitulation. So it doesn't make sense for them to talk up the stock until then.

 

You can analyze all their actions with "what is the best for the Goodman's" and you'll come to the right conclusion 100% of the time, and if they are going to do a buyback (to keep their stake up) a lower price in the interim is better for them.

 

Earlier in the thread folks were asking why there was no management buying if management thought it was cheap, and the answer is they knew this was coming. As mentioned, trading $1.35 in stock (or $1.15, or less...) when you can get $2 in prefs in exchange for it is a good deal, but you wouldn't want to put your capital in front of the dilution.

 

I think its likely there will be a buying opportunity, but probably not until after the exchange offer shares have cleared.

 

I don't think you're crazy to short it. I wouldn't do it myself. But you can make a decent case that selling pressure from the new shareholders will push down the stock and the Goodmans are unlikely to buy enough shares at a high enough price to put a big dent in that decline. You're right that the incentives are for them to buy cheap as possible.

 

I don't worry about management overhead in my valuation because I don't expect a bloated structure. If they become simply a passive investment company, then I think they will run with very few employees. Maybe half a dozen. As it is, their plans are to operate an active advisory business with multiple services. Obviously that would require more employees to run it. And that cost will get factored into the valuation of the advisory business they develop. They are going to be a hybrid structure, the investment holdings you could value at market, the advisory business is where you net out the bulk of the G&A and value that business based on the net earnings. So the costs are all accounted for. Currently much of the employee count is probably devoted to dealing with the legacy assets that are in the process of being disposed of. I expect that the numbers will continue to shrink.

 

The lack of insider buying was one of the reasons I believed that conversion of the E's was going to happen. The other major reason was the long delay in putting out a proposal to renegotiate.

[Rod]

I notice Ned Goodman transferred his stakes to a trust just a couple days before the bloodbath:

 

https://www.canadianinsider.com/node/7?menu_tickersearch=DC+%7C+Dundee

 

Wonder if anyone knows the rationale / benefit for the Goodman for this transfer?

 

It looks like Ned is simply passing control onto his four sons, who are the trustees. So I guess it's a natural evolution. I doubt timing has anything to do with it. Ned has been silent for a long time and I wonder if he is experiencing declining health, either mental or physical. He may be getting his affairs in order.

[lessthaniv]

Not an expert in trusts but likely the change of ownership would trigger a deemed disposition tax wise. It would be strategic to do that along the lows in the stock.

[sculpin]

https://princeoftravel.com/blog/review-jw-marriott-parq-vancouver

 

[sculpin]

If they sell Blue Goose & CSX exchange holdings and succeed in refinancing Parq over the next 2 months would like to see them take the $30 to $40 million and do a substantial issuer bid in the range of $1.25 to $1.50 for 25 million shares.

 

Once this is complete put in a normal course issuer bid to opportunistically buy back up to 10% of 75mm or so shares left outstanding after the Dutch auction bid.

[bizaro86]

Not an expert in trusts but likely the change of ownership would trigger a deemed disposition tax wise. It would be strategic to do that along the lows in the stock.

 

I think the question was why do that before the exchange was announced, as there would be a predictable drop after the announcement. Then you could lock in an even lower price for the deemed disposition.

 

I think it's possible that the answer is that Ned has a loss on his shares. Given the size of the position and Canadian tax law, realizing a larger loss may not make sense. So doing it earlier might eliminate a tax loss he can't use while giving the trust a higher coat basis.

 

That's just speculation, but the furthest back I could find a DC.A chart was 1995, when it traded at $1.86. I know there have been some distributions that would have split a cost basis since then (Dream née Dundee Realty for example) but it's also possible he's got some high cost shares added along the way.

 

That's just idle speculation, but it seems to fit the fact pattern. They would have definitely know the exchange offer was coming and that it would hurt the price of the common...

 

[Cardboard]

"I took a pretty good short position this AM."

 

By the way, which broker got you a large number of shares to short of an illiquid stock, trading below $2 hence not marginable and usually unavailable for retail accounts?

 

Cardboard

[bizaro86]

"I took a pretty good short position this AM."

 

By the way, which broker got you a large number of shares to short of an illiquid stock, trading below $2 hence not marginable and usually unavailable for retail accounts?

 

Cardboard

 

Large means different things to different people, naturally, and I meant relative to how I would normally size a naked short, not large compared to the size of AUM some have on here.

 

That said, I got the borrow from interactive brokers, which had quite a bit of availability. It's been trickling down the last few days, and they only have 85k shares left now. You can check their availability online, which is one of the many reasons they're my favorite broker. (And why I have an IBKR long position).

