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

[petec]

It makes a lot of sense and I’ve been thinking the same. Unfortunately under MIFID2 in Europe ALL securities that pay out based on a reference value are termed PRIIPS and PRIIPS can only be sold in Europe if they come with a Key Information Document or KID. KIDs are 3 pages long and are so summarised as to be actively unhelpful but apparently we are all too stupid to read the real underlying documents. Anyway, obviously only European issuers give a fuck about it this and issue KIDs so the unintended consequence is Europeans can’t buy floating rate bonds or prefs issued outside Europe. (Or maybe it was an intended consequence - capital controls anyone?) And this comes in just when rates are rising and the only way to protect yourself is ... a floating rate bond! And while I’m on a roll, the final straw is that I’m British, and we are leaving the EU, so why are we implementing the damned regulation anyway?

 

In case you can’t tell I’m bloody annoyed. I’ve emailed Dundee and asked them to consider preparing a KID. They are pretty basic and can refer to a prospectus so it would take about five minutes. Got no reply. (Atlantic Power replied and said no.)

 

Grrr.

[doc75]

The new guy has said that 100 positions is way too many and wants to cleanup. If that happens then liquidity has to dramatically increase which should certainly alleviate fears around the preferreds.

 

Makes any sense?

 

Cardboard

 

Agreed with most of your points, and I've been holding my nose and buying.

 

Many of the 100+ holdings must be of very low value. I hope that they are aggressive with their clean-up process.  I think market sentiment would improve dramatically  if they were to cut their losses on some of the larger non-performing holdings. It's not like anyone is currently assessing these things at their carrying value anyway. So the writedowns wouldn't be a surprise, and the simplicity/transparency gained would be significant.

 

The market is currently pricing this business to anticipate "more of the same".  Any substantive action demonstrating that the new sheriff is optimistic and will run things differently would be very welcome.  (Along these lines, I think management is being unnecessarily stubborn/noncommittal regarding repurchases and insider purchases.)

 

[Cardboard]

"Along these lines, I think management is being unnecessarily stubborn/noncommittal regarding repurchases and insider purchases."

 

Isn't this crazy to you that while they are a large holder (9.6 million shares or still worth $17 million) and their family is highly associated to this company, that it takes other people to tell them what to do or the obvious? And even then they refuse?

 

I mean if the salaries were much larger than the stake I could see the incentives but, here?

 

Cardboard

[sculpin]

"Along these lines, I think management is being unnecessarily stubborn/noncommittal regarding repurchases and insider purchases."

 

Isn't this crazy to you that while they are a large holder (9.6 million shares or still worth $17 million) and their family is highly associated to this company, that it takes other people to tell them what to do or the obvious? And even then they refuse?

 

I mean if the salaries were much larger than the stake I could see the incentives but, here?

 

Cardboard

 

There is a reason I titled this thread "Dumbdee"...

[doc75]

There is a reason I titled this thread "Dumbdee"...

 

Indeed.  Although perhaps the title needs to be updated to reflect that it has moved from a "30% of NAV bargain?" to a "17% of NAV bargain?"!!

[sculpin]

Horizon Kinetics done selling??

[Cardboard]

I have been buying the preferreds "B".

 

Amazing value and they would have to screw up in a crazy way to impair these. And even if partially impaired, they are at $11.40 vs par of $25...

 

Cardboard

[doc75]

I have been buying the preferreds "B".

 

Amazing value and they would have to screw up in a crazy way to impair these. And even if partially impaired, they are at $11.40 vs par of $25...

 

Cardboard

 

Ditto.  And couldn't resist picking away at some common in the mid $1.70s. 

[Rod]

I’m split half and half between B prefs and common. I’ve been reinvesting the dividends from the prefs into common. I don’t average down—I set a position size at the beginning, so reinvesting divs is all I can do. Feels good to get a 12% yield then reinvest that in assets that seem to be worth at least double or triple the price I’m paying.

[sculpin]

Dundee: An Under The Radar Holding Company Trading At A Significant Discount To Conservative NAV

https://seekingalpha.com/article/4167479-dundee-radar-holding-company-trading-significant-discount-conservative-nav

 

Summary

 

Trades at a significant discount to conservative NAV of $4.41 per share, compared to stated NAV of $10.36.

