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

[sculpin]

 

Jim Roumell

 

Author’s reply » Dundee liquidates Red Leaf for $9.2 million 30% above our estimate of $7 million.

 

Dundee sells 500K shares of DPM.

finance.yahoo.com/...

 

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

[petec]

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.

 

My understanding is that Ned was brilliant, and then shot himself in the foot buying a lot of crap after the crisis, motivated (I think) by the belief that money printing would lead to runaway inflation.

 

I am not sure to what extent Mark contributed to that but he certainly started to unwind it. Then he fell ill and Jonathan took over.

 

I believe Jonathan had an important role in building DPM, which is undeniably a success, and he has made good decisions since taking over Dundee. So I think we are in OK hands and I certainly don't view the fact that Ned is no longer in charge as a negative.

 

If I am wrong, someone please correct me.

[petec]

 

Jim Roumell

 

Author’s reply » Dundee liquidates Red Leaf for $9.2 million 30% above our estimate of $7 million.

 

Dundee sells 500K shares of DPM.

finance.yahoo.com/...

 

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

 

I think this was below BV though.

 

They also sold $2.5m of DPM, ceasing to be a control person so that DPM has better fundraising options (apparently). They timed this sale beautifully from what I can see.

[sculpin]

FY20 we model FCF of US$136 mln for an impressive 19% FCF yield

 

January 9, 2020

 

Dundee Precious Metals Inc.

DPM (TSX): C$5.18

Stock Rating: Outperform

Target: C$8.50

 

Risk Rating: Above Average

 

Ada Tepe Supports Solid Operational Q4/19

 

Ada Tepe FY19 Production at Top End of Guidance Range

 

Production beat. Q4/19 consolidated gold production of 69.5k oz (NBF 65.2k oz), up 3.9k oz q/q and 7% above our

estimates. Gold sales of 82.1k oz (NBF 80.6k oz) were up 42.5k oz q/q as the Q3/19 sales deficit was resolved, as expected.

Copper production of 10.0 mln lbs (NBF 9.1 mln lbs) was flat q/q. Mine-by-mine highlights include:

● Q4/19 Chelopech production of 43.0k oz (NBF 40.9k oz), up 2.7k oz q/q and modestly above our estimates. FY19 production

of 173.4k oz was in line with the guidance range (155-187k oz).

● Q4/19 Ada Tepe production of 26.5k oz (NBF 24.3k oz), up 1.7k oz q/q, delivering continued solid performance in its second

quarter of commercial production. Positively, FY19 production of 57.2k oz lands near the top end of the guidance range

(45-60k oz).

Measurable FCF on deck. After preliminary updates, our estimates have improved slightly, and we model Q4/19 FCF of

~US$27 mln (vs. Q3/19 of US$10.2 mln), benefiting from higher gold sales and metal prices (~US$1,483/oz in Q4/19 vs.

US$1,461/oz in Q3/19), with offset from commencement of prepaid gold sales (~46.2k oz over 6 qtrs). Our Q4/19 FCF

estimates factor DPM's ~US$7.7 mln investment in INV Metals Inc. (INV: TSX) which closed Oct. 28, 2019. Looking ahead, for

FY20 we model FCF of US$136 mln for an impressive 19% FCF yield.

Maintaining Outperform rating and $8.50 target. Trading at P/NAV 0.68x (peers 0.80x), P/CF20 4.0x (peers 4.5x) and P/

CF21 3.0x (peers 4.0x). Our target is based on 5.0x EV/EBITDA NTM (100%). DPM reports financials after market close on

Feb. 13 with the conference call scheduled for Feb. 14 that 9 AM EST (dial-in: 1-844-264-2104).

 

Don DeMarco, (416) 869-7572, [email protected]

Associate: Rabi Nizami, (416) 869-7925, [email protected]

Associate: Harmen Puri, (416) 869-8045, [email protected]

[Cevian]

Anyone listened in today?

[sculpin]

In the MD&A, Dundee have marked their investment in Taurx down to $40mm which represents just over $30 US per Taurx share.

 

applied a value per share of US$30.60, the equivalent of a 50% discount to the volume-weighted average price of ordinary shares issued from treasury during 2015 and 2016.

