|Shares Out. (in M):||93||P/E||0.0x||0.0x|
|Market Cap (in $M):||37||P/FCF||0.0x||0.0x|
|Net Debt (in $M):||-10||EBIT||0||0|
Aberdeen International Inc. (TSX: AAB CN) is a compelling way to gain exposure to the junior natural resource sector, which has been utterly decimated since the commodity cycle rolled over five months ago (TSX Venture Index down almost 40% since mid-February). While it would not make sense to invest in Aberdeen if one expected the small-cap, Canadian-listed mining and energy stocks that comprise the bulk of Aberdeen’s portfolio to continue to fall, the steep discount to the easily quantified sum-of-the-parts valuation and the potential for a value-unlocking corporate catalyst make the stock compelling even without a rebound in the beleaguered resource sector.
Aberdeen is a resource investment and merchant banking company focused on the private and micro/small-cap natural resource companies. The company began its operations in July 2007 but Aberdeen is effectively the publicly-traded, closed-end arm of Toronto-based natural resource powerhouse Forbes & Manhattan (F&M). Stan Bharti is the founder and CEO of F&M and also the chairman and second largest shareholder of Aberdeen. David Stein is both the head of investments at F&M and CEO of Aberdeen.
The idea behind Aberdeen was to secure a permanent source of investment capital for Bharti and his team, which includes over 50 geologists and engineers located in key resource basins around the world, to make early-staged resource-related investments. This boom/bust prone sector requires a great deal of patience and an active, hands-on approach to earlier stage resource investing can be highly rewarding. F&M emphasizes this in all of its promotional materials, stating, “We are NOT traders….we BUILD assets.” Based upon high profile successes like Desert Sun Mining, Consolidated Thompson and First Uranium, where F&M did build assets (leading to substantial realized returns on invested capital) Bharti and his team hoped that Aberdeen would trade at a premium to net asset value as investors would gladly participate in future value creation via ownership of Aberdeen. F&M’s capital comes almost exclusively from Bharti and other insiders so Aberdeen would be the only way for outside investors to gain access to the team’s deal flow and value creation over time.
With the shares now trading at a large discount to the value of just the cash and publicly traded stocks in the Aberdeen portfolio, I would argue that the model has failed, is an embarrassment to Bharti and should be wound down. F&M is now reportedly out trying to raise a private equity fund, which is a more appropriate structure for making illiquid investments at opportunistic times in the commodity cycle than a vehicle like Aberdeen which has a perpetual or evergreen mandate. This effort, coupled with the fact that Aberdeen has been aggressively buying back its stock rather than deploying all of its available capital into a highly depressed resource market, leads me to conclude that Bharti may just unwind Aberdeen. This would in effect accelerate the narrowing of the discount and would increase the IRR for shareholders but is not necessary, in my opinion for an investment in Aberdeen to represent an attractive risk-adjusted return.
Aberdeen has 87 million shares outstanding and at the recent price of CAD$0.40 per share, the market capitalization is a mere $37 million. I calculate the net asset value to be $62 million, which is $0.71 per share or about 80% higher than the current price. Half of that NAV, or $32 million, is invested in publicly traded securities, 30% is in private investments, and the rest is in cash net of some tax liabilities and payables. In the tables at the end I detail how I arrive at these figures but it is worth walking through each component of NAV one at a time.
The publicly traded securities portfolio is based on the detailed disclosure provided in Note 3 of the April 30th interim financial statements. There the entire stock portfolio including the cost basis of each investment is provided. Using prices as of July 2nd yields a market value of $32 million, excluding any value for the warrants or performance rights/shares Aberdeen holds in several portfolio companies. On an apples-to-apples basis, meaning also excluding everything other than common shares, the portfolio declined in value by 13% from April 30th to July 2nd. The median year-to-date return for the 20 stocks in the portfolio is -43% and the median decline from the 52 week high is -72%. Clearly these stocks have been decimated. I don’t apply any additional discounts for taxes, since so many stocks in the portfolio are deep underwater and would not generate any taxable gains if sold, nor do I apply discounts for illiquidity. Sulliden Gold represents 40% of the value of the public stock portfolio (20% of total estimated NAV) and Aberdeen’s investment in Sulliden is only 5% of the company and could be liquidated over the course of a quarter or so. The other positions are much smaller and could be liquidated in the open market as well. Regardless, there is enough of a spread between the NAV and the market value that you could chose to apply additional haircuts to the stock portfolio and still gain exposure to a basket of depressed mining and energy stocks at a meaningful discount.
I value the private investment portfolio, including the loans receivable and the convertible bond that Aberdeen took as part of the proceeds from selling its gold royalties to Premier Gold, at a total of $20 million. I arrive at this by marking down each deal that Aberdeen has marked up back down to its cost and making no adjustment if the deal has already been marked down below cost. For example, Brazil Potash has been marked up by 30% versus the cost basis but I carry it at cost. Temujin Mining has been marked down by 82% and I use this mark. For the portfolio of five loans I apply a 25% haircut to the Aberdeen marks. Likewise for the $9.4 million convertible bond received from Premier Gold (TSX: PG CN), which is a $600 million market cap company, I discount by 25%.
