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Finding assets that are worth more than recorded


Morgan
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I've been reading There's Always Something to Do and Cundill's career at least in up until the mid 1970's (that's how far I've read so far) he was able to find companies that had significant "forgotten about" value from assets that had been recorded at cost a long time ago and were worth far more than stated on the books.

 

I work in real estate and the opportunity to find real estate and get it for cheap, maybe with a profitable company thrown in for free sounds very good. What strategies do you recommend for turning up these types of situations?

 

 

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These are the holy grail for asset investors, unfortunately there is no systematic way to find these.  Here are a few thoughts:

 

-Find companies with old operations, usually something has been in operation that long.

-Look for companies that are real estate heavy, Bowl America comes to mind, operating bowling alleys since the 1950s, most recorded on the books at cost (1950s & 60s cost).

-Look for neglected companies, or companies no one bothers to value, things like Texas Pacific Land Trust, Aztec Land & Cattle.

-Look for things with alternate uses, Aztec Land & Cattle comes to mind, most of their land is grazing land, but being investigated for wind farms.  Land was on the books for around $60/acre, selling at $30/acre last I looked.

-Look for family owned or controlled companies, they're usually much more tax conscious and try to minimize taxes by eliminating churn, they'll hold onto something rather than sell it.

 

The best way is to just turn over a LOT of rocks.  Be creative, go to the library, Carnegie Business Library (in Pittsburgh) has a ton of OLD Moody's manuals and stock reference manuals.  Look up real estate companies in editions from the late 1970s and early 1980s, then see who still trades.  I'm guessing 90% of the companies are gone, but the other 10% probably still have some of that original land on their books at cost.

 

Here's another angle, this is a hidden asset gimme..download the list of bank branches in the US, then sort them by age, there are a LOT from the 1800s and early 1900s.  I'm guessing you'll eventually stumble on a community bank that has four or five branches held at 1930 prices. 

 

I couldn't resist, so I ran a query and found that there are 4170 bank certs with more than 5 branches that were established before 1930, lots of potentially hidden value there.  I'll note that BAC is at the top of the list with 809 branches established before 1930.

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I agree with Nate for the most part. LOTS of reading and research is the only way that you are going to do this. Develop your own skill set and then share it! Tax records are often a good place to start once you find the company that you find might have cheap items on the books. If you are looking for RE assets, think about the business and your research on it much as a RE investor would. One of those "I am a better investor because I am a businessman and a better businessman because I am an investor" sorta things.

 

I will add... Be weary of land trust type companies- this can extend to retailers as well, which can often be pretty "land trusty" in and of themselves.

 

I have often wondered how many companies there are out there that have REALLY odd assets on their books that are undiscovered.

 

*Cash is too obvious, and there are still A FEW companies trading for less than net cash. A few years ago, they were quite common.

*Real estate is the obvious goto, but that seems too easy.

*Some firms have more securities on hand than their market cap, but those are exceedingly rare.

 

FARM has/had a ton of coffee on their books that gave them a ton of hidden value due to LIFO reserves. You could do some sort of scan based on FIFO/LIFO or even cost average styles of accounting, depending on what kind of environment you are looking at.

 

When reading about Buffett, his arbitrage style of investments (with, say, soy warehouse receipts) just seem all too easy. Some sort of hindsight bias, I suppose. I wonder how rare those things actually were back in the day, especially when compared to now.

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Beware of hidden assets without a path to monetization.  I'm thinking of a coal company that trades for $10m but has reserves of $4b.  The name escapes me right now.

 

I talked to someone who called the CEO a few months back, the CEO said the coal is good and worth mining yet it's under contract with a company that has zero incentive to mine it.  He said the contract expires in 10 or 11 years, at that time they'll mine it.  So there's a huge hidden asset, this thing could be a 10-100 bagger easily, yet you'd need to wait 10 years.  What if the market changes so much in 10 years that it's not worth mining?

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Beware of hidden assets without a path to monetization.  I'm thinking of a coal company that trades for $10m but has reserves of $4b.  The name escapes me right now.

