Fairfax stock positions

[gfp]

12 minutes ago, nwoodman said:

Another IRR 20%+ pre-tax?  12.2m shares @ 20.5 in 2018.  Say $65 adjusted sale price in 6 years.  I think it’s fair to say that this is supportive of the 15% CAGR thesis.  Well done.

 

I lost track of all the Stelco dividends over the years - are you factoring those in?

[gfp]

So Stelco is on the books under the equity method ("associates") and looks to be carried at $274.4m USD at the end of Q1.  There will be slight adjustments but looks like about a $392m USD write-up pre-tax.

[Junior R]

5 minutes ago, gfp said:

 

I lost track of all the Stelco dividends over the years - are you factoring those in?

The dividends would make it way higher as they paid many special dividends ...I think last year was $4

 

CAGR is prob 20% with Dividends 

[Hoodlum]

Faron Mining announced new equity investments this morning with Fairfax taking part. 

 

https://foranmining.com/wp-content/uploads/2024/07/Foran-News-Release-Foran-Announces-Strategic-Investments-by-Fairfax-Financial-Agnico-Eagle-and-other-Cornerstone-Investors-Formal-Construction-Decision-for-Phase.pdf

 

$222 million brokered private placement, with participation indications received from various existing long-term shareholders, including Fairfax, underscoring continued strategic support

 

[petec]

2 hours ago, nwoodman said:

Another IRR 20%+ pre-tax?  12.2m shares @ 20.5 in 2018.  Say $65 adjusted sale price in 6 years.  I think it’s fair to say that this is supportive of the 15% CAGR thesis.  Well done.

 

The board HATED this investment when it was made! 

[SafetyinNumbers]

2 hours ago, petec said:

 

The board HATED this investment when it was made! 

Alan says it’s a 32% CAGR

 

[gfp]

Fairfax bought about a year after the IPO I believe.  That might not reduce their CAGR though.  This has been a good one for FFH.

 

edit:  looks like Stelco went public for $17/sh and Fairfax bought most of the position about a year later for $20.50/share

Edited July 15 by gfp

[Viking]

6 hours ago, petec said:

 

The board HATED this investment when it was made! 

I was one of them. 
 

Here is an update on Fairfax’s investment in Stelco. Stelco is just one example of the significant value that is building on Fairfax’s balance sheet that will be realized in the coming years. This is the big thing most investors do not grasp (leading them to undervalue the company - still). This is likely a big reason why Fairfax continues to aggressively buy back stock at current prices - they know the value (although hidden) is there.

 

 

Edited July 15 by Viking

[gfp]

Fairfax only bought 12.2 million shares at $20.5 in November 2028.  Does anybody remember when, and at what price, they increased their position to 13 million shares or whatever it is currently?

[Junior R]

the next thing I think could happen within the next 1 year is the Bangalore airport IPO...which should add more gains to FFH...I just hate that FIH is so hard to buy as there is no volume and I try to put low ball offers like $13.90 lol

[SafetyinNumbers]

50 minutes ago, gfp said:

Fairfax only bought 12.2 million shares at $20.5 in November 2028.  Does anybody remember when, and at what price, they increased their position to 13 million shares or whatever it is currently?

Looks like Q1 2019

 

[gfp]

Thanks!  So even cheaper - great

[TwoCitiesCapital]

Any of y'all know how much Cairo Mezzanine Fairfax holds from the prior spin-off/restructuring of Eurobank? 

 

according to IB - my shares are up ~4x since October and so am wondering what kind of impact that has on their balance sheet at as one of the largest holders of Eurobank prior to spinning off these loans. 

[Junior R]

25 minutes ago, SafetyinNumbers said:

Looks like Q1 2019

 

I think he posted top of the page but heres another screenshot from Canadian insder

 

 

[StubbleJumper]

4 hours ago, petec said:

 

The board HATED this investment when it was made! 

 

I hated this investment when it was made.  A heavily unionized company in a commodity industry that was targeted by then-president Trump as a strategic sector, and it had already gone bankrupt to boot.  But, I guess there's a price for everything.

 

Beyond that, I think I might have bitched about what FFH's exit-strategy would be, because there seemed to be no exit-strategy for existing crap-positions like Blackberry or Resolute.  Well, this is a great exit with a fully acceptable ROI.  Kudos to management for having gotten in, and then more importantly, having gotten OUT of stelco profitably.

 

 

SJ

[SafetyinNumbers]

43 minutes ago, TwoCitiesCapital said:

Any of y'all know how much Cairo Mezzanine Fairfax holds from the prior spin-off/restructuring of Eurobank? 