Finally, there is the cash on the balance sheet of $2 million plus the $11.5 million in cash that the company just received from Premier Gold for the royalty sale. From this $13.5 million I deduct the small working capital deficit and the full amount of taxes payable and deferred tax liability despite the fact that the huge declines in the stock portfolio should easily allow for the sheltering of any realized gains for a long period of time.
So the sum of the public portfolio using current market prices ($32 million), the privates and loans marking anything marked up back down to cost and taking 25% discounts on the loan and Premier Gold convert ($20 million) and the cash net of tax liabilities ($10 million) is $62 million or $0.71 per share, an 80% premium to the current stock price. Two stress test type scenarios illustrate the margin for error in this NAV-based valuation. First, if Sulliden Gold (TSX: SUE CN), the largest investment in Aberdeen’s portfolio, is expropriated by the Peruvian government and goes to zero, the NAV becomes $0.56, which is 40% above the current price. Alternatively, if you write off the private equity, loans and Premier Gold convert and just look at the stocks and cash, you still get $0.48, still comfortably above the current price).
It is also worth noting that the company pays a $0.01 semi-annual dividend which equates to a 5% yield. They reiterated on the recent quarterly conference call that they were committed to maintaining the dividend despite the implosion in the resource sector and their portfolio as it is a fairly modest amount of cash and they can easily create the liquidity from their portfolio. I would prefer that if they are going to continue running Aberdeen that they either invest excess cash back into the sector at these fire sale prices or buy back even more stock of Aberdeen. Aberdeen’s board and management team own 14% of the shares and cash bonuses are based on pre-tax portfolio returns, which have been negative, so they are probably happy to supplement this via cash dividends on their holdings.
|As of 4/30/12 Update||Current (7/2/12)||Percentqage Change|
|Public Investments||Shares Held (mm)||Stock Price||Value ($mm)||Stock Price||Value ($mm)||% of NAV||4/30/12 to Current||YTD||From 52 Week High|
|Black Iron Inc||6.00||0.45||2.7||0.25||1.5||2.4%||-44%||-55%||-78%|
|East Asia Minerals||4.00||0.31||1.2||0.26||1.0||1.7%||-15%||-45%||-92%|
|Total of 9 Nothers||NM||NM||1.2||NM||1.2||2.0%||NM||NM||NM|
|Company Valuation||Adjusted Valuation|
|Private Investments||Cost||Markup (Down)||Value ($mm)||Markup (Down)||Value ($mm)||% of NAV|
|6 Other Equity Investments||0.87||28%||1.1||0%||0.9||1.4%|
|Portfolio of Loans Recievable||3.98||0%||4.0||-25%||3.0||4.8%|
|Convert Received from Royalty Sale||9.40||0%||9.4||-25%||7.1||11.3%|
|Cash and Other||Value ($mm)||% of NAV|
|Cash pre Royalty Sale||2.0||3.3%|
|Cash Received from Royalty Sale||11.5||18.5%|
|Net Working Capital||(0.3)||-0.4%|
|Taxes Payable and Deferred Tax Liability||(3.6)||-5.8%|
|Total Net Asset Value||62.2|
|NAV Per Share||$ 0.72|
|Current Price||$ 0.40|
|Upside to NAV||79%|
|Entry||07/06/2012 09:44 AM|
I think that if you wanted to hedge this and isolate the discount, you would first look to short Sulliden. I don't think it has a very high short interest and it is a $250mm market cap (decent size) but I have not checked aroudn on borrow availability or rates. The GDXJ would be the best liquid ETF to hedge, and since the correlation across different sectors in the commodities universe is high, I don't know that you need to worry about also shorting base metals and E&P related ETFs.
However, I think this trade is better expressed long only (and sized down given the higher risk profile) given how hard hit the portfolio has been.
|Subject||RE: Corp G&A|
|Entry||07/06/2012 10:12 AM|
good comments/questions. thank you.
during the 12 months ended 1/31/12 they bought back 2.54mm at 75c, then during the next 4 months (ended with the announcement of Q1 results) they bought back 487K at 48c. So that is 3mm shares or about 3.5%. Not a super impressive total. However, doing some back of the envelope math, this was about 320 trading days and perhaps a third were likely blacked out from repurchase activity so that leaves 213 days to buy back stock. The average trading volume over this period was 200K shares per day so that is 42.6mm shares meaning that they were 7% of this total. They can only buy a certain percentage of the daily trading volume under TSX rules (I thihnk it is 10% but not sure) so using this guesstimate they were about 1mm shares shy. Sorry that was likely confusing. Was trying to show that of the non-blacked out trading days, using 10% of volume, they should have bene able to buy 4.2mm but bought 3mm. Still not super impressive admittedly, but a reasonable pace when scaled for this stock and the limitations on buybacks.
as for G&A, I will go back to managemetn to confirm but I believe that G&A has been much higher in the last year than is expected looking forward because the past year was very active on several fronts (setting up new portfolio companies, closing complex deals with their key private companies like Temujin, lawsuit with Simmers & Jack, and most importantly selling their gold royalties). Management said on the conference call that they are likely to work with existing investments and within the public space in this environment rather than setting up new early stage companies or doign more privates. Also, with the royalty gone and litigation basically done, this is a far simpler (and hopefully cheaper) portfolio to manage. Finally, they had a two (really three) headed monster with David Stein and George Faught running the portfolio and Bharti baby sitting as chairman. Now Faught has resigned leaving Stein to run the portfolio. That will save money as Faught will just be a director.