 

Dundee has a variety of levers to pull to realize value for shareholders; it continues to de-risk the portfolio and is reducing costs at the corporate level.

 

The Goodman family has significant financial and reputational skin in the game and has never sold a share.

 

Liquidity concern re preferred notes due 2019 is unwarranted as it has the option to pay cash, issue common shares or a combination of the two.

 

[Foreign Tuffett]

A couple questions after 15 minutes of research:

 

Aren't they liquidity-constrained? Based on the CC comments they have 60 million in cash needs this year. Next year they'll have to make a decision on how they want to redeem the (82 million par value?) preferred. The idea is that they will sell off assets to raise cash, thus closing the large market price-NAV spread right? Why haven't they been more aggressive in selling off assets to raise cash?

 

Do they have any major subsidiaries that will likely be cash generative in the near future? Similarly, do they have any subsidiaries that are strong businesses?

 

 

 

[sculpin]

A couple questions after 15 minutes of research:

 

Aren't they liquidity-constrained? Based on the CC comments they have 60 million in cash needs this year. Next year they'll have to make a decision on how they want to redeem the (82 million par value?) preferred. The idea is that they will sell off assets to raise cash, thus closing the large market price-NAV spread right? Why haven't they been more aggressive in selling off assets to raise cash?

 

Do they have any major subsidiaries that will likely be cash generative in the near future? Similarly, do they have any subsidiaries that are strong businesses?

 

Well their position in Dundee precious metals is publicly traded and currently worth $118 million - this could be sold easily over the next year to raise money to redeem those preferreds.

[SafetyinNumbers]

I think it’s important to note that holders chose to redeem less than allowed at previous redemption dates of DC.PR.E and that will likely be the case on June 30, 2019.

 

Its possible, they will trade like DRM.PR.A which trade at a premium to par and are puttable at any time.

[obtuse_investor]

I ran into a writeup about Dundee today from Roumell Asset Management, which is a value shop of the Ben Graham variety.

 

http://www.roumellasset.com/pdf/update_1Q2018.pdf

 

It includes a SOTP analysis and their conservative estimate of NAV comes to about $4.40/share. The writeup is on pages 5 and 6.

 

Enjoy.

[doc75]

I ran into a writeup about Dundee today from Roumell Asset Management, which is a value shop of the Ben Graham variety.

 

http://www.roumellasset.com/pdf/update_1Q2018.pdf

 

It includes a SOTP analysis and their conservative estimate of NAV comes to about $4.40/share. The writeup is on pages 5 and 6.

 

Enjoy.

 

Just FYI the Seeking Alpha post above is from the same outfit.

 

I really don't understand fears over the pref A redemption.  There are plenty of levers to pull.

[sculpin]

A couple questions after 15 minutes of research:

 

Aren't they liquidity-constrained? Based on the CC comments they have 60 million in cash needs this year. Next year they'll have to make a decision on how they want to redeem the (82 million par value?) preferred. The idea is that they will sell off assets to raise cash, thus closing the large market price-NAV spread right? Why haven't they been more aggressive in selling off assets to raise cash?

 

Do they have any major subsidiaries that will likely be cash generative in the near future? Similarly, do they have any subsidiaries that are strong businesses?

 

Well their position in Dundee precious metals is publicly traded and currently worth $118 million - this could be sold easily over the next year to raise money to redeem those preferreds.

 

Here is more on Dundee PM which is worth about $2 per DC.A share at the current price and about $3.25 per Dundee share at Paradigm's $5 target price....

 

In Summary....

Dundee Precious Metals: Hosted a lunch with DPM senior mgmt recently… in sum, it’s a cheap name that has deep value and a lot of growth within the next 12-18 months.

• The Tsumeb smelter is operating efficiently – generated FCF for the first time of $7m in 2017 and CEO Rick Howes tells us we can expect $12-15m FCF going forward at Tsumeb

• With both mines operational in 2019… AuEq >350koz @ $600oz AISC for the next 3 years….

