Fairfax stock positions

[nwoodman]

I enjoyed this exchange on the recent Altius CC (10 March)

 

Carey MacRury

Hey, Brian. Just had a couple of follow ups here. First, just on the Fairfax warrants, obviously, in the money here. Can you just remind us what the trends around those warrants are? Is that something that they would exercise or what the expiry date et cetera?

 

Brian Dalton

They can exercise that anytime quite frankly. The way the original agreement, so that would have been back in ‘17. We -- the strike price on the warrants is 15. I think we did stock was just under that. And yeah, so it's a $15 exercise price. I think the way it was meant to be it would expire, they would expire in April of this year, except in the event that the share price is $24 or higher, in which case they would naturally extend for two years.

 

Carey MacRury

Okay, so you're currently seeing about $24. So --

 

Brian Dalton

Exactly. We shall see. But look--

Carey MacRury

And then I guess --

 

Brian Dalton

But from a perspective of that. I'm just obviously tickled pink that it's worked out so well for Fairfax and remind everyone that the main part of that deal was $100 million preferred investments that Fairfax made, which ultimately resulted in buying our position in Labrador, half of the potash and seed funding and renewables business. So if ever there was a win win deal in the world, this was starting to feel like. And I would also say that it Fairfax were to exercise towards at least every indication I've had in the past that the goal there ultimately would be just to slide into the position of long-term shareholder.

 

Edit:  A reminder of the terms

 

Fairfax has agreed to purchase, on a private placement basis, 5% preferred securities in an aggregate amount of up to $100 million, issuable in tranches of not less than $25 million. Altius has closed today an initial purchase of preferred securities for $25 million, and has sole discretion until December 31, 2017 to require additional purchases by Fairfax for the remaining $75 million. The preferred securities are subordinate secured securities that may be repaid by Altius at any time after April 26, 2022 and at any time after April 26, 2020 if the volume-weighted average trading price of its common shares for any 10 day period after April 26, 2020 is at least $24 per share.

 

Altius has also issued today 6,670,000 common share purchase warrants, exercisable at $15 per share, which will vest proportionately based on the aggregate amount of preferred securities purchased by the Fairfax entities under the private placement. Each vested warrant will be exercisable on or prior to April 26, 2022, but the expiry date will be extended to April 26, 2024 if the closing price of Altius' common shares is less than $24 per share on April 26, 2022. Altius can also elect to require early exercise of the warrants if the volume-weighted average trading price of Altius' common shares for any 10 day period reaches $24 per share at any time after April 26, 2020.

 

So when they convert they will own 6.67/(6.67+41.2)=13.9%

 

Altius holds royalty interests in 12 producing assets throughout the Americas. In Canada these assets include a 4% NSR royalty on Hudbay's 777 copper-zinc mine in Manitoba, 6 potash mines and 1 coal mine located in western Canada, and a royalty on the Voisey's Bay nickel-copper-cobalt mine in Labrador. In Brazil, we have a 3.7% stream interest on Lundin Mining's Chapada Mine.  The Company also receives regular dividend income from its equity ownership in Labrador Iron Ore Royalty Company, which is treated as iron ore royalty revenue, being a pass-through vehicle.  Altius holds ~59% of Altius Renewable Royalties (ARR-TSX) which at December 31, 2021 was valued as approximately $193.5 million (Altius position in shares plus in-the-money warrants).

Edited March 22, 2022 by nwoodman

[Parsad]

36 minutes ago, nwoodman said:

I enjoyed this exchange on the recent Altius CC (10 March)

 

Carey MacRury

Hey, Brian. Just had a couple of follow ups here. First, just on the Fairfax warrants, obviously, in the money here. Can you just remind us what the trends around those warrants are? Is that something that they would exercise or what the expiry date et cetera?

