Archive

Archive for the ‘Investment Idea’ Category

Oroco Resources (OCO): A 9 year legal battle comes to an end

May 26, 2018 1 comment

(Note: This is the undisclosed position that I mentioned in my 2017 performance post).

Oroco Resources (OCO) is a mineral exploration company with history of gold assets in Mexico. It is a company that has a history of acquiring assets, proving resources, and then selling assets. I hate investing in companies that are associated with gold mining but this is different.

But it is not the gold assets that makes Oroco an incredible investment opportunity. It is a copper asset that they recently got possession of. It has a story that includes corruption, copper price swings, fictitious lawsuits, securities fraud, naive investors, and a happy ending.

The asset that Oroco has acquired has a complicated history. But the story going forward is very straight forward. Oroco owns a large piece of this asset that is unlikely to be put into production by Oroco. The play is to provide some updated resource assessment and sell the asset (in an extremely bull copper market). The asset is something that major producers salvate over. And we have a tiny $20M market cap company owning it.

The asset

Santo Tomas is an asset that been known for decades as having a large copper deposit. This is an asset located in a mining friendly country (Mexico), with infrastructure (access to roads and railway) in place to mine and sell the copper. This is a huge sized asset, 7B+ pounds of copper, and some gold and silver. The copper deposit information is from a study published in 1994, so with the higher copper price and newer data we could see the asset size increase.

Also, the company has recently acquired adjoining properties. I’ve been looking to find the resource estimates for these properties but haven’t found anything concrete yet. So I put no value on it but it is likely worth a decent amount (actually a huge amount if you compare it to Oroco market cap).

The option

(This is a very complicated story with legal cases in Bahamian, Canadian, and Mexican courts. Fortunately there is a site dedicated to layout the entire history and court documents to prove the story. http://santotomascopper.com/

The asset had been owned by Ruben Rodriguez. The asset was owed by a Bahamian company, Ruero International, which Ruben controlled, via a Mexican company. In 2001, copper prices hit rock bottom. Ruben wanted out, so he sold the asset to Fierce Investment.

The sale price was $8M, which Fierce was required to make in a series of scheduled payments. The agreement included a clause that if Fierce didn’t make the payments, Ruben could get back the asset (this is key as you will see below). Fierce initially made a few payments to Ruben but then they stopped making payments.

Fierce was controlled and run by David Hermiston. David basically was a crook who didn’t have any plans to make the entire $8M payment. David needed cash to keep making payments. So he setup a company in Canada, via which he could raise capital and then make payments.

David setup Aztec Copper in Arizona. He raised some capital from naive investors and signed a deal with Fierce. Fierce sold its rights to acquire Santo Tomas for cash from Aztec. Aztec agreed to make the scheduled payments to Ruben for Santo Tomas.

Aztec made initial payments but then stopped. So we now have a situation the acquirer is in default and Ruben can get back the asset (since payments haven’t been made).

Oroco to rescue

In 2010/2011, the management team of Oroco comes to the rescue of Ruben. Basically, a group composed of investors including Oroco’s management helps Ruben get back the legal ownership of Santo Tomas and in return, they gain an ownership interest. Once successful they negotiated to sell the interest they have earned to Oroco. (Oroco is currently negotiating the acquisition of the remaining interest that it doesn’t already own.)

Ruben isn’t a rich guy and he is based in Mexico. So he doesn’t want to deal w/ the international legal rules and doesn’t have the capital to fight the case to get back the asset.

The legal battle is extremely complicated. There are multiple jurisdictions (Bahama, Mexico, Canada) and fake lawsuits (between Aztec and Fierce).  Fortunately for investors in Oroco, the legal battle is well documented. http://santotomascopper.com has a really good explanation of the entire legal battle and legal documents showing Oroco and Ruben getting ownership of the assets. (The company putting up a website to document all the legal documents in a public place, seems like a clear indication to me that this company has no intent to go into production. They want to sell the asset to some).

Happy ending 

Oroco has been fighting the case and working its way through the international legal issues and the Mexican rules to get the asset back to Ruben and then registered to Oroco. This has been a long and expensive process. But after 9 years the end is here.

Oroco now owns the asset via a private company it has invested in. From what I can tell we still have couple of legal hurdles to complete. But these look like mostly formality. Oroco owns the asset.

