Aberdeen International was the first company I looked at in my project to go through all of the OTCBB and Pink Sheet companies. It turns out it’s a favorite of a few investors I follow and owned by some small hedge funds I respect. In fact, there was a great article here on GuruFocus in February by Kelpie Capital: Aberdeen International - Own a Piece of Their Experience.
I’m not especially enamored with gold or gold miners, so I initially was reluctant to look very deep into the name. What I am interested in, though, are special situations and stocks that have unique characteristics, especially when they are potentially uncorrelated to the overall markets. As I looked deeper into Aberdeen International, I got more interested. Ultimately I ended up opening a position.
Aberdeen trades on the Pink Sheets under ticker AABVF and on the Toronto Stock Exchange under ticker AAB. They’re a Canadian-based investment company that provides capital to early-stage miners. They often see them through the IPO process. They have significant exposure to gold miners, along with some other companies in the resource space.
Director Stan Bharti is involved in running Forbes & Manhattan (F&M), an investment bank he founded. Aberdeen uses F&M’s expertise, including their international network and technical expertise (engineers, etc.). When Bharti’s F&M invests in junior miners, Aberdeen typically co-invests.
These are Aberdeen’s top-five holdings:
- Sulliden Gold (SUE-T) (SUE.WT-T) – Gold miner in Canada
- Temujin (Private) – Mining company in Mongolia
- Forbes & Manhattan Coal Corp (FMC-T) – Coal mining co. with mines in S. Africa
- Black Iron Inc (BKI-T ) – Iron ore miner primarily in Ukraine
- Aguia Potash (AGR-ASX) – Australia phosphate miner
All of this is great, but I wouldn’t have been interested if not for the stock trading at a significant discount to the assets. Aberdeen is trading for less than 50% of its current cash and investments with no debt. It’s also trading for less than 40% of its latest reported NAV. That NAV has almost surely declined, but we’re still looking at a trading price significantly below its NAV. AABVF is trading at about 40 (U.S.) cents.
The publicly traded investments were at about 46 (U.S.) cents as of April 30, 2012. Note that in the company’s press releases, they use Canadian dollars. I’ve translated the amounts here to U.S. dollar since I’m trading the U.S.-listed Pink Sheet shares.
Although they reported their cash and publicly traded investments as of April 30, 2012, their latest reported NAV is for Jan. 31 2012. They have it listed at $1.08. A lot has happened since late January, so that number is going to be much different next time. For one, they recently sold a royalty stream for $11.5 million in cash and additional $9.4 million in convertible debt. That just closed on June 1, so those figures aren’t included in any of the amounts reported by the company. I’ve got that sale adding 23 cents per share (U.S.) to cash their cash, investments and loans.
The company reported about 68 cents per share in cash and investments on 4/30/12, so we can add that 23 cents to that figure, coming up with 91 cents. At the same time, that sale will decrease an undetermined portion of their NAV. We won’t get the exact figures until June 15. So, we’ve got 91 cents of cash and investments, making today’s stock price trading for about 44% of that. There are additional assets that make up the NAV. I’m not going to attempt to calculate them precisely because with the already huge discount, it doesn’t really matter right now. Also, the company will tell us in about a week anyway. That figure will be roughly around 10 cents.
Why the huge discount? That’s a good question and I think there are a few reasons I can identify, and probably other reasons I can’t. First, these early-stage miners are risky. The volatility in them scares some people, I think, and that’s reflected in a company like Aberdeen where some of these investments are private and we don’t know the exact value of them on a day-to-day basis. At the same time, most of Aberdeen’s holdings are public.
I think there’s also a concern about the structure of Aberdeen. Naturally there are a lot of related party transactions. Bharti and other board members sit on the boards of their investments. In the context of venture capitalists, this is natural. Here, there can sometimes be conflicts. Some of Aberdeen’s investment companies owe Aberdeen a great deal of money because of loan defaults. There potentially can be conflicts when Bharti and others are on the boards of those junior companies. There are also potential conflicts between F&M and Aberdeen. Some discount because of that is justified… to a degree.
There is also an issue of some warrants that would have diluted Aberdeen shareholders had the stock traded above $1. However, those warrants will expire worthless on 6/6/12.
Finally, it’s a small company, not followed by large investors. And, it’s based in Canada. I don’t think a lot of investors know about Aberdeen, and I think some investors who come across it are turned off by the structure of the company. It takes a little bit of work to drill down, and I don’t think most people are willing to take the time to go through the filings and presentations.
Aberdeen has made it a priority to reduce this discount. They have been buying back shares, though Canada has some buyback limitations that make it a bit difficult to make large open market purchases. In the first quarter they did buy back about $100,000 worth of shares at around 55 cents per share. This refers to AAB. Last year they bought back $1.9 million worth of shares. The market cap right now is around $40 million, so that’s not an insignificant figure. I’ve read in a few places that they’re interested in buying back blocks of shares if any bigger investor wants to sell them. On the negative side, they also issued about 1 million shares of stock options last year.
Aberdeen also has a dividend that currently yields about 4.5%. Management and directors own about 15% of shares.
I wouldn’t be interested in this company at 90% of NAV, but it seems like a steal at less than 50% of cash and investments of 91 cents. The discount isn’t justified, in my opinion, because Aberdeen is not simply a holding company. They are more akin to a venture capital firm where they are clearly helping these early stage miners get access to capital and, eventually, enter the public markets. They are adding a tremendous amount of value to their investments. Aberdeen also has been able to turn some failed investments into winners. This royalty stream they recently sold that netted $40 million was the result of a busted investment from years ago that they were able to parlay into an attractive asset.
Old gold miners are volatile, especially early-stage ones, and it’s difficult to determine what their true value should be, but with Aberdeen you have the opportunity to participate in the upside while also being protected with this huge discount.
Disclosure: Long AABVF