 

I talked to someone who called the CEO a few months back, the CEO said the coal is good and worth mining yet it's under contract with a company that has zero incentive to mine it.  He said the contract expires in 10 or 11 years, at that time they'll mine it.  So there's a huge hidden asset, this thing could be a 10-100 bagger easily, yet you'd need to wait 10 years.  What if the market changes so much in 10 years that it's not worth mining?

How could a company have no incentive to mine it if mining and selling the coal is economical? I obviously don't know the specifics of the situation, but hard for me to see how there can be no incentive.

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Beware of hidden assets without a path to monetization.  I'm thinking of a coal company that trades for $10m but has reserves of $4b.  The name escapes me right now.

 

I talked to someone who called the CEO a few months back, the CEO said the coal is good and worth mining yet it's under contract with a company that has zero incentive to mine it.  He said the contract expires in 10 or 11 years, at that time they'll mine it.  So there's a huge hidden asset, this thing could be a 10-100 bagger easily, yet you'd need to wait 10 years.  What if the market changes so much in 10 years that it's not worth mining?

How could a company have no incentive to mine it if mining and selling the coal is economical? I obviously don't know the specifics of the situation, but hard for me to see how there can be no incentive.

 

The company is paid some flat fee, they don't get paid more to mine more, so they mine what that need and that's it.  I think the company is Central Natural Resources, I should look into them again. 

 

So in 10 years the contract will expire and they'll contract someone to extract the $4b worth of coal, guess this is probably worth considering.

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True story! I bought a small, 50 year old manufacturing company out of bankruptcy a number of years ago. Bought the assets pennies on the dollar. While cleaning out an old filing cabinet I found stock cert (in the company's name) in a since de-mutualized insurance company. Turned out to be worth about 10% of entire purchase price. Now that was a hidden asset!

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True story! I bought a small, 50 year old manufacturing company out of bankruptcy a number of years ago. Bought the assets pennies on the dollar. While cleaning out an old filing cabinet I found stock cert (in the company's name) in a since de-mutualized insurance company. Turned out to be worth about 10% of entire purchase price. Now that was a hidden asset!

 

This is awesome! The real world equivelant of what we're doing in the public markets.

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Beware of hidden assets without a path to monetization.  I'm thinking of a coal company that trades for $10m but has reserves of $4b.  The name escapes me right now.

 

I talked to someone who called the CEO a few months back, the CEO said the coal is good and worth mining yet it's under contract with a company that has zero incentive to mine it.  He said the contract expires in 10 or 11 years, at that time they'll mine it.  So there's a huge hidden asset, this thing could be a 10-100 bagger easily, yet you'd need to wait 10 years.  What if the market changes so much in 10 years that it's not worth mining?

How could a company have no incentive to mine it if mining and selling the coal is economical? I obviously don't know the specifics of the situation, but hard for me to see how there can be no incentive.

 

The company is paid some flat fee, they don't get paid more to mine more, so they mine what that need and that's it.  I think the company is Central Natural Resources, I should look into them again. 

 

So in 10 years the contract will expire and they'll contract someone to extract the $4b worth of coal, guess this is probably worth considering.

how sure are you about this. For this kind of money at stake i am sure a lot of things can be done to unlock value

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Beware of hidden assets without a path to monetization.  I'm thinking of a coal company that trades for $10m but has reserves of $4b.  The name escapes me right now.

 

I talked to someone who called the CEO a few months back, the CEO said the coal is good and worth mining yet it's under contract with a company that has zero incentive to mine it.  He said the contract expires in 10 or 11 years, at that time they'll mine it.  So there's a huge hidden asset, this thing could be a 10-100 bagger easily, yet you'd need to wait 10 years.  What if the market changes so much in 10 years that it's not worth mining?

How could a company have no incentive to mine it if mining and selling the coal is economical? I obviously don't know the specifics of the situation, but hard for me to see how there can be no incentive.

 

The company is paid some flat fee, they don't get paid more to mine more, so they mine what that need and that's it.  I think the company is Central Natural Resources, I should look into them again. 