 

Brian Dalton

They can exercise that anytime quite frankly. The way the original agreement, so that would have been back in ‘17. We -- the strike price on the warrants is 15. I think we did stock was just under that. And yeah, so it's a $15 exercise price. I think the way it was meant to be it would expire, they would expire in April of this year, except in the event that the share price is $24 or higher, in which case they would naturally extend for two years.

 

Carey MacRury

Okay, so you're currently seeing about $24. So --

 

Brian Dalton

Exactly. We shall see. But look--

Carey MacRury

And then I guess --

 

Brian Dalton

But from a perspective of that. I'm just obviously tickled pink that it's worked out so well for Fairfax and remind everyone that the main part of that deal was $100 million preferred investments that Fairfax made, which ultimately resulted in buying our position in Labrador, half of the potash and seed funding and renewables business. So if ever there was a win win deal in the world, this was starting to feel like. And I would also say that it Fairfax were to exercise towards at least every indication I've had in the past that the goal there ultimately would be just to slide into the position of long-term shareholder.

 

Edit:  A reminder of the terms

 

Fairfax has agreed to purchase, on a private placement basis, 5% preferred securities in an aggregate amount of up to $100 million, issuable in tranches of not less than $25 million. Altius has closed today an initial purchase of preferred securities for $25 million, and has sole discretion until December 31, 2017 to require additional purchases by Fairfax for the remaining $75 million. The preferred securities are subordinate secured securities that may be repaid by Altius at any time after April 26, 2022 and at any time after April 26, 2020 if the volume-weighted average trading price of its common shares for any 10 day period after April 26, 2020 is at least $24 per share.

 

Altius has also issued today 6,670,000 common share purchase warrants, exercisable at $15 per share, which will vest proportionately based on the aggregate amount of preferred securities purchased by the Fairfax entities under the private placement. Each vested warrant will be exercisable on or prior to April 26, 2022, but the expiry date will be extended to April 26, 2024 if the closing price of Altius' common shares is less than $24 per share on April 26, 2022. Altius can also elect to require early exercise of the warrants if the volume-weighted average trading price of Altius' common shares for any 10 day period reaches $24 per share at any time after April 26, 2020.

 

So when they convert they will own 6.67/(6.67+41.2)=13.9%

 

Thanks for sharing that nwoodman!  Cheers!

[nwoodman]

It won't be material but it will be interesting to see if they  increased their stake in BABA significantly during the recent sell off

 

[lessthaniv]

Investments overall having a nice push prior to quarter end. Stelco having a big day. 

[TwoCitiesCapital]

On 3/24/2022 at 12:09 PM, lessthaniv said:

Investments overall having a nice push prior to quarter end. Stelco having a big day. 

 

The TRS aren't looking too bad after today either. Gonna have another cool $50-60 million in cash delivered this quarter if prices stay right around here for another few days. 

[bearprowler6]

A few updates on Farmers Edge:

 

https://www.farmersedge.ca/farmers-edge-reports-fourth-quarter-2021-results/

 

https://www.farmersedge.ca/wade-barnes-stepping-down-as-farmers-edge-ceo/

 

https://www.farmersedge.ca/farmers-edge-announces-c75-million-loan-from-fairfax-financial-holdings-limited/

 

All the talk about how the team at Fairfax has learned its lessons and is new and improved and then they throw more good money after bad towards Farmers Edge. More of the same if you ask me. Very disappointing.

[glider3834]

56 minutes ago, bearprowler6 said:

A few updates on Farmers Edge:

 

https://www.farmersedge.ca/farmers-edge-reports-fourth-quarter-2021-results/

 

https://www.farmersedge.ca/wade-barnes-stepping-down-as-farmers-edge-ceo/

 

https://www.farmersedge.ca/farmers-edge-announces-c75-million-loan-from-fairfax-financial-holdings-limited/

 

All the talk about how the team at Fairfax has learned its lessons and is new and improved and then they throw more good money after bad towards Farmers Edge. More of the same if you ask me. Very disappointing.