• We expect DPM to generate $120m in FCF each year between 2019-2021

• Cheapest of the junior producers:

o 0.49x p/nav, vs junior producer avg. of 0.91x.

o 5.2x p/cf, vs junior producer avg. of 7.1x.

 

 

 

Dundee Precious Metals Inc.

RESEARCH NOTE | May 1, 2018

Don MacLean, Sr. Analyst | 416. 360.3459 |dmaclean@paradigmcap.com

Don Blyth, Analyst| 416.360.3461| dblyth@paradigmcap.com

Lauren McConnell, Analyst | 416.366.7776 | lmcconnell@paradigmcap.com

 

Open Path to Revaluation

 

Investment Thesis. DPM has the potential to achieve a substantial rerating, based on strong

growth over the next 1–2 years, but first it must prove it can operate its Tsumeb smelter profitably

and secondly DPM, now with permitting and financing complete, it must build the Krumovgrad

mine. We believe it can.

 

Event

 

We hosted a client lunch on April 24 with members of DPM’s senior management team

(CEO, CFO, SVP Corporate Development and Investor Relations). While DPM has

already experienced strong outperformance, up 19% in the last year, we believe a

further 30–50% rerating is setting up to occur in 2018 as the Tsumeb Smelter

continues to perform and remains cash flow positive, Chelopech remains a steady core

performer and Krumovgrad moves toward first concentrate in late 2018, positioning

DPM for a >100% increase in cash flow.

 

Highlights

 

 Smelter Transitioning to Free Cash Flow | Five years of construction finally

wound down in 2017 with an essentially new plant. Smelters require continuous

operation and the on-and-off nature of tying in rebuilt parts of the project precluded

this. The only continuous aspect was that the operating team constantly had to

learn new features about the processes. Since Q1/17, Tsumeb has essentially

been able to operate continuously, save the annual refractory relining (now every

14–15 months), showing that it is able to break even or better. Nameplate capacity

is 240KTpa. It produced 220Kt in 2017 and is guided to 220–250KTpa in 2018, with

upside to 265KTpa without further construction capital. Our C$7.27/sh NAV for

DPM attaches zero value to the smelter (Figure 1), which we suspect other analysts

do as well. Indeed, the market might assign a negative intrinsic value via a risk

discount, given the long history of capital consumption ($50M acquisition plus

$365M construction, plus sustaining capex). Our luncheon discussion confirmed

that there are no longer obstacles to prevent Tsumeb from operating continuously,

or extra capital items required that will prevent it from generating net free cash flow.

If it can do so in 2018, together with the three-quarter stretch in 2017, we would

expect the market to gradually lower its smelter risk discount.

 Construction of Krumovgrad on Time and Below Budget I As of March 31,

Krumovgrad’s construction was 59% complete with $96.3M having been spent and

a further $66–$72M to be spent over the next two quarters (total $162–$168M,

budget $178M). Commissioning and start-up are expected in Q3/18 with first

concentrate production in Q4/18 (targeted for November). Krumovgrad’s production

is expected to average 103Koz/year for the first five years, increasing DPM’s gold

production by an average of 60% and boosting our estimated cash flow by an

average of 75% during that timeframe.

 

Chelopech Continuing to Deliver I Chelopech has been DPM’s cash flow engine, and while

grades have been declining to align with reserve grade, this has been offset by productivity improvements. The mine, now one of the most modern in the world, is positioned to deliver

relatively steady grades and hence cash flow going forward. Until 2016, exploration at Chelopech had focused in-mine. DPM now has several targets that it is testing outside of the current mine area, but still very close to existing infrastructure. It has planned 15,000m this year, comprising 10,000m infilling existing holes at the Southeast Breccia Pipe Zone (SEBPZ)

and 5,000m at the Krasta target (Figure 2). Underground drilling at SEBPZ in 2017 confirmed

the potential for economically significant high-sulphidation style copper-gold mineralization over the 1,500m strike length. This year the focus will be to conduct systematic underground drilling to test the large areas between previous drilling. At the Krasta target, drilling only

began in late 2017 with two surface diamond drill holes showing encouraging results with alternation and copper-gold mineralization similar to the Chelopech high-sulphidation style

ore bodies.