 

according to IB - my shares are up ~4x since October and so am wondering what kind of impact that has on their balance sheet at as one of the largest holders of Eurobank prior to spinning off these loans. 

I believe 1 share was distributed for every 12 EUROB shares so it can’t be that big. Presumably FFH would have to equity account for it as well but probably on a lag. Since they reported in April, maybe we get that in Q2 results.

[gfp]

2 hours ago, TwoCitiesCapital said:

Any of y'all know how much Cairo Mezzanine Fairfax holds from the prior spin-off/restructuring of Eurobank? 

 

according to IB - my shares are up ~4x since October and so am wondering what kind of impact that has on their balance sheet at as one of the largest holders of Eurobank prior to spinning off these loans. 

 

Fairfax owns 49.99% of Cairo Mezz PLC, mostly in Eurolife FFH Life Insurance (46.9%).

 

So... Around EUR 63.6 million at market price - just under $70m USD ?

(edit: I agree this is obviously not marked to market on Fairfax's books)

Edited July 15 by gfp

[TwoCitiesCapital]

16 hours ago, gfp said:

 

Fairfax owns 49.99% of Cairo Mezz PLC, mostly in Eurolife FFH Life Insurance (46.9%).

 

So... Around EUR 63.6 million at market price - just under $70m USD ?

(edit: I agree this is obviously not marked to market on Fairfax's books)

+1

 

18 hours ago, SafetyinNumbers said:

I believe 1 share was distributed for every 12 EUROB shares so it can’t be that big. Presumably FFH would have to equity account for it as well but probably on a lag. Since they reported in April, maybe we get that in Q2 results.

+1 

 

I didn't think it would be terribly significant - but anything that is up 400% can quickly become so. 

[Junior R]

another 52 week high

[Viking]

Stelco - Reaping the Rewards of New Fairfax

 

On July 15, 2024, Stelco announced that the company had been sold to Cleveland-Cliffs for about C$70/share (C$60/share cash + .454 share of CLF). Total proceeds to Fairfax should be about US$666 million ($570 million for Stelco + $96 million for CLF shares). The deal is expected to close in Q4 of 2024.

 

Stelco is a great example of what I like to call ‘new Fairfax.’ In about 2018, Fairfax appeared to ‘tweak’ their value investing framework when it came to new equity purchases. One of the important changes was putting a much higher premium on partnering with great CEO/founders/owners. Fairfax’s new equity purchases since 2018 have been very good.

 

Stelco was purchased in November 2018. Fairfax decided to partner with Alan Kestenbaum (CEO/founder/owner of Stelco). Over the past 7 years, Kestenbaum has put on a clinic on how to do capital allocation (see below for more). In short, Kestenbaum has been a rock star - even Billy Idol would agree.

 

How has Fairfax’s investment in Stelco performed?

 

I know… I know… Show me the money!

 

In November 2018, Fairfax paid $193 million for 14.7% of Stelco. Over the past 3 years Stelco has repurchased 38% of all shares outstanding - so Fairfax now owns 23.6% of Stelco.

 

When Fairfax announced their Stelco purchase in late 2018 I hated it. At the time, it screamed ‘old Fairfax’ to me. Boy was I wrong.

 

Over its 6 year holding period, Fairfax stands to earn a total return of about $588 million, or 305%, on its investment in Stelco. The 6-years CAGR is 26.3%. That is an outstanding return.

 

The return is made up of:

• Regular and special dividends = $115 million ($47 + $68).
• Expected proceeds from sale:
  • Stelco shares sold = $570 million
  • Cleveland-cliffs shares received = $96 million

Fairfax has a carrying value for Stelco of $275 million (Q1 2024). When the deal closes in Q4, Fairfax will likely book a total pre-tax gain of about $392 million.

 

 

New Fairfax - Reaping the Rewards

 

Stelco is only one of the very good new investments that Fairfax has made since 2018. Fairfax has also ‘fixed’ most of their underperforming legacy equity holdings (purchased before 2018). As a result, the quality and earnings power of Fairfax’s current collection of equity holdings has never been better. Most importantly, the intrinsic value of their collection of equity holdings has been marching higher each year.

 

Fairfax is monetizing one asset today. More asset sales are coming - I think this sale might be signalling the beginning of the next wave of equity monetizations. And like the sale of Stelco, when they happen they will surface significant hidden value for shareholders. I think most investors do not fully grasp this part of Fairfax’s business model. It has been so long since this part of Fairfax was working (equities) its like they have forgotten about it. This is leading many investors to underestimate the future earnings of Fairfax. Which is leading them to undervalue (still) the company. Yes, that sounds nuts. But I think it is true.