 

The new investor in Taurx is buying shares at $200 US which is 6.5 times the carrying value of DC's Taurx investment on the books. While these shares do have other rights (marketing of drug in Asia etc), the $200US/share value would value Dundee's interest in Taurx at $260 million Canadian or about $2.50 per DC share.

The investor subscribed for 500,000 class B preference shares at an aggregate subscription amount of US$100 million or US$200/share.  The new class of preference shares does not have any liquidation preferences but convey to the holder a call option to acquire commercialization rights for LMTX® over certain territories in Asia.  The preferences shares are convertible to ordinary shares on a one-to-one basis upon the attainment of pre-specified regulatory and/or listing objectives alongside the injection of a further material amount of cash.

[ADcure]

Would that investor be Genting or someone else?

Thanks

[petec]

Stock v strong on at least 3 separate days recently, including +30% today. I feel like someone knows something...

[Sportgamma]

Stock v strong on at least 3 separate days recently, including +30% today. I feel like someone knows something...

 

And at the same time, the prefs aren't moving.

[sculpin]

 

 

Good read on Dundee from Ravensource Fund - smart activist style investors. Let's hope they are able to convince the Goodman's to chop G&A more, get more aggressive on selling non core & core assets at decent values & direct proceeds to increase value of both the common & preferred...

 

 

Dundee Corp. (“Dundee”) Through a combination of an increase in market prices and dividends earned, our investment in Dundee’s preferred shares was our top performer in 2019, generating a total gross return of 52.5% and increasing the value of your Ravensource investment by 3.4%.

 

Dundee is a Canadian, publicly listed holding company (TSX: DC.A) with investments across a broad spectrum of industries. Ravensource has an investment in Dundee’s Series 2 & 3 preferred shares, which are the highest-ranking securities in Dundee’s capital structure. We believe the preferred shares are mis-priced – the company’s tangible assets are worth several times our purchase price of approximately $12 per $25 preferred share – and there are win-win restructuring initiatives to capitalize on the mis-pricing that the Stornoway Team can help actualize.

 

Our 2019 performance was a result of actions taken by Dundee to de-risk itself and create material asset value of which the preferred shareholders were the prime beneficiaries. Stornoway identified and advocated certain of these initiatives directly to Dundee’s CEO in late 2018 and early 2019. Most importantly, Dundee removed the #1 risk facing our investment by converting $82 million of Series 5 preferred shares that ranked equally with our preferreds into common shares that rank behind us (the “Equitization”). In effect, we jumped the queue to the claim on Dundee’s assets. 

 

While the Equitization was the watershed moment, other value-enhancing milestones in 2019 included non-core asset sales; a buyback program for our Series 2 & 3 preferreds; and Dundee Precious Metals completing its second gold mine, enabling the initiation of a dividend to Dundee.

 

Despite its increase in price over 2019, Dundee’s preferreds continue to trade at just 60 cents on the dollar. This large discount persists even though the market value of Dundee’s publicly traded stake in Dundee Precious Metals alone is worth 2.7x the preferred shares’ market price, and Dundee’s common shares have a market capitalization of more than $115 million despite ranking behind the preferred shares. If the markets are rational, our preferred shares should trade closer to $25.  But to do so, it will take a more encompassing solution than the company has embarked on to date. 

 

In 2019, much was achieved to de-risk Dundee and increase the value of our investment. However, neither we — nor the market — are satisfied. Dundee must aggressively expand its efforts to stream-line its bloated overhead, sell non-core assets and opportunistically restructure its liabilities. Rest assured, in 2020, we will up our ante and intensify our engagement with the company to enhance Dundee’s stakeholder value and capture the value lying dormant in its preferred shares.

http://www.ravensource.ca/storage/documents/1587402336-Ravensource_Fund-Letter_to_Unitholders-December_31__2019.pdf

 

 

[petec]

Dundee has agreed to sell 20m shares in DPM at 6.35 and warrants for a further 10m at 8.

 

C$127m to Dundee and $C207m if the warrants are exercised.

 

 

[bskptkl]

They upsized DPM offering to 24 million units for proceeds of $152 million. If the $8 warrants are exercised, they would have only 30k DPM left.

Impressive. I thought they would hang around and collect DPM dividends for years.

Cash could be over $175 million after this transaction - $1.75 per share.

Earnings after close tomorrow.