Valuation

We don’t really know how much Santo Tomas is worth. The asset was never put into production, so we don’t have a good estimate on the size of the resource or the production rate. We have some old data that says it is a large copper deposit. The size of the asset is something a medium or large major could only get into production.

Copper is high demand. All the talk about EV cars has been revolving around lithium and other minerals needed for batteries. But copper is a huge component and demand has been increasing. Also, copper has many other applications. As the Asian economies grow they will need more copper for all the construction that is happening.

If you look at the copper spot prices, we are currently around $3.2. We are within 10% of all-time highs in the last 5 years. There isn’t much new copper assets coming into production. Infact, copper was one of the best metal investment in 2017 and the future looks really good.
(https://www.cnbc.com/2017/10/24/goldman-says-market-not-fully-appreciating-whats-sending-copper-higher-as-it-ups-forecast.html)

So how much is Santo Tomas worth?

An old study on the asset:

We do have an old, 1994, study that discusses the economics of the Santo Tomas property. It states: (http://webcache.googleusercontent.com/search?q=cache:baJ9NGuW-oIJ:www.northernminer.com/news/positive-study-at-exall-s-santo-tomas/1000179477/+&cd=2&hl=en&ct=clnk&gl=us)

 “Capital costs for a 60,000-tonne-per-day operation utilizing all new equipment are estimated at US$318 million. The payback period will be 6.6 years with a rate of return (ROI) estimated at 16%. These estimates are based on US$1 per lb. copper, US$380 per oz. gold and US$5 per oz. silver.”

$1 in 1994 is worth $1.69 in 2018. So the capital requirements are $540M. The price of copper was $1.20 in 1994. So that is $2 in 2018, current copper prices are 60% higher. And this study is only the Santo Tomas asset, doesn’t account for the adjoining property (Oroco has acquire the adjoining property also). The article mentions the adjoining property is also very good.

For a company with a market cap of 20M, it doesn’t take much to move the valuation. But owning an asset like Santo Tomas makes it worth multiples of current valuation. We don’t need any exact numbers, but just based on the rough numbers above we know Oroco is worth a lot lot more. Don’t want to state how much it could be worth as it sounds too absurd, but I don’t think 10x from current prices is not absurd.

Old transaction in close proximity to asset:

In 2007, a Chinese company acquired an asset (Bahuerachi) close to Santo Tomas for $213M. Copper prices were dropping at that time. Current copper market prices are much higher, in the $3-3.50 range, a tight copper market with very few large deposits in a friendly mining country. The Chinese company acquired the asset for around 4.7 cents per pounds of copper in ground. At that price, Santo Tomas is worth about $350M. But the copper market is much different now and prices much higher.

Recent M&A:

In Nov ‘17, Altona Mining was acquired. It is an Australian based mining company. The sale price was $70M, about 4 cents per pounds for their copper resource. That values Santo Tomas’ 7B pounds at $300M. But copper prices have been moving up and Santo Tomas has much better geography and mining jurisdiction that Altona. The Santo Tomas property is much easier to access, has better infrastructure in place, and Mexico is much more friendly than Australia for mining.

Based on the different methods the asset is likely worth $300M+. The company currently has 88M shares outstanding. The current market cap is roughly $22M (CAD). Comparing it to the current market cap we have a huge runway.

Insider Buying

If you look at the insider buying the CEO has been buying all the shares he can. From my records he has bought over 3M shares just in Q4 ‘17. The company had 88M shares O/S, so that is a huge % of the company to acquire in the public markets in a short time period.

Risks

– Even though Oroco has all the legal documents to show they have own the court rulings and own the assets, there could always be something that we don’t know.

– The company will likely need some capital to do testing and proving out the resources. They recently closed a PP that has been in the works for 6+ months. So now they have capital to do some initial study report and market the property. If needed, I think mgmt can wait until price goes up to do another raise for a fully study.

 

More Reading

The company’s legal battle makes for lot of changes that are happening rapidly. The best resources I use to stay updated is the santotomascopper.com site and Calichebahada.com site.

http://www.santotomascopper.com

http://webcache.googleusercontent.com/search?q=cache:baJ9NGuW-oIJ:www.northernminer.com/news/positive-study-at-exall-s-santo-tomas/1000179477/+&cd=2&hl=en&ct=clnk&gl=us

https://www.swissinfo.ch/eng/bloomberg/copper-deals-off-to-best-start-in-12-years-as-prices-surge/43857014#.WmxeUyMdlJU.whatsapp

http://calichebahada.com/

http://www.stockhouse.com/companies/bullboard?symbol=v.oco

 

Advertisements
Categories: Investment Idea Tags: ,

Hollywood Media: Market is sleeping to huge event

November 13, 2013 4 comments

This one is a list minute idea so it could go away quickly, but just goes to show that market is not efficient.

