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Mass Financial and Recent Canoro Transaction


accutronman
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Apparently, we're in for a battle on Mass Financial's recent Canoro transaction. I'm sure Smith wouldn't have made his move if the outcome wasn't certain.

 

TORONTO, ONTARIO, May 31, 2010 (MARKETWIRE via COMTEX) -- Assam Company India Limited (Assam) today reminds shareholders of Canoro Resources Ltd. (Canoro) that the previously announced transactions (Transactions) between Canoro and Mass Financial Corp. (Mass), are subject to a recent decision of the High Court of Delhi in India (High Court), which could have material adverse effects on Canoro and shareholders.

 

The High Court has issued an order declaring that the Transactions, including the previously completed private placement with Mass, will be subject to the final outcome of the Petition by directing that "lis pendens will apply to the proceedings" (Court Order). Assam has written to the TSX Venture Exchange and Alberta Securities Commission regarding Canoro's failure to comply with its disclosure obligations and alert Canoro shareholders of the considerable risk, among others, that the High Court could order the Transactions to be unwound, that shares issued by Canoro as part of the Transactions could be subject to such orders or that Canoro may be required to pay substantial damages to Assam.

 

Basis for the Petition to the High Court of Delhi

 

Assam asserts in the Petition that completion of the Transactions violates the requirements of the Production Sharing Contract dated February 23, 2001 (PSC) between Canoro, Assam and The Government of India (Government) and the Joint Operating Agreement between Canoro and Assam dated May 5, 2004 (JOA).

 

Under the PSC, Government approval is required by Canoro prior to the entering of the Transactions. Without the consent of the Government, which to Assam's knowledge has neither been requested by Canoro nor given, the Government could terminate the PSC relating to Canoro's oil and gas properties in India, which would be materially prejudicial to Canoro, its shareholders and Assam.

 

Under the JOA, if Canoro wishes to sell or assign/transfer its interest in the Amguri oil field, Canoro is required to give notice to Assam so that Assam is able to exercise its pre-emptive right to purchase the participating interest of Canoro. No such notice has been given to Assam by Canoro. The JOA also states that Assam's pre-emptive right would extend to "any sale or assignment of the stock" of Canoro (other than to an affiliate) where Canoro's Participating Interest under the JOA in the Amguri oil field is Canoro's sole or principal asset at the time of the sale or assignment. The Amguri oil field is Canoro's sole producing asset at this time. Assam contends in the Petition that the JOA requires that Canoro give prior notice to Assam of the Transactions and permit it to exercise its pre-emptive right in respect of the Transactions.

 

Canoro filed its Short Form Prospectus dated May 21, 2010 in connection with a rights offering of common shares as one step in the Transactions. However, in light of the above, Assam believes that the disclosures made by Canoro in its Prospectus in relation to the Court Order are not complete, accurate or sufficiently objective to enable Canoro's shareholders to assess the potential risks in respect of the Transactions. Assam believes Canoro has not fully disclosed to shareholders, in a fair and transparent manner, the potential risk that the High Court could order that the Transactions be unwound, that shares issued pursuant to the rights offering could be subject to such an order or that Assam could be awarded substantial damages against Canoro. Shareholders should expect accurate and balanced disclosure of the existing facts and their implications in order to make an informed decision.

 

Assam Offer for Canoro

 

Assam also confirms that on April 20, 2010 it provided the Board of Directors of Canoro with a non-binding proposal for Assam to make a supported take-over bid for all of the issued and outstanding common shares of Canoro at $0.21 per common share, a per share price that far exceeds the consideration offered by Mass under the Investment Agreement, subject to certain terms and conditions including due diligence access. This proposal was sent following a number of attempts to engage Canoro's Board of Directors in discussions regarding a possible strategic investment in Canoro. To date, Canoro has not responded to Assam's offer so as to advance its current proposal or any other potentially superior transactions, to the ones being considered with Mass, including a private placement.

