Description

TriMaine Holdings Inc. (TRMH) is an interesting special situation investment valued at a fraction of what it seems to be worth. The corporation is said to operate in the financial services industry, and future plans stated in their filings seem to point in that direction, but currently the company simply holds real estate and equity ownership in MFC Bancorp (MXBIF).

The company is in fact an 83% owned subsidiary of MFC Bancorp with approximately 15.2 million shares outstanding. TriMaine is very thinly traded (volume is many times zero) and has a market cap of $17 million at the current $1.12/share. TriMaine Holdings Inc. owns 1.87 million shares of MFC Bancorp, which are currently worth about $41 million at current market prices, and the company also owns real estate in the Puget Sound region in the state of Washington. Total liabilities are $5.463 million ($4.949 M are deferred income tax liability) as of the last 10Q. The stock ownership of MFC alone is obviously worth much more than the current market value of TriMaine. So the main question is how much is MFC Bancorp really worth? And, how much is that real estate worth?

The real estate in Washington consists of undeveloped property of approximately 65 acres in the Puget Sound region zoned for various commercial uses; and approximately 47 acres of undeveloped property in the City of Gig Harbor, Washington partly zoned for residential construction and some acres for commercial use. TriMaine plans to sell the real estate in the Puget region and develop through partnerships or joint ventures the land in the City of Gig Harbor. Either way the real estate is not what excites me but it does have some value. I estimate that the real estate is worth around $9 million (calling to the surrounding areas and getting average per acre costs).

The real value of TriMaine lies in their ownership of a little followed merchant bank call MFC Bancorp. The merchant bank provides specialized banking and corporate finance services as well as offering advice to corporations on mergers and acquisitions. MFC also invests its own capital to realize long-term gains. The investments MFC makes are in assets whose price does not reflect intrinsic value, typically due to legal, financial or other distressful circumstances according to their annual report 2002. The report also then goes on to state that MFC’s investments are generally not passive, and they seek investment opportunities where their financial and management expertise can add or unlock value.

Lip service to these principles means nothing to me but MFC has proven they practice what they preach and hear is how one of their investments will benefit TriMaine. MFC bought part of a cobalt mining company a few years back when the demand for cobalt was next to nothing. The purchase price was something like $260,000. MFC shutdown the mine and waited for a sunny day. Now cobalt prices are very high and MFC is in the process of cashing out. In fact, they sold forward half of the 2004 production, which will result in $13 million of free cash to MFC. The company’s president, Michael Smith, has declared to distribute the cobalt related assets in a special tax-efficient manner to shareholders. This would equate to about a $1.07 dividend giving TriMaine a cash inflow of about $2.0 million.

MFC Bancorp is a very interesting story and I encourage more people to take a look. As for whether not it is worth the current $22/share it trades for, here are a few numbers:

Price = $22
Book Value = $16.42
ROE = 20% (consistently)
P/E = 7

To give MFC Bancorp more backing, some of the top holders of MFC equity include Tanaka Capital, FMR (Peter Lynch spoke about MFC in an article I read), and a small stake is held by the great value firm Tweedy Browne.

Final Thesis: By owning TriMaine Holdings Inc. you get about $9 million worth of real estate, $41 million worth of MFC Bancorp stock (that seems undervalued but worse case book value is a low point), for a price of $17 million. The planned distribution of the cobalt assets provides more cash to TriMaine and the final sale of the cobalt assets (planned by MFC but no details yet) will undoubtedly increase cash even more. A quick look at the share of the cobalt assets belonging to TriMaine via ownership of equity (counting all cobalt assets not just the recent announcement of distribution) plus their ownership of real estate, equates to their current market cap. So you are getting the MFC Bancorp stock for free. This investment is a good place to stash some cash in the current expensive environment where great businesses cannot be bought cheap and interest rates are low. The problem is obviously the liquidity of shares.

Definitely a special situation investment in my opinion, but if you believe in management at MFC, TriMaine is ran by the same individuals and they seem to have similar investment plans for TriMaine as MFC. Use the company’s own capital to make investments in undervalued assets. If that plays out, TriMaine is worth a whole lot, and if MFC is currently undervalued it is worth even more. In the meantime, TriMaine is still worth much more than the current market value even if you do not believe in the future of the company. I like it for a special situation investment not a long term holding.

Catalyst

1) Distribution of cobalt related assets by MFC Bancorp (TRiMaine's pro-rata share