Hollywood Media has been written up quite a bit. Baker Capital owns a nice 15% of the equity. Basically it is an asset play. The market cap is 33m w/ cash of 25M. The biggest asset that has been hard to monetize so far is the stake in movietickets.com. There has been a case going w/ AMC and Hollywood Media. HOLL saying AMC is in contract to sell tickets via movieticket.com. AMC broke this contract when it went to fandango.com. This has been a legal case that just has been dragged out for years. although AMC has been looking to go public and has impetus to settle.

The court case was suppose to go in-front of judge on Nov 13th, tomorrow. But if you look at the court website it says the case is now settled. If you google or search on SEC you don’t see any filings. I just googled the court page from google cache as of Nov 4th and the case was not settled. But today the same page says settled. so looks like it is an event that has just occurred but no one has really reported anything.

google cache – Nov 4:
http://webcache.googleusercontent.com/search?q=cache:7Nb2ld6-s4MJ:15thcircuit.co.palm-beach.fl.us:8080/web/guest/sasser/trialcalendar+&cd=1&hl=en&ct=clnk&gl=us

current page:
http://15thcircuit.co.palm-beach.fl.us:8080/web/guest/sasser/trialcalendar

Now this could just take off  but given that HOLL is a small cap, i wouldn’t be surprised if you get a day or 2 purchase window. We don’t know the details of the settlement, so there is an uncertainty here. But for 33M market cap, w/ 25M in cash you are basically putting very little at risk. Unless HOLL got out foxed in the negotiation, there should be plenty of value created for HOLL from this settlement to cover the risk at current prices.

Categories: Investment Idea

Investment opportunities

November 5, 2012 1 comment

This market is very interesting, there are a few compelling investment opportunities. Overall the market is not filled with many investments. The few that I’ve been looking at in the last few days: Western Union (good piece from Value Ground) and Pitney Bowes. Western Union is an extremely compelling company with the number one position in the market, number 2 is way far behind. Pitney Bowes is similar to WU and has a sweet 11% dividend yield.

Categories: Investment Idea

New buy: JC Penney

June 10, 2012 Leave a comment

I’ve recently bought a position in JC Penney. The JCP transformation is well known. The story became public when Bill Ackmann reported his initial stake in JCP, then his fight to make changes to management, and finally with the appointment of Ron Johnson.

The vision that Ron Johnson has put out for JCP is very compelling. The vision that comes to mind is a mix between Nordstorm’s, Apple Store, and a value conscious buyer. The store-within-store idea is very interesting and it is something that Nordstorm has done very well with showcasing brands within its stores. If JCP is successful in its implementation, the future for JCP is extremely bright and compelling.

When Ron Johnson put out his vision for JCP, the stock took off. Getting to a high of $36/share. Since then the stock has come back down to less than $25. At these prices you are paying a small premium to what Ackmann paid to build his position.

The company has recently hit poor revenue numbers. With any transformation you will see initial hit taken to revenue and the bottom line. What is interesting is the success the company has in cutting off expenses and the ability to sign up brands to JCP’s new vision. I think if you are patient you can see fruits of this transformation in 12-18 months. Some investors have been saying that the fruits will be visible in a few quarters, but transformations always take longer than expected. The company is still building its management team, so give the company some time to start showing results.

The company also owns large amounts of land and has very cheap long-term lease rates. The value of these assets are understated on the financials, due to wonders in accounting. So at current prices you are getting assets that can create some margin of safety.

There are plenty of write-ups online that discuss the valuation for JCP. So no need to restate what is already public. Just look at Bill Ackmann’s detailed presentations and put a decent discount to his numbers, just to be safe.

Doing valuation on JCP is tricky. You get into numbers where you start projecting success on the transformation. With these numbers, the valuation can dramatically change based on how well you think the transformation will go. I basically look at it as what is the worst case situation, the management fails in its transformation and is forced return to previous model of a crappy retailer. In that situation, given the assets on the book, the downside from today’s prices is limited.

Categories: Investment Idea

Investment Idea

August 8, 2011 2 comments

The market craziness today has created some amazing buying opportunities. Here is one that Mr. Market is providing that is absurd.