 

 What’s Next for DPM? I A substantial valuation multiple lift (about one-third) typically comes with growing a company from a Junior to an Intermediate producer. For us, the threshold is +250–300Koz/year. We estimate that DPM will produce gold in concentrate of 263Koz and 305Koz in 2019 and 2020, respectively, and will generate net free cash flow of $75M and $150M. Once Krumovgrad is up and running in Q4/18, will it deploy this cash and, if so, how?

Management feels that it should be deployed. An operating project would be ideal, otherwise a development/advanced exploration-stage project would make sense, particularly in Eastern

Europe, where it has a solid track record and understanding. In our April 9 Gold Sector research note, we suggested that DPM and Nevsun Resources (NSU-T, C$5.20 TP, Buy) would be a good fit as Nevsun proceeds with its Timok project in Serbia, where DPM also has exploration/development projects (Lenovac, Timok and Tulare projects). Another possibility

could be Sabina (SBB-T, C$3.25 TP, Speculative Buy), of which it currently holds ~10% of

the shares outstanding. DPM acknowledged that it has always liked the project and the upside potential that Back River has (see our April 18 research note), but had always viewed SBB as too big. That might change in 2018–2019. Sabina’s market cap is $333M and the preproduction capex is $426M (our estimate), whereas DPM’s market cap is $453M. It would be a large bite, but one that could be considerably more doable with DPM’s US$75–

US$150M/year of net free cash flow and if a rerating of DPM occurs.

 

Valuation & Conclusion

 

We think that DPM is positioned for a rerating among the Junior Producers in 2018. It is now finally able to offer more predictable performance and free cash flow from its existing operations, the smelter in particular, followed by strong growth starting in late 2018 from the new Krumovgrad mine. If

investors can gain confidence that the smelter will be at least self-funding and Krumovgrad starts up

without the problems experienced by most new projects these days, we think DPM could see a 30–

50% rerating, possibly more. It stands to reason that it will take multiple quarters before investors stop looking for the elephant in the room, but the upside is considerable and we believe it is achievable. DPM is trading at 0.45x NAV@5%, assuming spot gold of $1,315/oz and zero value for the smelter. Our Junior and Intermediate averages are 0.91x and 0.81x, respectively. We mention both tiers

because with 2019–2021 production of 263–305Koz/year, plus copper, DPM will be on the 250–

300Koz/year threshold of our Intermediate category. With base metal and gold multiples now very

similar, we like DPM’s blend of copper and gold. The smelting element might keep its valuation

multiple below its gold peer average, but we still we see potential for a further 30–50%+ relative outperformance over the next year. DPM remains a Top Pick with a Buy rating and C$5.00 target.

 

[doc75]

Dundee's Q1 report was released this morning.  More losses, yawn.  NAV down to $10.06 from $10.36 at Dec 31.

 

Some highlights:

 

- Raised approx $43mm from asset sales, mostly publicly listed securities.  Details weren't provided but it appears that they've sold off some (all?) of their shares in Osisko.  No sales of Dundee Precious Metals or eCobalt Solutions.

 

- They had $37mm cash at end of Q.

 

- All of their subsidiaries experienced operating losses, except for Dundee Energy (small gain due to accounting gimmickry) and UHIC (revaluation of future royalties given higher oil price).

 

- The Parq "ramp up" is not going as well as expected. They put another $17mm into the project.  Refinancing unlikely to happen in Q2, probably Q3 or Q4.

 

- Put another $7mm into Blue Goose, which had a $6.4mm operating loss.  They were asked on the call if/when they would throw in the towel on some of these losers.  No clear answer aside from saying the status quo is not an option.

 

- They're "streamlining" GCIC and expect to move the bulk of the AUM to other platforms.  Unclear what effect this will have on GCIC's numbers.

 

- Only two analysts on the call.  Very few probing questions.

 

 

 

 

[sculpin]

GMP commentary....

