|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|
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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%|
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