 

Value investing 101 - the Fairfax Model - Sell high and buy low

 

There is a second even bigger benefit to what Fairfax is doing. Realizing significant value hiding on the balance sheet is good (selling high). But reinvesting the proceeds back into undervalued assets (buying low) is even better - when you include the power/effect of compounding over time.

 

In recent years, Fairfax has been putting on a clinic of the benefits of the P/C insurance / value investing business model. As a result, earnings, ROE and book value are spiking.

 

For the past 4 years most investors have been one step behind what is actually happening under the hood at Fairfax. I think this continues to be the case today. And I love it - because it tells me that despite the run up in the shares over the past 4 years, much more likely lies ahead (as Fairfax delivers earnings and ROE that continues to ‘surprise’ to the upside).

 

Stock buybacks

 

In 2024, Fairfax continues to aggressively buy their back stock. Why? They know the stock is still very undervalued. Why? They see the value of all the assets residing on their balance sheet - and they know many will be monetized in the future - surfacing an incredible amount of incremental shareholder value over time. And they know the proceeds will then be reinvested into wonderful undervalued opportunities - creating even more shareholder value over time. The set-up for Fairfax and its shareholders has never looked better.

 

Fairfax detractors

 

But talk to Fairfax detractors - and my guess is they still view Stelco as a shitty investment. They explain it away with ‘Fairfax got lucky.’ It is a commodity producer after all! It cracks me up when I hear the detractors talk about Fairfax’s equity holdings. They usually have no idea what they are talking about. But boy do they ever have a lot of conviction when they express their views.

 

What has made Stelco such a good investment for Fairfax?

 

The CEO of Stelco, Alan Kestenbaum.

 

Since buying Stelco out of bankruptcy in 2017 (via Bedrock Industries) his capital allocation decisions have been outstanding. Some examples:

• What did Stelco do with the earnings windfall from the historic bull market in steel in 2021 and 2022?

  • He bought back 38% of shares outstanding. And he did not overpay. That was freaking brilliant.

    • Fairfax’s ownership in Stelco increased from 14.7% to 23.6% - with no new money invested.

  • A significant amount was paid out in the past 6 years in dividends = C$11.03/share

    • Regular dividends = C$3.90/share and special dividends = $7.13/share.

• Two other brilliant moves by Kestenbaum:

  • April 2020 - Minntac deal: at a cost of $100 million, got an 8-year supply agreement with US Steel with option to purchase 25% of Minntac (the largest iron ore mine in the US) – done when Covid was raging. 

  • June 2022: real estate sale of ‘Stelco lands’ for C$518 million. The timing of this sale is looking brilliant - at what might be close to the peak of Canada’s real estate bubble.

• And the final act? Selling the entire company for C$70.00

Kestenbaum has been schooling the steel industry on capital allocation for the past 7 years.

 

—————

A short history of Fairfax’s investment in Stelco

 

In November of 2018, Fairfax invested US$193 million in Stelco, buying 13 million shares at C$20.50. At the time, it was a deeply contrarian purchase. I did not like it. It screamed ‘old Fairfax’ to me: buy a bad business in a bad industry. Boy, was I wrong.

—————

Stelco Corporate Presentation - Q1 2024 Results

• https://s201.q4cdn.com/143749161/files/doc_earnings/2024/q1/presentation/Q1-2024-Earnings-Presentation-FINAL.pdf

—————

News release on sale from Stelco

 

Cleveland-Cliffs to Acquire Stelco for C$70 per Share - July 15, 2024

• https://investors.stelco.com/news/news-details/2024/Cleveland-Cliffs-to-Acquire-Stelco-for-C70-per-Share/default.aspx

HAMILTON, Ontario--(BUSINESS WIRE)-- Stelco Holdings Inc. (TSX: STLC) (“Stelco” or the “Company”) is pleased to announce that it has entered into a definitive agreement (the “Arrangement Agreement”) with Cleveland-Cliffs Inc. (NYSE: CLF) (“Cliffs”), pursuant to which Cliffs has agreed to acquire all of the issued and outstanding common shares of Stelco (the “Transaction”) at a price of C$70.00 per share (the “Consideration”), consisting of C$60.00 in cash and 0.454 of a share of Cliffs common stock (equivalent to C$10.00 based on the closing price of Cliffs common stock on July 12, 2024) per Stelco share.