 

Dundee Corporation BUY

 

DC.A-TSX

 

Last: C$1.89  May 14, 2018 ▼ Target: C$5.90

 

Q1/18 – Streamlining continues

 

Undiscounted NAV $7.37

 

Dundee Corp. (DC.A-TSX) reported its Q1/18 results on May 14, 2018. Our NAV

of $7.37 versus $8.00 previously was lower q/q largely due to losses

recognized in its equity accounted investments and the continued

underperformance of some of its investments. The discount to NAV is

consistent at ~74%, largely unchanged q/q.

 

Notable events

 

Proceeds of $43.0 million was recognized from the sale of a basket of

securities (Osisko Mining Inc. being one) – non-core to the business. A portion

of the proceeds were invested in Parq Vancouver ($17.4 million). GCIC

reported AUM of $210.8 million, an increase of $16.7 million, y/y. GCIC has

indicated that during Q2/18, it will complete a streamlining of its private client

line of business, following which ~$130 million in AUM will be transferred to

other platforms. Relief efforts through government compensation has been

sought with responses expected in Q2/18, for a wildfire that resulted in higher

feed costs for Blue Goose.

 

Parq guidance

 

Parq Vancouver became fully operational in Jan/18. The initial ramp up of

operations were slower than expected due to regulations and higher costs.

However, Parq Vancouver is forecasting improved results in Q2/Q3 – in line

with an improved outlook on the overall tourism industry in B.C. Funding of

$33.4 million by two partners were invested into the project in order to meet

certain obligations.

 

Maintain BUY – Strategic review

 

In our view, management has made some progress towards meeting key

objectives. Management has created an industry-focused capital markets

group with the hire of four seasoned professionals; subsidiaries will proceed

with their streamlining activities to reduce annual corporate cash needs. Net

cash at the corporate level was ~$37.2 million exiting the quarter. Our NAV is

now $7.37 (previously $8.00). The discount to NAV remain largely consistent at

~74%. We apply a 20% discount to yield our target of $5.90 (previously $6.40).

We maintain our BUY rating. See Figure 1 for our NAV sensitivity analysis.

[doc75]

Osisko released an underwhelming resource estimate for their Windfall deposit yesterday after market close.  OSK shares are currently down 20%.  I wonder what price Dundee got for their shares. 

[lessthaniv]

A 50% allocation of investment dollars between the commons and the preffered seems to make sense to me. Net dividends of 5.75%. The pref is acquired at <50% of par which hedges the capital invested into the common if you believe in the safety of the prefs. Limits the downsize exposure immensely but still gives significant exposure to the undervalued common. A textbook asymmetric bet.

 

Value here is visible. Hence, I’ve joined the party.

[Cardboard]

I am a little over 50% into the stock but, totally agree with you Lessthaniv.

 

Let's hope that this Goodman or Jonathan finally wakes up sometime this summer when he is done with his portfolio review and does something constructive.

 

Oh, and I had to hold myself yesterday not to call in and to tell Lucie to go FU in her retirement and hoping to never hear from her again!

 

Cardboard

[doc75]

I am a little over 50% into the stock but, totally agree with you Lessthaniv.

 

Let's hope that this Goodman or Jonathan finally wakes up sometime this summer when he is done with his portfolio review and does something constructive.

 

Oh, and I had to hold myself yesterday not to call in and to tell Lucie to go FU in her retirement and hoping to never hear from her again!

 

Cardboard

 

Do you have something specific against Lucie?  Just curious.  I don't hold her responsible for bad investing decisions and I found her answers to questions were generally quite thorough and explanatory.  But I haven't been following this company for years so don't know any of the history.

[sculpin]

Recent review of the Marriott at Parq including many photos....

 

https://pointswise.ca/jw-marriott-parq-hotel-review-water-view-guest-room-vancouver-bc/

 

 

 

 

[doc75]

The B prefs are on sale again, trading with a yield over 12.5%. 

[Cardboard]

That new CEO will finish his review of the portfolio this summer and then will take action...

 

Seriously, how much analysis do you need to figure out that buying your debt at 46 cents on the dollar is a good deal?

 

Cardboard