Still, I agree with your math/logic. If I thought that Aberdeen would be aroudn for 10 years worth of $6mm of G&A leakage and was just playing for the discount convergence, then I definitely would not own any stock. I think that the portfolio has far more upside than downside (which I do not really get into in the writeup since it was cumbersome to talk to much about Sulliden, Belo Sun, Brazili Potash and Temujn (they key portfolio companies) but aside from that I think that actions will be taken to wrap this up if F&M can raise enough outside equity to keep investing in the sector and earnings fees without Aberdeen.
|Subject||RE: Intrinsic Value of Holdings?|
|Entry||07/06/2012 10:28 AM|
I follow the sector fairly closely and have an opinion on most of the major positions (and in the past have owned some names that Aberdeen has also owned, like CRK CN unfortunately). For the publicly traded names, I would rather not give price targets since I am basically just saying that the market is wrong and my "intrinsic value" or "NAV" are more accurate. I might beleive that, but wouldn't expect any savvy VIC members to. I will say that Sulliden's Shahuindo gold/silver project (100% owned) in Peru is a very attractive asset. It has the potential to become a simple open pit, heap leach operation with expected life-of-mine cash costs on the low end at $500 per ounce and capex in teh $250mm range. Even at $1200 gold, this is a decent asset in large part because this is an area with good infrastrucutre (near severl multi-million ounce mines). The feasibility study is expected before year end and will clarify the economics. The problem is that they are in Peru, which scares everyone, including bankers needed to provide project financing. So that is why the stock trades at $1 vs. intrinsic value of $2.5 or more on a fully financed basis using $1500 gold and 10% discount rate.
I have spent some time on the private deals and can share my thoughts but i thought it made more sense to write down anythng Aberdeen has written up (Brazil Potash, Irati Energy, Raven Minerals) and use Aberdeen marks for what has been written down (note that Temujin has a $12.7mm cost basis -- decent copper/gold assets but in Mongolia -- written down to $2.4mm).
hope this helps.
|Subject||RE: Forbes & Manhattan|
|Entry||07/06/2012 11:31 AM|
Thanks for your comments JetsFan. I don't view them as overly harsh though I would characterize his reputation as mixed. I thought it was Luxor that controlled/led the CRK transaction but I could be wrong. I know people were upset about the Longford situation (justifiably so) I didn't know about thh DSM loan. I would not characterize F&M as shareholder friendly, and hope it didnt come across that way, but I also could have pointed out that Bharti is known for having sharp elbows particuarly when struggling companies need financing and few or no others step up. There will be fee leakage, as there generally is with Canadian listed micro cap resource companies, but there will aslo be successes (I mention 3). So, if this sector continues down the tubes and companies, including some larger ones like Sulliden, are being carved up for parts, then yes I would not want to be there along side Stan (despite his ownership of Aberdeen stock). Your point is well taken.
|Entry||07/09/2012 02:59 PM|
I too was dismayed by the option grant answer on the conference call. This definitely is in stark contrast to how fund managers are compensated but unfortunately doesn't deviate much from how Canadian junior resources companies run their options programs. It would have been more fair (or at least less stinging) to take a similar sized grant in the when their portfolio tanked as opposed to a larger one.
I got a similar answer on G&A, meaning that it will be much lower but shouldnt have been as high as it was in the quarter just reported.
I own the stock because I think the portfolio is extremely cheap and while some discount due to poor corporate governance and value erosion from G&A is warranted, this large of a discount occuring at the same time that the portfolio/sector is so depressed makes for an attracive risk/adjusted reward in my opinion. That being said, the points made on Bharti's antics and the risks of being involved with him are well taken.
|Subject||RE: RE: Transaction|
|Entry||08/27/2012 07:10 PM|
I have a call scheduled with management later in the week to get their spin on the deal. And I have some more work to do valuing Dacha. But, based on what I have done so far, after marking to market Dacha's rare earth portfolio (prices have collapsed) it looks like Dacha is still very undervalued. But, of course so is/was Aberdeen and this is a stock for stock deal. So while I am not invclined to sell given the gross undervaluation even pro forma for the Dacha merger and marking down Dacha's illiquid RE stockpiles, I hate the optics of this deal (mashing together two Bharti companies and adding Scott Moore to the management mix -- he does not have a good reputation).
Yes, they should/could have just sold Sulliden shares and bought Dacha for cash (though buying their own stock more agressively would be even better).
|Subject||Anyone still in the name?|
|Entry||11/18/2014 02:45 PM|