 

What will they do with the cash?

[petec]

I’d guess at a common stock buyback and investments in mining small caps, which are crapped out.

 

I’d go so far as to say that Jonathan Goodman has not put a foot wrong - but the most difficult part, which is restarting growth, is yet to come.

[petec]

Notably the $8 warrants are only valid for 12 months so Dundee keep upside above 8 if it takes longer than a year to get there. Quite a smart deal structure.

[doc75]

I’d guess at a common stock buyback and investments in mining small caps, which are crapped out.

 

I’d go so far as to say that Jonathan Goodman has not put a foot wrong - but the most difficult part, which is restarting growth, is yet to come.

 

Why do you guess common buyback over prefs?  I'd imagine an SIB for the prefs before a common buyback, given that it decreases cash outlay going forward.  I *hope* something is in the works with respect to their capital structure.  I'm expecting that COVID is also forcing them to put more capital into some of their bigger operating businesses. 

[bskptkl]

I’d guess at a common stock buyback and investments in mining small caps, which are crapped out.

 

I’d go so far as to say that Jonathan Goodman has not put a foot wrong - but the most difficult part, which is restarting growth, is yet to come.

 

Why do you guess common buyback over prefs?  I'd imagine an SIB for the prefs before a common buyback, given that it decreases cash outlay going forward.  I *hope* something is in the works with respect to their capital structure.  I'm expecting that COVID is also forcing them to put more capital into some of their bigger operating businesses.

The preferred shares are permanent capital with no covenants and a reasonable rate. I wouldn't SIB them, maybe pick them off a little by little. The common however - that I would SIB a boatload - say $75 million buyback at $1.50 per share? That could retire half the shares outstanding.

[doc75]

I’d guess at a common stock buyback and investments in mining small caps, which are crapped out.

 

I’d go so far as to say that Jonathan Goodman has not put a foot wrong - but the most difficult part, which is restarting growth, is yet to come.

 

Why do you guess common buyback over prefs?  I'd imagine an SIB for the prefs before a common buyback, given that it decreases cash outlay going forward.  I *hope* something is in the works with respect to their capital structure.  I'm expecting that COVID is also forcing them to put more capital into some of their bigger operating businesses.

The preferred shares are permanent capital with no covenants and a reasonable rate. I wouldn't SIB them, maybe pick them off a little by little. The common however - that I would SIB a boatload - say $75 million buyback at $1.50 per share? That could retire half the shares outstanding.

 

Yes, sorry, my question was about what Dundee *would* do (given that they want to continue extracting their salaries and rebuild the empire), not what they should do to maximize shareholder equity. :)

 

Agreed that the prefs are permanent capital. I wouldn't expect them to repurchase near par.  But they do continue to drain liquidity so I could see them making an SIB somewhere in the 7-8% yield range.   

 

I'll be both pleased and surprised if they commit to a large-scale commons buyback. 

[petec]

They talked about doing a common buyback after they converted the series 5 prefs, but never had the cash.

 

Now they have a boatload of cash.

[Rod]

I doubt there will be much buyback activity for some time. The common is cheap but not necessarily cheaper than other investment opportunities they have. And the prefs are actually expensive relative to other safer prefs IMO, many of which trade around $10. The prefs have run up to $15 seemingly on speculation of a large imminent tender offer. I don’t think management is going to feel obligated to reward this “front running”. I expect they will wait for them to drop back. I sold all my B and D prefs.

[petec]

Other safer prefs IMO, many of which trade around $10.

 

May I ask which?

[Rod]

Other safer prefs IMO, many of which trade around $10.

 

May I ask which?

 

I would suggest Brookfield Office Properties. I own BPO.PR.N

 

I like them because they are receiving dividends from the core office property segment of Brookfield Property Partners (BPY). This is the safest part of BPY (not retail). And there is no way that dividends will be suspended because BPY can’t access the cash flow from it’s office properties without first paying the BPO divs. BPY needs that cash to pay its own distribution and support it’s retail segment through these hard times.

[SafetyinNumbers]

Other safer prefs IMO, many of which trade around $10.

 

May I ask which?