Agreed this has been one of the most disappointing investments - mgmt execution terrible - they said in Q3 they had enough cash to get to break even, but this Fairfax loan suggests otherwise that they need more cash. I would be worried if loan was unsecured or substantially more - but at $US60 mil I can digest that - yes I don't like it but reasons below why I think they made it.

 

 1. capital raise would be very dilutive

2. a bank/alternative lender loan would put the bank/lender in charge of FDGE as main creditor - this way it puts Fairfax at front of the line as sole secured creditor if Farmers Edge needs to go into into any business restructuring in the future then they are in a better position to dictate terms.

3. based on their cash burn, provides FDGE with around 2 yrs of cash which hopefully gets them to breakeven, however, I haven't listened to the conference call so want to wait for that in terms of their projections on future revenues and cost structure to see what they are expecting.

 

Also I noticed Wade Barnes was left off Prem's CEO list in the Annual report - so I was not surprised with CEO resignation.

 

[Viking]

1 hour ago, glider3834 said:

Agreed this has been one of the most disappointing investments - mgmt execution terrible - they said in Q3 they had enough cash to get to break even, but this Fairfax loan suggests otherwise that they need more cash. I would be worried if loan was unsecured or substantially more - but at $US60 mil I can digest that - yes I don't like it but reasons below why I think they made it.

 

 1. capital raise would be very dilutive

2. a bank/alternative lender loan would put the bank/lender in charge of FDGE as main creditor - this way it puts Fairfax at front of the line as sole secured creditor if Farmers Edge needs to go into into any business restructuring in the future then they are in a better position to dictate terms.

3. based on their cash burn, provides FDGE with around 2 yrs of cash which hopefully gets them to breakeven, however, I haven't listened to the conference call so want to wait for that in terms of their projections on future revenues and cost structure to see what they are expecting.

 

Also I noticed Wade Barnes was left off Prem's CEO list in the Annual report - so I was not surprised with CEO resignation.

 

@bearprowler6 yes, this investment has been a complete dog with fleas. It started in late 2016. Fairfax made a number of poor investment decisions  before 2018 (EXCO, APR, Fairfax Africa, AGT are a few that quickly come to mind). Most have been dealt with. Farmers Edge was one of the remaining problem children. Crazy that they have burned through most of the IPO proceeds already. 
 

But i have also come to accept that Fairfax is probably going to have one big clunker like this each year. They still have a few pot holes left to fill in. And they also do like to swing for the fence with their investments - and a few will always fail/way underperform. Fortunately, they have been hitting the ball out of the park in recent years with most of their new equity investment decisions (Digit, Atlas, Stelco, Dexterra). This does lessen the sting from situations like Farmers Edge.
 

@glider3834 i see one exit for Fairfax… they likely need to sell this puppy/merge it into a larger player - and do it quickly. Perhaps that is the purpose of the loan… buy some time to find a home for Farmers Edge. Perhaps for equity in a larger player. It looks like it is generating -$50 million in free cash flow per year… nuts. Or take it into bankruptcy. And, as you state, that likely explains the purpose of the loan - to control the bankruptcy process.

—————

I think another factor is at work: Fairfax wants to attract entrepreneurs. To do this Fairfax must be viewed as a good, patient and trustworthy partner. Especially when a business is experiencing difficulty (which they all do). Look at the last 2 investments Fairfax India has made. They are not all going to work out.  But a few that do work will do so spectacularly. Peter Lynch: “In this business, if you're good, you're right six times out of ten. You're never going to be right nine times out of ten”

Edited March 26, 2022 by Viking

[petec]

What’s the loan secured against?

[Viking]

Fairfax's equity holdings (that I track) finished Q1 down a little under 1% (about $110 million); given S&P500 is down 5.5% Fairfax delivered a solid quarter. Mark to market equity positions were essentially flat for the quarter. Of course, my spreadsheet does not capture a bunch of equity holdings (partnerships etc) so what Fairfax actually reports Q1 will be different.