[petec]

Just updating my NAVPS. As a common holder I love the conversion of the prefs - materially reduces risk while still leaving multibagger potential (although that's increasingly dependant on UHIC). My NAVPS for the common now ranges between $0.90 and $7, so I quite like the risk/reward. The $0.90 assumes virtually all the investments bar DPM are a 0, but does value the prefs at market not par - in other words it basically assumes they sell DPM and buy back the prefs, or swap DPM for prefs at market. The $7 is mainly driven by current BV less TauRx plus something for Parq, with the big driver being UHIC finding oil and the probability assumptions in that DCF going to 100%.

 

I am intrigued by Parq - they have written off the entire equity and pref equity position, and a third of their (small) debt position. Downside risk is very limited here unless they pour more capital in. But when I play around with scenarios based on ebitda, refinancing rates, and FFO cap rates it wouldn't surprise me if there is some value in the prefs at least. And just about the only good thing about this investment is that Dundee has moved further up the cap structure with every additional investment so they get more of any upside than the other owners do.

 

Question: has anyone seen a call transcript?

[colinwalt]

You mean of the Q4 call?

 

https://seekingalpha.com/article/4251829-dundee-corp-ddejf-ceo-jonathan-goodman-q4-2018-results-earnings-call-transcript

[petec]

I do - thanks.

[petec]

An accounting question...

 

Blue Goose is consolidated (Dundee own 89%). It has external debt but it also has $29m of intercompany liabilities that reduce minority equity. I assume this includes the $15m convertible debenture that Dundee owns. Does anyone know what the rest is?

 

Also how are the intercompany liability and the $15m convertible pref accounted for at Dundee? Are they eliminated as an intercompany asset? (They're not in private debt - that's $25m, split $15m Eight Capital and $10m Parq).

 

NB BG is on Dundee's books for $27m, just below the value of the intercompany asset/liability.

 

I'm mainly asking because I don't want to double count, but it's also interesting to think about sale scenarios. The good thing is BG doesn't have to have equity value for Dundee to get some cash back. The bad thing is if Dundee only sell the equity, and there's no concurrent refinancing, they may be stuck with the debt.

 

[Rod]

An accounting question...

 

Blue Goose is consolidated (Dundee own 89%). It has external debt but it also has $29m of intercompany liabilities that reduce minority equity. I assume this includes the $15m convertible debenture that Dundee owns. Does anyone know what the rest is?

 

Also how are the intercompany liability and the $15m convertible pref accounted for at Dundee? Are they eliminated as an intercompany asset? (They're not in private debt - that's $25m, split $15m Eight Capital and $10m Parq).

 

NB BG is on Dundee's books for $27m, just below the value of the intercompany asset/liability.

 

I'm mainly asking because I don't want to double count, but it's also interesting to think about sale scenarios. The good thing is BG doesn't have to have equity value for Dundee to get some cash back. The bad thing is if Dundee only sell the equity, and there's no concurrent refinancing, they may be stuck with the debt.

 

You might want to email the CFO to get an answer. I haven't tried to figure out Blue Goose to that degree because I am just assuming it's worth zero to be conservative.

[sculpin]

Beacon...

 

Dundee Precious Metals Inc. (DPM-T)

12 Month Target: $7.40 (was $6.65) | Buy (unch)

 

Site Visit Update

 

Last week we attended a site visit to evaluate both of the company's operating mines in Bulgaria; Chelopech and Krumovgrad.  We were extremely pleased with all aspects of both operations.  At Krumovgrad, DPM has already won an award for the environmentally responsible mine design and we expect there will be many more awards to come.  The process plant should be 100% finished by month end and will likely end up being $10m under budget.  Despite being under budget, the plant utilizes the latest and greatest technology and we now expect the life of mine recoveries will be above forecast in the feasibility study.  The gold concentrate produced could possibly even grade as high as 500 g/t once the mine is fully ramped up.

 

At Chelopech, we were even more impressed.  This is absolutely the best looking underground mine we've ever and seen and is why it has won so many awards.  Additionally, the management structure and buy-in from the mining unions is unparalleled.  This is reflected in its cost performance.  The mine runs at about 6,100 tonnes a day and has mining costs of $14/t, processing costs of $8/t and all in costs (before royalties - which the company can't control) of about $32/t.  Simply put, that is fantastic.  There is also loads of available capacity throughout the mine and plant and thus the company is focusing a great deal of effort on in mine (and near mine) exploration.  As a reminder, Chelopech has operated uninterrupted for over 65 years and currently has eight to nine years of life in reserves.