 

The total enterprise value pursuant to the Transaction is approximately C$3.4 billion. The Consideration represents an 87% premium to Stelco’s closing share price of C$37.36 on July 12, 2024, and a 37% premium to Stelco’s 52-week high.

 

Fairfax Financial Holdings, an affiliate of Lindsay Goldberg LLC, Alan Kestenbaum, and each of the other directors and executive officers of Stelco collectively holding approximately 45% of the current outstanding Stelco common shares have entered into support agreements to vote in favour of the Transaction, subject to customary exceptions.

—————

Comments from Prem about Stelco from Fairfax's 2022AR.

 

“2022 was an active and successful year for Alan Kestenbaum and the talented team at Stelco. The company ended the year with its second-best fiscal result since going public despite an approximately 50% decline in steel prices over the summer. Stelco is benefiting from the Cdn$900 million it has invested in its Lake Erie Works mill since 2017, which has made the mill one of the lowest-cost operators in North America. Stelco entered 2022 with an extremely strong balance sheet and put its capital to good use, completing three substantial issuer bids during the year, thereby repurchasing approximately 29% of its outstanding shares. These repurchases have resulted in Fairfax’s ownership increasing to 24% from 17% at the beginning of the year. In addition to share repurchases, Stelco paid a Cdn$3 per share special dividend and increased its regular dividend to Cdn$1.68 per share from Cdn$1.20 per share. Stelco maintains over Cdn$700 million of net cash on its balance sheet and we anticipate that it will continue to be active both investing in its operations and efficiently returning excess capital to shareholders. We are excited to continue as a significant investor in Alan Kestenbaum’s leadership at Stelco.” Prem Watsa – Fairfax 2022AR

—————

Details of Stelco’s Hamilton land sale in 2022, for proceeds of $518 million.

 

“Stelco Holdings Inc. (TSX: STLC) (“Stelco” or the “Company”) announced today that its wholly-owned subsidiary, Stelco Inc., has successfully closed a sale-leaseback transaction with an affiliate of Slate Asset Management (“Slate”). Stelco Inc. has sold the entirety of its interest in the approximately 800-acre parcel of land it occupies on the shores of Hamilton Harbour in Hamilton, Ontario to Slate for gross consideration of $518 million. In conjunction with the sale, Stelco Inc. has entered into a long-term lease arrangement for certain portions of the lands to continue its cokemaking and value-added steel finishing operations at its Hamilton Works site in Hamilton, Ontario.”

• https://www.thespec.com/news/hamilton-region/all-of-stelco-s-hamilton-land-sold-in-deal-that-would-see-it-transformed-into/article_17a333af-8198-5f97-9866-8c61ed8f799f.html?

—————

Details of Stelco’s agreement with US Steel in 2020 to securing long term supply for iron ore pellets.

 

Stelco Announces Option To Acquire 25% Interest In Minntac, The Largest Iron Ore Mine In The United States, And Entry Into Long-Term Extension Of Pellet Supply Agreement With U.S. Steel

 

“Stelco will pay US$100 million, in cash, to U.S. Steel in consideration for the Option (the "Initial Consideration"). The Initial Consideration is payable in five US$20 million installments, with the first installment paid upon closing of the Option Agreement and the remaining four installments payable every two months thereafter. Upon the exercise of the Option, Stelco would pay a net exercise price of US$500 million.”

 

Transaction Highlights:

• Secures long-term future of Stelco's steel production and solidifies Stelco's low-cost advantage
• Provides supply of high-quality iron ore pellets from a well-understood and consistent source for the next eight years, or longer if the Option is exercised
• Increases annual pellet supply to level required for Stelco's higher production capacity following this year's blast furnace upgrade project
• Supports Stelco's tactical flexibility model to deliver highest margin outcomes based on prevailing market conditions
• Creates a secure pathway for Stelco to become a vertically integrated player in the future through ownership in a low-cost iron ore source which is the largest producing iron ore mine in the Mesabi iron range
• Structured in stages that will preserve Stelco's strong balance sheet and financial flexibility

https://investors.stelco.com/news/news-details/2020/Stelco-Announces-Option-to-Acquire-25-Interest-in-Minntac-the-Largest-Iron-Ore-Mine-in-the-United-States-and-Entry-into-Long-Term-Extension-of-Pellet-Supply-Agreement-with-U.S.-Steel-04-20-2020/default.aspx

 —————

Here is a little more information of Kestenbaum’s initial investment in Stelco in 2017.