 

Biggest Gainers?

1.) Eurobank   + $195 million

2.) Stelco        + $117

3.) FFH TRS    + $103

 

Biggest Decliners?

1.) Blackberry - $192

2.) Quess        - $123

3.) CIB             - $109 (Egyptian pound was devalued)

Fairfax Equity Holdings March 31 2022.xlsx

[newtovalue]

Fairfax exercising most of its Atlas warrants

 

https://www.newswire.ca/news-releases/fairfax-announces-intention-to-exercise-warrants-in-atlas-reinforcing-confidence-in-atlas-as-a-platform-for-growth-885095138.html

 

[A_Hamilton]

17 hours ago, Viking said:

Fairfax's equity holdings (that I track) finished Q1 down a little under 1% (about $110 million); given S&P500 is down 5.5% Fairfax delivered a solid quarter. Mark to market equity positions were essentially flat for the quarter. Of course, my spreadsheet does not capture a bunch of equity holdings (partnerships etc) so what Fairfax actually reports Q1 will be different.

 

Biggest Gainers?

1.) Eurobank   + $195 million

2.) Stelco        + $117

3.) FFH TRS    + $103

 

Biggest Decliners?

1.) Blackberry - $192

2.) Quess        - $123

3.) CIB             - $109 (Egyptian pound was devalued)

Fairfax Equity Holdings March 31 2022.xlsx 235.05 kB · 12 downloads

Always good to have BB report on first day of a new quarter. 

[dartmonkey]

Wow. The Atlas position was already big, rivalling Eurobank for the biggest equity position, with 100m shares for a total value of $1.5b. Eurobank was at $1.4b; Stelco and BDT are at $540m, and Resolute, Quess, ShawKwei, Blackberry, CIB, Kennedy Wilson are all between $300 and $400m) Now with 25m more shares, and still with warrants for another 6m, Atlas will be over $1.9b. All of Fairfax has a market cap of $17b, so this is now over 10%. Not quite the size of Apple within Berkshire, but Atlas probably has more room to run...

[gfp]

2 hours ago, dartmonkey said:

Wow. The Atlas position was already big, rivalling Eurobank for the biggest equity position, with 100m shares for a total value of $1.5b. Eurobank was at $1.4b; Stelco and BDT are at $540m, and Resolute, Quess, ShawKwei, Blackberry, CIB, Kennedy Wilson are all between $300 and $400m) Now with 25m more shares, and still with warrants for another 6m, Atlas will be over $1.9b. All of Fairfax has a market cap of $17b, so this is now over 10%. Not quite the size of Apple within Berkshire, but Atlas probably has more room to run...

 

A $17 Billion market cap must be in Canadian dollars but I think the rest of your figures are in US Dollars, correct?

[dartmonkey]

3 hours ago, gfp said:

 

A $17 Billion market cap must be in Canadian dollars but I think the rest of your figures are in US Dollars, correct?

yes, that’s right. So the Atlas stake is C$2.4b, an even bigger part of the C$17b market cap, ignoring the deferred tax. Thanks for the correction. 

[glider3834]

Francis Chou's comment on Exco Resources from his 2021 Shareholder letter

 

Fairfax owns 43% of Exco - based on Francis  comments below, Fairfax carrying and market values look conservative IMHO

 

 

'Since it is a private company, I am not at liberty to divulge all the financial statements but what I can tell you is that my calculation of its PV-10 value was approximately US$1.2 billion based on New York Mercantile Exchange (NYMEX) forward pricing as of September 30, 2021. Its number of shares outstanding was 51,341,478. We estimate that its EBITDA for the year ending 2022 will be approximately US$225 million.

 

Although a substantial portion of EXCO’s oil & gas production is hedged for the year 2022, we believe that EXCO can fetch much higher prices as the hedges roll off.'