Over this weekend Berkshire came out and made an offer to buy Transatlantic Holdings for $52 a share, an all-cash deal. Transatlantic Holdings is in the reinsurance business. Although this investment opportunity doesn’t require any knowledge about the insurance business or Transatlantic Holdings’ financials. Berkshire’s offer to buy the company for $52 a share is one of the most certain things in the investment world, second only to promises by US Government to pay its debt. Berkshire has never, best of my knowledge, made an offer to buy a company and then run into problems getting cash to finish the transaction. So, for all purspose I look at this offer as something that doesn’t hold any financing risk.

I think the big uncertaintly (not risk) here is Transatlantic Holdings’ board rejects this offer. Typically a board would reject an acquisition offer only if they believe the company is worth more than the offer price. There are other reasons as well, like the board believing the transaction can’t be completed due to financing or regulatory hurdles to complete the transaction. In this case, I think the biggest uncertaintly is board believing the offer price is a low-ball offer. In that case, the board would have to convince the shareholders the company, as a standalone, is worth lots more than $52 a share. If the company is worth less than the offer price, the board would be best served to accept the offer.

We know the type of companies Berkshire likes to acquire. We know the management qualities that Berkshire looks for in potential matches. So we can rule out any risk that the management and board of Transatlantic is using the company as a vehicle for personal enrichment at the expense of shareholders.

At close of day on Monday, the company’s shares were trading for $48.31 a share. The is a difference of $3.69 a share, to the offer price. So you are getting a 7.64% return on an investment if the offer closes. If the offer doesn’t close, the board has to show how the company is worth more than $52/share. There is potential upside if someone else comes and out-bids Berkshire.

The biggest downside on this investment is that the deal doesn’t close. Since we know the quality of management, based on Berkshire’s screening, you have got to believe management is top quality. So management rejecting this offer means you have a good quality management that believes the company is worth lots more than the offer price.

Categories: Investment Idea

Portfolio updates

March 11, 2011 2 comments

Some recent updates to the portfolio. Due to lack of time, the write-up are brief.

I sold out of WellCare and Radisys. Although I believe both these companies are cheap and should do well, I sold out to acquire other companies where I feel more comfortable with the management team and the business. I also want to keep plenty of cash on hand.

Also, early in the quarter I was increasing my holding in Harvest Natural Resources, KVH Industries, and Heckmann. Their shares pulled back early in the quarter for no apparent reason, creating a good opportunity to buy more. All of these purchases worked out well as all 3 have moved up substantially since the start of the quarter.

New Buys

The Dolan Company: A high ROIC company with a strong moat, run by a very strong management team that acquires companies (mostly providing services to the legal profession) and then scales the business. The management team has a history of successfully applying the strategy in early 2000 when the company acquired a group of public records companies. The company sold these businesses and then used the cash to acquire businesses that provide services to the same industry. Most recently the company has acquired 2 companies, NDeX (providing outsourcing for the foreclosure business) and DiscoverReady (providing service for the discovery process in legal cases, the process where lawyers collect information/support for their case).

The company is the leader in providing back-office and IT services to law firms doing foreclosure filing for the banks. The company has a large presence in the big states w/ foreclosures and they are the leader in each of these big states. When a bank wants to foreclose a property, it assigns a law firm to work on its behalf. The law firm can do the paperwork, management of information, contacting/mailing letters to the homeowner, …. or it can outsource it to Dolan Company, their NDeX platform. Dolan gets paid a set fee for each file it takes over. The company has signed long term exclusive contracts w/ large foreclosure law firms for these services.

The foreclosure process has been a stop-n-go. With all the talk in the last 2 years about what to do w/ the large foreclosure pipeline, the only solution is to actually foreclose on these properties. I don’t think there is any other alternative that is going to work. The recent robo-paper problem has delayed the foreclosure process but the number of properties that need to be foreclose only increases. Interesting, the company reported its Q4 numbers today and the revenue/profits were not that strong. The reason was the slow-down in foreclosures. Although its FY 2011 projected numbers stayed the same. So the company believes any delay in foreclosures doesn’t mean revenue is lost, just delayed.

DiscoverReady is a new business acquired a year ago. This is a high growth business, growing double-to-triple digits. One of the major cost areas for lawsuits is the discovery process, where the law firms collect data to support their case or how to fight the case. Basically the DiscoverReady process has shown to substantially reduce costs and time. There have been a few law firms using this service until recently. The company is looking to increase the law firms using the product and so far the results have been very good.