 

Notwithstanding Assam's attempts to engage Canoro in discussions and notwithstanding the contractual impediments and implications of proceeding with the Transactions, on April 19, 2010 Canoro announced a private placement, underwritten rights offering and convertible debt transaction with Mass including a standby commitment by Mass to back-stop the discounted rights offering and significant changes to the composition of the Canoro Board to allow Mass's nominees on the Board. The combined result of the Transactions is likely to be the transfer of "control" of Canoro to Mass at a discounted value. Canoro's Board of Directors has consented to the Transactions without giving Canoro's shareholders an opportunity to consider a transaction that would provide superior value to both Canoro and its shareholders and without adequate disclosure regarding the required approvals and consents to be obtained from the Government of India and from Assam before Canoro may sell or assign its interest in the Amguri oil field under the PSC and the JOA and the risks associated with not obtaining such approval/consents. This is not in the best interests of Canoro or its shareholders.

 

Canoro and its shareholders have witnessed Canoro's share price steadily decline over the past 12 months. Shareholders are now expected to believe that the existing Board and senior management team of Canoro, who have presided over this dramatic decline in shareholder value, will be able to change the operation and value of Canoro. The Amguri oil field is an asset controlled by the Government of India under the PSC. The Government of India, the PSC, the JOA, the Amguri oil field itself and, therefore, Canoro's interest in the Amguri oil field under the PSC and the JOA are all subject to the jurisdiction of the Indian courts. Given the potential risk that the High Court could order that the Transactions be unwound or that Canoro may be liable for damages in the petition filed by Assam against Canoro, Assam urges shareholders of Canoro to insist that Canoro adjourn the shareholders meeting to be held on 9 June 2010 pending the outcome of the court challenge in India or receipt of Government of India approval of the Transactions by Canoro.

 

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Hi accutronman,

 

I guess you follow Michael Smith and Mass Financial. I've tried to find more information about him and the company, but Smith is a very secretive man. When you read it's letters, while it's fairly candid, he is not as comprehensive and you don't get the same feel than when you read FFH and BRK letters.

 

Do you know him? Have you followed this company enough to share some insight with us?

 

Thank you very much.

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Thanks for posting this.  I've been following Michael Smith and Mass Financial for a while too.  I thought this proposed transaction was interesting.

 

Mass is offering $3M in equity, a $35M convertible credit line, and intends on backing a ~$14M rights offering.  This would be a fairly substantial for Mass if fully subscribed/executed, $52M compared to about $330M in cash that they had at the end of 2009.

 

Canoro is a Canadian company (based in Calgary) but the play here appears to be in India, as the terms of the credit line say that it can be used for approved cap ex in India.  Attached is Canoro's annual report for the year ending March 31, 2009 which outlines the business.  The pictures look more like tourist snaps than your typical annual report glossies -- a jitney bus on a rural road, a woman with head dress carrying a jar on her head, a huge pile of chiles, etc.

 

I don't know anything about oil and gas exploration in India.  The company showed heavy losses in recent years, sounds like they basically drilled a bunch of dry holes, though they had slightly positive result in 2009.  Cost base is too high given low production.  They say that in 2009 & 2010 they will focus solely on production and not exploration.

 

Smith must have some special insight here, it looks like an ongoing train wreck.  Maybe Mass is going to facilitate their sale of gas through Mass or some other subsidiary, maybe there is a merchant banking angle.

 

The terms of the credit line state that the amount outstanding are convertible to equity at the share price *when drawn*.  This means that if the share price declines, these become a "death spiral convertible", except that Mass is in the driver's seat.  If share price tanks, Mass could take ownership of the company easily.

 

I have seen this tactic before from Mass and other Smith-run companies -- a convertible credit line secured by certain assets.  This starts out as a merchant banking arrangement but if one of the triggers is hit (such as a debt covenant or whatever has been negotiated), then it becomes a vehicle for controlling the company's stock.

 

As always with Smith, this is an interesting but mystifying transaction.  I doubt he'd make such a significant investment if he didn't think that success was likely.

 

RT

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  • 3 weeks later...

accutronman, thanks for the update. I for one am very interested in everything Michael Smith. Unfortunately its difficult to get info on his dealings.