 

So my takeaway - Fairfax look to have Exco on books at forward EBITDA of 2x -  and that EBITDA is substantially hedged and should increase further as those hedges come off.

Edited April 2, 2022 by glider3834

[petec]

5 hours ago, glider3834 said:

Francis Chou's comment on Exco Resources from his 2021 Shareholder letter

 

Fairfax owns 43% of Exco - based on Francis  comments below, Fairfax carrying and market values look conservative IMHO

 

 

'Since it is a private company, I am not at liberty to divulge all the financial statements but what I can tell you is that my calculation of its PV-10 value was approximately US$1.2 billion based on New York Mercantile Exchange (NYMEX) forward pricing as of September 30, 2021. Its number of shares outstanding was 51,341,478. We estimate that its EBITDA for the year ending 2022 will be approximately US$225 million.

 

Although a substantial portion of EXCO’s oil & gas production is hedged for the year 2022, we believe that EXCO can fetch much higher prices as the hedges roll off.'

 

So my takeaway - Fairfax look to have Exco on books at forward EBITDA of 2x -  and that EBITDA is substantially hedged and should increase further as those hedges come off.

Remind me how much FFH own and what they carry it at?

[dartmonkey]

According to the 2021 annual report (p.11), FFH owned 43% of Exco, meaning it is treated as an associate, with equity accounting (which holds for non-controlling stakes where FFH owns between 20% and about 50%). That stake is held at a carrying value of $195m but had a market value of $267m, as of 2021-12-31.

[glider3834]

Yeh we don't have all the data points with Exco but  Francis's forecast for EBITDA in 2022 is $225 mil (my EBITDA estimate $153 mil in 2021 based on Prem's letter).

 

Debt is 115 mil at 31 Dec-21 (paid down $30 mil in debt in 2021 . Debt was $145 mil at 31 Dec-20)

 

Enterprise value (EV) using Fairfax carrying value for equity is (CV 450 + debt 115) = 565 mil     

EV/forecast EBITDA 2022 = 2.5x

 

EV using Fairfax market value for equity is (MV 616 + debt 115) = 731 mil         

EV/forecast EBITDA 2022 = 3.2x

 

So those multiples look low but then going forward you factor in potential for further additional debt reduction in 2022 plus hedges coming off, allowing Exco to receive higher pricing - so seems reasonable to expect higher revenues & higher EBITDA in 2023. 

 

And then looking from a NAV angle, Francis's PV-10 value estimate for Exco was $1.2bil in Sep-21 or $1.085 bil after net debt and Exco appear to be aggressively expanding their proved reserves in 2021 

 

The value of Exco’s total proved reserves increased 85%. Its reserves replacement ratio for 2021, not related to commodity price improvements, was 434%

 

Fairfax did report a share of loss of $41 mil for Exco in 2021 (compared to $4.6 mil loss in 2020). So again we don't have data on what is driving that - D&A or one-off items?? But we do know from Prem that FCF improved in 2021 over 2020 plus they paid down $30 mil in debt.

 

 

 

 

 

 

 

 

Edited April 4, 2022 by glider3834

[petec]

So carrying value $195m vs value of $470m according to Chou (calculated as (1200-115)*.43).

 

Could be a nice little write-up one day.

[glider3834]

interesting new small position circa $42 mil position in copper miner - Atalaya Mining 

https://www.accesswire.com/696120/Atalaya-Mining-PLC-Announces-Holdings-in-Company

 

I haven't looked into this but there might be a bit of a theme here with Fairfax's investment in Altius as well.

 

Interesting article on copper market 

https://www.kitco.com/commentaries/2022-01-17/Copper-boom-likely-to-last-for-decades-prompting-a-global-hunt-for-new-supply.html

 

'In fact, analysts at Goldman Sachs are calling copper "the new oil", as the metal is a key part of sustainable technologies, including electric vehicle batteries and deriving clean energy.

