I wrote earlier this month about how there are no mistakes of “omission”. My thinking is that it is never a bad idea to pass on a potential investment if you are not 100% certain that you like the price. Of course you are going to miss out on some big successes, but you are going to greatly reduce your mistakes and overall end up having more cash available to deploy when true mouth watering opportunities present themselves.
So while reminding myself that I am perfectly content to miss out on some large profits I revisit Aberdeen International. Aberdeen is a publicly traded merchant bank that has a portfolio of publicly traded investments in early stage resource companies.
The company is easy to value as most of the portfolio can be verified through open market transactions. On July 5, 2010 I wrote the following with the stock price of $0.35 (as of yesterday it is $0.75).
“I've known about this one for a while. A very small and very undervalued company called Aberdeen International (AAB-T).
Aberdeen is a global resource investment company and merchant bank.
Their focus is on the resource sector and especially gold.
I'll get right to the good stuff and will take a deeper dive into the portfolio during another article later.
This valuation work is not rocket science.
Here is what everything on the company balance sheet adds up to from a valuation perspective (rounded to the nearest million at Apr 30):
Publicly Traded Securities $38mil
Private Investments $11mil
Non Trading Warrants $10mil
Loan Receivable $8mil
Value of Gold Royalty $20mil
Total Investments/Assets $88mil
Less: Accounts payable/other liab $500k
Total Net Assets $87mil
Shares Outstanding 87.5mil
Value per share = $1.00
Current Share price is $0.35
Couple of comments:
1) You can value the $38mil of publicly traded securities yourself as they are obviously publicly traded. So the value of those securities alone is more than the current stock price per share
2) The gold royalty I valued at $20mil which is 10x the $500k per quarter that the company is currently receiving (actually likely higher with the move in gold prices).
The company is taking advantage of this frustrating discount to NAV as it bought back 10% of the shares oustanding in 2009 and will do so again this year.
Management and directors own 14% of the company so there is considerable motivation to close this discount and realize a 100% plus return from current prices.”
So pretty simple valuation. Doesn’t seem terribly risky as the opportunity is across a portfolio of investments. The insiders are aligned with shareholders through a sizeable position. But I decided to take a pass and as a result I’ve missed the ride from $0.35 to $0.75 in half a year.
Why did I take a pass ? Gold. I don’t get it. To me the intrinsic value of the commodity seems to be based on a popularity contest rather than supply and demand. There was a recent article by Howard Marks of OakTree that sums up my thinking (on a much higher level):
The funny thing is that because gold has done so well and the underlying investments of Aberdeen have increased in price as well the discount to Net Asset Value has hardly been reduced despite the stock price rise from $0.35 to $0.75. Here is the most recent update from the company:
“TORONTO, ONTARIO -- (MARKET WIRE) --12/16/10 --ABERDEEN INTERNATIONAL INC. ("Aberdeen", or the "Company") (TSX: AAB) is pleased to announce that it has released its financial results for the third fiscal quarter of 2011, endingOctober 31, 2010. For more information please see the Company's quarterly financial statements and Management's Discussion and Analysis ("MD&A") posted on SEDAR at www.sedar.com.
As atOctober 31, 2010, Aberdeen's Shareholders' Equity (or Net Asset Value, "NAV") was$115.5 million, or$1.33 per share. Aberdeen's shareholders' equity increased by$17.5 MM from$98.0 million at the end of Q2 2011. The increase in shareholders' equity was due largely to exceptional performance of Aberdeen's investment portfolio in the third quarter, which increased in value by 40% (see press release ofNovember 9, 2010). The Company enjoyed very good market performance for small capitalization mining and resource stocks which make of the bulk of its investment portfolio. In addition several holdings enjoyed exceptional company-specific gains during the quarter, in particularSulliden Gold (TSX: SUE),Avion Gold (TSX VENTURE: AVR),Belo Sun (TSX VENTURE: BSX),Crocodile Gold (TSX: CRK) andApogee Minerals (TSX VENTURE: APE). On a year-over-year basis, Aberdeen's shareholders' equity increased by$21.1 million or 22.3%. Note that the reference to shareholders' equity is similar to previous references to Net Asset Value or "NAV" by Aberdeen.
Aberdeen reported net earnings of$17.7 million or$0.21 per share for the third quarter from total revenue of$25.8 million ($25.1 million from net investment gains, 0.5 million from royalties,$0.3 million from interest, advisory and other income). For the nine months endingOctober 31, 2010, Aberdeen report net earnings of$12.1 million or$0.15 per share from total revenue of$21.9 million ($19.4 million from net investment gains,$1.5 million from royalties,$1.0 million from interest, advisory and other income).
Aberdeen received royalty revenue of$503,585 from 38,014 ounces of gold sold atSimmer & Jack's Buffelsfontein Mine andFirst Uranium's Mine Waste Solutions Tailings Recovery Operations during the quarter endingOctober 31, 2010, compared to$439,715 in the previous quarter.
Normal Course Issuer Bid
During the quarter endingOctober 31, 2010, 836,500 shares were purchased for cancellation at an average cost of$0.41. As of the time that Aberdeen's Q3 financial statements were prepared, 6,698,500 shares remain eligible for purchase and cancellation under Aberdeen's Normal Course Issuer Bid ("NCIB"). Aberdeen's current NCIB expires onFebruary 4, 2011. Aberdeen expects to continue to purchase shares over the remainder of the fiscal year, depending on market conditions and other investment opportunities that may be available”
So for $0.75 today you get exposure to $1.33 of net asset value. I’m still going to take a pass as the fact that the price of gold has increased doesn’t help me understand the commodity any better than before. But for those of you who want exposure to gold this might be an attractive opportunity.