The company also has many other smaller businesses, some of them are the leader in their area. Although the above 2 are the main drivers of growth.

The company has grown by taking on debt to do acquisitions. In the last couple of years, after the 2 recent acquisitions, the company has been working on paying down debt. They have reduced debt dramatically and I believe we will start seeing the company now using the cash flow to buyback shares. In the most recent CC, management said they think the current share prices are cheap and would see anything less than $30/share a cheap (compared to current price of $12. I the $30 target was a bit sarcastic but not too much of a stretch).

The company has about $138M of debt, market cap of $365M. They are doing EBIDTA of $92M w/ expectation of $100M in FY 2011. This is a high margin business w/ little CapEx requirement. Management has been buying shares in the $10 range. The management is accessable, has strong history in this industry, and smart allocators of capital based on their acquisition history.

Hallmark Financials: It is rare to find a very well run insurance company, with huge ownership by management, conservative investment portfolio, history of smart acquisitions, and company buying back shares. To find it at a discount to tangible book value makes is very tempting. The company is selling for 75% of book value, not a huge discount but the company has been growing book value at 16% annually for the past 5 yrs. The company is selling for less than half of the company’s investment portfolio, made up mostly of muni and corporate bonds. The company is controlled by hedge fund Newcastle Partners, run by Mark Schwarz. The company recently announced plan to acquire upto 3M shares, currently there are 20M shares outstanding. So we could get over 15% of the company bought back. In January, Hallmark filed a registration statement in which it mentioned that Newcastle is to sell 3.1M shares to Hallmark. Newcastle currently owns over 31% of the company. I see this as an opportunity to buy the company a discount to book value with plenty more upside from growth in the business and share buybacks. Schwarz has mentioned that he is prepared to hold the Hallmark investment for many more years and has plans to make Hallmark much bigger (The recent selling by Schwarz is due to liquidation request at Newcastle).

 

Categories: Investment Idea

New buys and adding to existing position

January 24, 2011 Leave a comment

I haven’t been able to update the blog regularly. In the last couple of weeks, I’ve bought some new positions.

Reed Resources

This is a small mining company in Australia with a very compelling risk/reward opportunity. The company has 3 main assets: gold, lithium, and vanadium. Any one of these three assets could make this investment a multi-bagger. The lithium assets are the most interesting and should make the biggest short-term impact on the company’s valuation. The gold assets were minuscule until a few week ago. Although a recent acquisition of a gold mine makes the gold assets worth multiples to the company’s current valuation. Finally the vanadium assets could have huge upside, although it will require a much longer time to realize the value.

I think any of these 3 core assets will make the company worth multiples to today’s valuation. Management has skin in the game and have shown to make smart decisions (the recent gold mine acquisition is a great example).

Some research reports:

Hallgarten & Company (focused on the lithium assets)
Shaw research (on the vanadium assets)
– Recent company presentation (detailed discussion on the recent gold mine acquisition)
A SumZero write-up on the company (requires login)
Other research reports on the company

 

Radisys (RSYS)

I recently acquired a small position in Radisys. About six weeks ago, the company announced that they won’t hit the Q4 revenue guidance. The stock took a hit and allowed me to buy an initial position.

The company has a market cap of $203M, cash of $133M and debt of $50M. The company has a legacy product that is declining in revenue and a new product that has strong growth ahead. The company should easily do $20-25M in FCF in 2011, creating a huge discount at current valuation.

A few months ago we posted David Nierenberg’s, of D3 Funds, letter to the board. Since the letter, the board has approved a share repurchase plan.

 

MAM Software (MAMS)

This is a micro-cap software company with a huge moat. The company provides an e-commerce solution and business management system for auto aftermarket. The company has been a turnaround story for years. The last few quarters, the company has started to show the strong cash flow generation with high ROIC. The company should be able to make around $6M of FCF annually, compared to the current EV of $22M.

A SumZero write-up on this company (shouldn’t require login)

 

Also, in the last few days I’ve been adding to my HNR position. There has bee a big pullback in the HNR shares in January, down almost 12%. I don’t believe anything has fundamentally changed with the company in the last month. The results from the Indonesia drilling will still take a few weeks. I see the pullback has a great opportunity to buy a company with a low-risk of a loss and huge upside within the next 6 months.

Categories: Investment Idea