[sculpin]

Year end commentary from the Ravensource Fund...

 

https://www.ravensource.ca/financials.php?sub_name=2018

 

Dundee Corporation (“Dundee”)

 

Dundee (TSX: DC.A) is a publicly listed holding company headquartered in Toronto. Founded in

1991, Dundee became one of the largest independent asset managers in Canada.

In 2011, Dundee sharply pivoted from what worked in the past by selling its asset management

and real estate crown jewels only to hastily spend the proceeds on speculative new investments

across ~100 holdings mostly in industries in which Dundee had no expertise. These new

investments have performed abysmally, causing Dundee to write-down approximately 70% of its

invested capital only a few years after they were made. In turn, Dundee’s common shares has fallen

in value by over 95% since its peak in 2013 while its Series 2 & 3 preferred shares tumbled to

approximately 50 cents on the dollar despite being Dundee’s most senior securities. Across the

capital structure, Dundee’s investors lost confidence, panicked and fled.

 

Free of emotional baggage carried by existing investors, we worked to determine whether there

was opportunity within the chaos. With Dundee’s portfolio of ~100 names, we first performed

triage to cull the smaller and speculative investments and focused our analytical rigour on the

remaining few with tangible and obvious value. Our analysis concluded Dundee’s assets were

worth in excess of the face value and 3x the market value of its preferred shares. We were also

attracted to the preferred shares’ 12% dividend yield, equivalent to 15.7% interest on a bond

factoring in the tax advantages of dividends. In the third quarter of 2018 we began buying the Series

2 & 3 preferred shares, based on a large margin of safety, healthy yield and potential catalysts for

meaningful capital appreciation.

[sculpin]

https://www.bloomberg.com/news/articles/2019-04-29/vancouver-s-once-rollicking-casinos-hit-by-dirty-money-crackdown

 

Meanwhile, Dundee has said it’s seeking to bring in a new partner to Parq by Tuesday. All told, investors had pumped more than C$1 billion in long-term debt and equity into Parq by the end of 2018, according to filings. Dundee, which put in C$142 million of that  :o :o, has said it doesn’t expect to fully recover its investment and that it could take another year or two before Parq is closer to stable operations.

 

"They don’t necessarily think they’re going to get their money back," said Hood. "But they do think that they’ll get a substantial portion back and that’s why they don’t just give up and sell it."

[bizaro86]

https://www.bloomberg.com/news/articles/2019-04-29/vancouver-s-once-rollicking-casinos-hit-by-dirty-money-crackdown

 

Meanwhile, Dundee has said it’s seeking to bring in a new partner to Parq by Tuesday. All told, investors had pumped more than C$1 billion in long-term debt and equity into Parq by the end of 2018, according to filings. Dundee, which put in C$142 million of that  :o :o, has said it doesn’t expect to fully recover its investment and that it could take another year or two before Parq is closer to stable operations.

 

"They don’t necessarily think they’re going to get their money back," said Hood. "But they do think that they’ll get a substantial portion back and that’s why they don’t just give up and sell it."

 

The first Parq reference in Dundee's filings is in their March 2015 AIF.

 

It must have taken some really impressive talent to lose dramatic amounts of money in a real estate development located in Vancouver over the past 4 years...

[Rod]

https://www.bloomberg.com/news/articles/2019-04-29/vancouver-s-once-rollicking-casinos-hit-by-dirty-money-crackdown

 

Meanwhile, Dundee has said it’s seeking to bring in a new partner to Parq by Tuesday. All told, investors had pumped more than C$1 billion in long-term debt and equity into Parq by the end of 2018, according to filings. Dundee, which put in C$142 million of that  :o :o, has said it doesn’t expect to fully recover its investment and that it could take another year or two before Parq is closer to stable operations.

 

"They don’t necessarily think they’re going to get their money back," said Hood. "But they do think that they’ll get a substantial portion back and that’s why they don’t just give up and sell it."

 

The first Parq reference in Dundee's filings is in their March 2015 AIF.

 

It must have taken some really impressive talent to lose dramatic amounts of money in a real estate development located in Vancouver over the past 4 years...

 

You'd think so, but Parq is not just a condo building. The size, complexity and uniqueness raise the uncertainty level dramatically. I think the mistake was doing something so far outside their circle of competence. These guys are not developers. They had no business getting involved. Parq has the fingerprint of Ned Goodman's later stage "Master of the Universe" persona that led to so much capital destruction. It's pretty sad that he succumbed to hubris after such a long and successful career and blew everything up.