 

So in 10 years the contract will expire and they'll contract someone to extract the $4b worth of coal, guess this is probably worth considering.

how sure are you about this. For this kind of money at stake i am sure a lot of things can be done to unlock value

 

How sure?  Do two things, first read their annual report, it discusses their coal reserves.  You can figure out how much they're worth based on current prices.

 

Secondly call the CEO and ask why they haven't developed those reserves and you'll hear about the contract.  No one is allowed to develop the reserves except for the company under contract right now.

 

I'm not disputing that it can't be developed, the CEO stated it could, it's just that the structure of the contract means the current miner will never do it, so investors/the company needs to wait until the contract expires.

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Thanks oddball, 4b is a lot of money (and its 400 times 10m) unless there is a catch, The annual report or ceo may not tell you the real catch if there is any.  i don't think contract can be such a problem they can pay more to the company mining and everyone likes to get paid more. I think powerful activists like Icahn or even Prasad and Pabrai ;) should get excited enough by this to take it forward. it just appears a little too good to be true.

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Beware of hidden assets without a path to monetization.  I'm thinking of a coal company that trades for $10m but has reserves of $4b.  The name escapes me right now.

 

I talked to someone who called the CEO a few months back, the CEO said the coal is good and worth mining yet it's under contract with a company that has zero incentive to mine it.  He said the contract expires in 10 or 11 years, at that time they'll mine it.  So there's a huge hidden asset, this thing could be a 10-100 bagger easily, yet you'd need to wait 10 years.  What if the market changes so much in 10 years that it's not worth mining?

How could a company have no incentive to mine it if mining and selling the coal is economical? I obviously don't know the specifics of the situation, but hard for me to see how there can be no incentive.

 

The company is paid some flat fee, they don't get paid more to mine more, so they mine what that need and that's it.  I think the company is Central Natural Resources, I should look into them again. 

 

So in 10 years the contract will expire and they'll contract someone to extract the $4b worth of coal, guess this is probably worth considering.

how sure are you about this. For this kind of money at stake i am sure a lot of things can be done to unlock value

 

How sure?  Do two things, first read their annual report, it discusses their coal reserves.  You can figure out how much they're worth based on current prices.

 

Secondly call the CEO and ask why they haven't developed those reserves and you'll hear about the contract.  No one is allowed to develop the reserves except for the company under contract right now.

 

I'm not disputing that it can't be developed, the CEO stated it could, it's just that the structure of the contract means the current miner will never do it, so investors/the company needs to wait until the contract expires.

 

PROPERTIES: Mineral Ownership (Coal)

 

Currently, coal deposits in Sebastian Co., AR and LeFlore Co., OK totaling approximately 84,000,000 tons are leased to Wilkem, Inc., an assignee of the original lessee of the lease made in June 1969 for a period of 40 years (hereinafter referred to as the “Coal Lease”) which was renewed by the lessee in 2009 for another 40 year term (through June 2049). In 2006, the current lease was amended so that, in addition to the $90,000 per year minimum annual royalty, the Company may receive an additional payment in the amount of $79,375 annually from Wilkem to be treated as part of the minimum annual royalty under the Coal Lease, dependent on payments Wilkem receives from a sublessee of a portion of the subject property. Should the subject property be successfully developed by the sublessee, the Company may also receive an additional amount up to $190,625 per year as a further minimum annual royalty amount. Certain other changes in the Coal Lease were made that will not materially change directly and immediately any payments received by the Company.

Since the inception of the lease in 1969, the Company has received minimum annual royalty payments which may be credited against future royalty payments owed by the assignee for coal mined and shipped. In 2010, a new sublessee purchased the bankrupt entity and is now operating the mine. As the mine property contains coal owned by Central (leased to Wilkem as explained above), as well as coal owned by other parties, including the sublessee, it is often the case that little to no coal owned by Central is being produced for sale despite ongoing mining activity. This scenario existed at the end of 2012, resulting in

2

minimum production and sales of the Company’s coal from the property during the year. Since royalties due on production and sale amounts in the past two years was less than the minimum annual royalty payments, the prepaid credit toward future royalty payments increased over the time from 2011 through 2012. Even if mining should increase, there is no guarantee that coal will be produced in sufficient quantities to exhaust the prepaid royalty amounts that have accrued since the inception of the lease.