 

I would suggest Brookfield Office Properties. I own BPO.PR.N

 

I like them because they are receiving dividends from the core office property segment of Brookfield Property Partners (BPY). This is the safest part of BPY (not retail). And there is no way that dividends will be suspended because BPY can’t access the cash flow from it’s office properties without first paying the BPO divs. BPY needs that cash to pay its own distribution and support it’s retail segment through these hard times.

 

I like the prime floaters for credit quality and upside if rates ever go up like BAM.PR.B, BCE.PR.H and TRI.PR.B. I think GMP.PR.B and AZP.PR.C have high yields because investors haven't appreciated the fundamental changes in the respective businesses. We could see some compression in yields over time plus they are rate resets.

[sculpin]

M Partners note on DC....

 

We have a Research Note on Dundee Corporation (DC.A – TSX).

 

Dundee Corporation released Q1/20 financial results after market close yesterday. In the quarter, Dundee recorded a net loss of $166.4M ($1.63/share), compared to earnings of $14.9M ($0.21/share) in Q1/19. The majority of the loss was driven by 84%-owned United Hydrocarbon International Corp. (UHIC), which reported a net loss of $117.5M primarily related to a fair value change in royalty interest and associated contingent bonus payments. This makes a minimal impact on our view of the value of Dundee for the following reasons:

 

The fair value change is largely driven by the steep decline in the price of oil, which could rebound once the economy restarts, or within the 2-3 years before first oil is expected for UHIC. Thus future quarters could see a gain on value in this investment. Assumptions were also negatively affected by changes in the discount rate and probability of success, and pushing out first oil by one year

 

Our core book value analysis always attributed zero value to UHIC's business (Resource Assets on the balance sheet), since it was based on a binary event of achieving first oil in Chad, with contingent bonus payments for meeting certain milestones and royalties on oil produced. In our view, this is additional upside, and fluctuations in the interim period are quite irrelevant to Dundee's value.

 

The loss in the quarter was also impacted by a $61.1M depreciation in the market value of investments, including a $39.8M decline in value of Dundee Precious Metals (DPM-TSX | BUY $9.50 TRGT). DPM is by far its largest position, and since quarter end has appreciated 40% ($64M). Other core positions such as Jervois Mining (JRV-TSXV | N/R) and Reunion Gold (RGD-TSXV | N/R) have appreciated since March 31.

 

Subsequent to quarter-end on May 7, Dundee announced that it had entered into an agreement with RBC Dominion Securities Inc. and Stifel GMP to sell 23.9M units of Dundee Precious Metals at $6.35/unit. Each unit consists of 1 common share owned by DC.A and one-half common share purchase warrant with an exercise price of $8.00 for 12 months. Through this transaction which closed today, Dundee will be generating $151.8M in cash, and through warrant exercise would generate a total of $247.4M. Prior to this sale, Dundee held 35.9M shares of DPM, or 19.83%. It will now own 6.62%, and less than 1% if warrants are fully exercised.

 

Our current core book value analysis indicates a target price of $2.60/share, in line with our previous analysis in August 2019 but with significant improvement in margin of safety considering we estimate $1.55 in cash/share following the sale of DPM and repayment of $10.1M in debt drawn in Q1. While this was a tough quarter for Dundee Corp. and the business is not immune to COVID-19, we believe that its exposure to mining will serve DC.A shareholders well in the near future, and with the massive cash injection from the sale of DPM, the current share price's discount to our core book value is even more unjustified. In these uncertain times, cash is king. While management is assessing potential uses for the cash, we believe it is highly probable we see a larger repurchase of preferred shares (Series 2 and 3, both with ongoing NCIBs) and an SIB/NCIB for the common shares.

 

 

 

 

Research

T. 416.603.4343

F. 416.603.8608

E: [email protected]

www.mpartners.ca

70 York Street Suite 1500

Toronto, ON Canada M5J 1S9

 

 

[doc75]

Some TauRx news today:

 

https://www.newswire.ca/news-releases/taurx-reveals-study-results-that-offers-new-hope-for-treatment-of-patients-with-dementia-882883302.html

 

Really hope they can sell this before too long.

[sculpin]

Jonathan Goodman bought 1.5M shares @ $1.15 on May 15.  Always nice when the CEO buys 1.5% of the company.

 

Insiders and Polar own approximately 35% of the shares outstanding... sizable buybacks will further squeeze out the marginal sellers.