 

Purchase of Stelco out of bankruptcy: Bedrock gets steelmaker for less than $500 million

• https://www.thespec.com/business/stelco-deal-bedrock-gets-steelmaker-for-less-than-500-million/article_da943b70-1a93-5a35-acb4-92a6da05946a.html?

Edited July 17 by Viking

[Haryana]

Could this change to New Fairfax from old be totally unrelated to depature of ex President Paul Rivett?

 

I mean look at this press release. They are telling how he is going to retire full time and that is all to it.

"Paul Rivett has decided to retire as President of Fairfax in order to spend full time with his family."

https://www.fairfax.ca/press-releases/fairfax-financial-holdings-limited-executive-announcement-2020-10-13/

 

Just 2 years later we learn of him fighting hard and bitter on corporate control.

"The clash of the media barons: Inside Jordan Bitove and Paul Rivett's battle to control Torstar"

https://www.theglobeandmail.com/business/article-torstar-ownership-jordan-bitove-paul-rivett/

"After airing dirty laundry publicly, warring Torstar partners retreating behind closed doors"

https://nationalpost.com/news/publisher-apologizes-to-staff-for-public-spectacle-as-bitter-toronto-star-feud-heads-to-court

 

Edited July 16 by Haryana
clarity

[nwoodman]

5 hours ago, Haryana said:

Could this change to New Fairfax from old be totally unrelated to depature of ex President Paul Rivett?

 

I mean look at this press release. They are telling how he is going to retire full time and that is all to it.

"Paul Rivett has decided to retire as President of Fairfax in order to spend full time with his family."

https://www.fairfax.ca/press-releases/fairfax-financial-holdings-limited-executive-announcement-2020-10-13/

 

Just 2 years later we learn of him fighting hard and bitter on corporate control.

"The clash of the media barons: Inside Jordan Bitove and Paul Rivett's battle to control Torstar"

https://www.theglobeandmail.com/business/article-torstar-ownership-jordan-bitove-paul-rivett/

"After airing dirty laundry publicly, warring Torstar partners retreating behind closed doors"

https://nationalpost.com/news/publisher-apologizes-to-staff-for-public-spectacle-as-bitter-toronto-star-feud-heads-to-court

 

This has been my feeling for a while now.  Just not sure whether this line of thinking is all that constructive.  I think it is much better to be forward looking, and appreciate the changes that have taken place while preserving a framework that has served them well.  Hat’s off to @Viking in this regard.

[Parsad]

6 hours ago, Haryana said:

Could this change to New Fairfax from old be totally unrelated to depature of ex President Paul Rivett?

 

I mean look at this press release. They are telling how he is going to retire full time and that is all to it.

"Paul Rivett has decided to retire as President of Fairfax in order to spend full time with his family."

https://www.fairfax.ca/press-releases/fairfax-financial-holdings-limited-executive-announcement-2020-10-13/

 

Just 2 years later we learn of him fighting hard and bitter on corporate control.

"The clash of the media barons: Inside Jordan Bitove and Paul Rivett's battle to control Torstar"

https://www.theglobeandmail.com/business/article-torstar-ownership-jordan-bitove-paul-rivett/

"After airing dirty laundry publicly, warring Torstar partners retreating behind closed doors"

https://nationalpost.com/news/publisher-apologizes-to-staff-for-public-spectacle-as-bitter-toronto-star-feud-heads-to-court

 

 

Well, are you then going to give credit to Paul for the move to put Andy Barnard as President of all of the insurance businesses?  What about the credit default swap investments?  How about bringing in Wade Burton?

 

It's easy to discount what happened during Paul's watch because things are going so well now.  Fairfax is a team...no egos...no individuals!  The team has done better. 

 

Cheers!

[Haryana]

31 minutes ago, Parsad said:

 

Well, are you then going to give credit to Paul for the move to put Andy Barnard as President of all of the insurance businesses?  What about the credit default swap investments?  How about bringing in Wade Burton?

 

It's easy to discount what happened during Paul's watch because things are going so well now.  Fairfax is a team...no egos...no individuals!  The team has done better. 

 

Cheers!

 

Sure.

I know nothing really.

Just human brain has a tendency to shoot in the darkness of ignorance trying to connect the dots looking for a pattern. 

 

[Parsad]

5 minutes ago, Haryana said:

 

Sure.

I know nothing really.

Just human brain has a tendency to shoot in the darkness of ignorance trying to connect the dots looking for a pattern. 

 

 

I spoke to Paul after he left.  The decision to leave was completely personal and family related.  Fairfax had no intention of letting Paul go...his family needed him around more.

 

Cheers!