Coal deposits aggregating approximately 92,000,000 tons in place with a net balance sheet carrying value of $722,402 at December 31, 2012 are not presently leased or producing coal in commercial quantities.

 

Detailed and updated descriptions of the Company’s coal properties are available on the Company’s website at www. centralholdings.com.

 

 

http://centralholdings.com/files/CTNR_2012_AnnualReport.pdf

 

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Here is the line about the coal deposits:

 

"Coal deposits aggregating approximately 92,000,000 tons in place with a net balance sheet carrying value of $722,402 at December 31, 2012 are not presently leased or producing coal in commercial quantities."

 

Where did you get the 10-11 year timeframe? In the annual report they say the lease was extended by 40 years in 2009.

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Here is the line about the coal deposits:

 

"Coal deposits aggregating approximately 92,000,000 tons in place with a net balance sheet carrying value of $722,402 at December 31, 2012 are not presently leased or producing coal in commercial quantities."

 

More on this, the spot today is $67.27 a short ton, that works out to $6,188,840,000, guess my estimate was off by $2b.. It all depends on the quality, Powder River coal is only going for $10 per ton, meaning this would only be worth $1b.

 

I don't believe this is as easy as getting in an activist to shake things up, don't you think current management would have tried to monetize it already?  They sure have a heck of an incentive, I believe they own most of the company, plus they could pull some incredible benefits.

 

Kmukul, I'd encourage you to look into this or call the company, maybe you'll have luck where others have failed.

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Here is the line about the coal deposits:

 

"Coal deposits aggregating approximately 92,000,000 tons in place with a net balance sheet carrying value of $722,402 at December 31, 2012 are not presently leased or producing coal in commercial quantities."

 

Where did you get the 10-11 year timeframe? In the annual report they say the lease was extended by 40 years in 2009.

 

Why would they resign that lease--it seems like they would want to mine it by 2009, rather than go another 40 years without the right incentives?

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Here is the line about the coal deposits:

 

"Coal deposits aggregating approximately 92,000,000 tons in place with a net balance sheet carrying value of $722,402 at December 31, 2012 are not presently leased or producing coal in commercial quantities."

 

Where did you get the 10-11 year timeframe? In the annual report they say the lease was extended by 40 years in 2009.

 

This is what the CEO told a friend, the coal could be mined in 2023 or 2024 (I don't remember which, just that it's about 10 years away).

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Here is the line about the coal deposits:

 

"Coal deposits aggregating approximately 92,000,000 tons in place with a net balance sheet carrying value of $722,402 at December 31, 2012 are not presently leased or producing coal in commercial quantities."

 

More on this, the spot today is $67.27 a short ton, that works out to $6,188,840,000, guess my estimate was off by $2b.. It all depends on the quality, Powder River coal is only going for $10 per ton, meaning this would only be worth $1b.

 

I don't believe this is as easy as getting in an activist to shake things up, don't you think current management would have tried to monetize it already?  They sure have a heck of an incentive, I believe they own most of the company, plus they could pull some incredible benefits.

 

Kmukul, I'd encourage you to look into this or call the company, maybe you'll have luck where others have failed.

 

Nate - is that $67 the spot price, i.e. where revenue is derived, or is it some type of transaction multiple on a per-ton basis?

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Obviously if it is the spot price the reserves are not worth anywhere near $6B - stating the obvious I'm assuming.

 

PV10 of proved reserves in the OG industry generally works out to about $10/BOE. Roughly, this is about 10% of the current $100 Brent spot price.

 

So applying his 10% rule of thumb to this coal company, the "PV10" of that $6B is $600MM. This is being generous too given a coal BTU is nowhere near as profitable as an oil BTU. So perhaps 5% is more appropriate? Suddenly Mr. Market doesn't look so dumb.

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Stopped at the Carnegie Business Library at lunch today and looked at some of the old books they have. I can see sitting down and plowing through the Mergent books in an afternoon and finding a few gems.

 

The really old books were cool, lots of information on these companies from 100 years ago.

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image.thumb.jpg.aea0510c0378f3b81bf35d00b9c0f48d.jpg

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