"Copper will be crucial in achieving decarbonization and replacing oil with renewable energy sources, and right now, the market is facing a supply crunch that could boost the price by more than 60% in four years," Goldman Sachs wrote in a report May 2021.'

 

 

[glider3834]

https://www.businesswire.com/news/home/20220413006065/en/Altius-Announces-Exercise-of-Warrants-Held-by-Fairfax-Surrendering-for-Cancellation-of-Preferred-Securities-and-Filing-of-Early-Warning-Report

 

'Following the completion of the Transaction, Fairfax will directly or indirectly own or control 6,670,000 Common Shares, which represents 13.94% of the issued and outstanding Common Shares as of April 14, 2022, on a non-diluted basis, and Altius will have no outstanding Warrants, Preferred Securities or resulting interest distribution obligations.'

[glider3834]

1 minute ago, glider3834 said:

https://www.businesswire.com/news/home/20220413006065/en/Altius-Announces-Exercise-of-Warrants-Held-by-Fairfax-Surrendering-for-Cancellation-of-Preferred-Securities-and-Filing-of-Early-Warning-Report

 

'Following the completion of the Transaction, Fairfax will directly or indirectly own or control 6,670,000 Common Shares, which represents 13.94% of the issued and outstanding Common Shares as of April 14, 2022, on a non-diluted basis, and Altius will have no outstanding Warrants, Preferred Securities or resulting interest distribution obligations.'

Prem Watsa, Chairman and CEO of Fairfax stated, “We are very happy to transition our investment in Altius to that of a supportive long-term shareholder. During the period that we held Preferred Securities we watched the Corporation’s progress closely and viewed the benefits of its disciplined, counter-cyclical and long-term strategies unfold. The Corporation’s business model of collecting royalties from a wide range of long-lived properties producing copper, gold, nickel, iron ore, potash and renewable energy generates considerable upside in an inflationary environment without having to make any additional capital investment. Royalty growth comes from production growth as well as price increases, not to mention meaningful optionality from existing royalty interests in projects which are likely to come onstream in the next few years.”

[Viking]

Fairfax owns an extensive number of equity positions. This leads to the question: is it better to own Fairfax or one or more of their undervalued equity holdings (or some combination of holdings)? When Fairfax was trading crazy cheap (pretty much all of the past 2 years) my strategy was to keep things simple and usually (not always) to go with an overweight position in Fairfax. 
 

We have some new news… Fairfax is now trading at a multi-year high (US$555) and it looks poised to break out to new all time highs. This is especially impressive performance given the decline we have seen in most market averages to start the year. My read today is Fairfax is still cheap… but it no longer looks crazy cheap. Especially when compared to some of its equity holdings. 
 

What of Fairfax’s equity holdings look crazy cheap today? Three names jump out to me:

1.) Fairfax India at US$12.50

- BV is close to $20. Catalyst? Another Dutch auction.  Rebound of BIAL asset. 

2.) Recipe at C$14.30

- market cap is C$840 million; net debt is $350 million. Stock was trading at over $18 pre pandemic (and +$25 from 2017-2019). Dominant family causal player in Canada with strong brands (Keg, Swiss Chalet, Harveys, St Hubert, Kelseys, Montanas etc). Q1 results will be weak (Omicron hit to Jan sales from lock downs in Ontario and Quebec). Q2-Q4 sales should ramp higher. Stock will likely pop significantly on ANY good news.

3.) Atlas at US$13.40

- see Atlas thread for thesis

 

On Friday i sold a little more Fairfax and used the proceeds to build positions in Fairfax India and Recipe. Are there other equity positions of Fairfax that board members view as crazy cheap today?

Edited April 15, 2022 by Viking

[petec]

Why would a second Dutch auction at FIH be a catalyst when the first one wasn’t?

 

If the discount is due to (il)liquidity and FFH’s rising stake, wouldn’t a Dutch auction make things worse?