 

while it does seem to be difficult to get much info on him & his dealings, & he is more secretive than your average stranger from a strange land, i have to ask: why the keen interest in mass financial & all things michael smith? i dont see anything in his record there that justifies it, frankly. what am i missing?

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  • 1 month later...
Guest misterstockwell

Reviving this thread--does anyone have more insight on this company and Michael Smith? On first glance, it looks interesting enough, though transparency is definitely not a priority!

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Guest Bronco

Damnit, I am a sucker for this story.  I read Tariq's great interview and bought a little (very little) Mass to put on my radar.

 

There is no way I can throw any real money into this stock, but in my opinion this stock looks interesting and the results impressive.  I will look forward to the semi-annual reports.  But I really only invest money into stories where there is that Buffett long-term track record (PEP, JNJ) or stocks where I have an informational edge.

 

Breezed through the latest financials, and will go through more this weekend. 

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I have done a lot of work here. One must understand the tax consequences of investing in a PFIC before considering investing in Mass.

 

The Canoro deal, like most of Michael Smith's deals, is an asset play. He has proven since the 80s that he can find undervalued/distressed assets and grab them from weak/distressed hands.  If you read back through past filings and news articles, you discover that he buys companies/assets very cheap and hates getting publicity for it.

 

Mass' main business now revolves around trade finance (specifically commodities) where in most cases Mass buys actual commodities from commodity producers who have difficulty accessing credit and do not have the ability to sell to end users themselves.  The company makes selective acquisitions and investments with the cash flows generated by this business and now has large amounts of cash to deploy.

 

The company is trading right around book value right now and a little above book at the fully diluted share count.

 

 

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Guest Bronco

Moto - I get the PFIC thing.  Thanks for that heads up.

 

What is your take on Mass as an investment.  I gather you are neutral, but that is my guess.

 

Do you find Michael Smith to be a good allocator of capital?  I seem to like the business model, but I am in the first inning of doing homework. 

 

Irrespective of price, how would you rate the business? 

 

One note from the F/S is "to enhance s/h value we intend to: create market awareness and liquidity for our shareholders".

 

That is a big deal to me.  I'll believe it when I see it though.  If this company remains profitable, I think it is an interesting story.

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I have done a lot of work here. One must understand the tax consequences of investing in a PFIC before considering investing in Mass.

 

pfic? mfcaf.pk?

 

i had started going thru the annual reports & scouring blogs & message boards like seeking alpha to get up to speed on this co, & have taken a starter position. not once did i see any one make reference to its pfic status until now.

 

i know they have passive investments but i thought they primarily traded commodities on behalf of customers as well as for their own account. thats their main biz. doesnt sound like a pfic in that case.

 

can you expand a little bit? point to a link indicating its a pfic, which i'm embarrassed to say i missed some how? can one bypass the pfic headache by owning it in an ira? and how big a headache is it to deal with all the tax forms of a pfic in your experience?

 

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hmmm, i still cant find any indication from mfcaf's website that it is a passive investment co, foreign or otherwise.

 

from their 2009 10k annual report are these snippets strongly suggesting they consider themselves to be an operating co, not a passive investment co:

 

<<As part of our merchant banking activities, we establish, utilize and maintain various kinds of

credit lines and facilities with other banks, insurers and finance providers, including accounts

receivable financing and letters of credit. Such trade finance is often layered with varying

limitations, exceptions and borrowing availability based upon financial ratios and other measures.

Our principal sources of funds are cash flow from operations, cash on hand and our

available credit facilities.>>

 

<<MERCHANT BANKING

We also commit our own capital to promising enterprises, and invest and otherwise trade to

capture investment opportunities for our own account. We seek to invest in businesses or assets

whose intrinsic value is not properly reflected in their share price valuation. Our investments

are generally not passive. We seek investments where our management and financial expertise

can be used actively to add or unlock value.>>

 

<<TRADING OF COMMODITIES AND NATURAL RESOURCES

Our operations include the trading, principally for our own account, of commodities and natural

resources. Such activities include purchasing and selling of such items. To a much lesser extent,

we also act as a trading agent for clients. We conduct our trading primarily through our

subsidiaries based in Vienna, Austria. These broad-based activities allow us to be in contact

with a geographically wide range of producers as well as consumers, creating more opportunities.

Our trading activities often utilize innovative and sophisticated trading strategies and

structures. We currently trade with commodity and other producers who are unable to execute

sales effectively because of credit or currency issues affecting them or their principal customers.

We are often able to facilitate purchases and sales of commodities with more efficient and

effective execution than many producers and customers could achieve on their own. Commodity

producers and end customers often work with us to better manage their internal supply, distribution

risk, currency and capital requirements.>>

 

etc etc

 

 

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On surface, it looks cheap. Smith long term track record seems to be very good, Mass Financial compounded book value per share figure so far have been stellar,but Smith is very secretive and don't seems to like to disclose a lot of information.

 

Do you still have doubts? I do. That's why I did not bought a single share on Mass Financial yet.

 

A collective search would be a good idea, since it might be a good long term investment candidate, and we like investment vehicles managed by great investors like Prem, Warren and the likes.

 

 

 

 

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Do you still have doubts? I do. That's why I did not bought a single share on Mass Financial yet.

 

A collective search would be a good idea, since it might be a good long term investment candidate, and we like investment vehicles managed by great investors like Prem, Warren and the likes.

 

 

i have a few doubts too. smiths lack of detailed disclosure borders on secretiveness. that deserves higher discount factor imo.

 

on the other hand he has a very long track record of strong shareholder returns. looking at the mfcaf long term performance charts shows this beyond a reasonable doubt, even after accounting for the last couple of years when khd got caught swimming naked in a storm, & suffered for it. the charts cut off just short of those last years if i recall, probably figuring that when they were spun out at the end of 06 they had effectively unhitched their wagon. i'm not sure i agree, especially if i were a shareholder who held on to khd in addition to the newly minted mfc.

 

 

i also think mfc was spun out at a very, VERY stripped down valuation. that put a wind at their back, benefitting subsequent returns. but balancing that would be the spinoffs & other distributions made over many years that apparently arent reflected in their performance record.

 

the story of mfcaf, ttt, khd, & that stranger from a strange land, michael smith, certainly makes for an interesting if challenging case.

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Do you still have doubts? I do. That's why I did not bought a single share on Mass Financial yet.

 

A collective search would be a good idea, since it might be a good long term investment candidate, and we like investment vehicles managed by great investors like Prem, Warren and the likes.

 

 

i have a few doubts too. smiths lack of detailed disclosure borders on secretiveness. that deserves higher discount factor imo.

 

on the other hand he has a very long track record of strong shareholder returns. looking at the mfcaf long term performance charts shows this beyond a reasonable doubt, even after accounting for the last couple of years when khd got caught swimming naked in a storm, & suffered for it. the charts cut off just short of those last years if i recall, probably figuring that when they were spun out at the end of 06 they had effectively unhitched their wagon. i'm not sure i agree, especially if i were a shareholder who held on to khd in addition to the newly minted mfc.

 

 

i also think mfc was spun out at a very, VERY stripped down valuation. that put a wind at their back, benefitting subsequent returns. but balancing that would be the spinoffs & other distributions made over many years that apparently arent reflected in their performance record.

 

the story of mfcaf, ttt, khd, & that stranger from a strange land, michael smith, certainly makes for an interesting if challenging case.

 

 

Oh!  So he might be a "Valentine"?  :)

 

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I stand corrected. I misread one of their filings from 2006. This is not a PFIC.

 

thanks, motown, this is good to hear.

 

mfc is so much more interesting as a non-pfic co. now its back to being a merely puzzle wrapped in an enigma, sans straight jacket.

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Oh!  So he might be a "Valentine"?  :)

 

 

ya never know! or maybe he's just bearing the cross of someones cruel-fiction  ;)

 

 

Does he Grok those strange transactions.   :o

 

ha! i'm just a lost, parched wayfarer. do you have water, brother?  :)

 

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