In this article, I am going to write about the largest, and
arguably the most frustrating, holding in my portfolio. As of April 24, 2012,
the name of the company is MFC Industrial Corp with a NASDAQ ticker symbol of MIL.
I write this because the name and ticker symbol could change at any moment. This
company was called Terra Nova with a ticker symbol of TTT when I first opened a
position in the company in January 2011. And as Dr Clemens Scholl writes in the
article linked below, the company was known as Arbatax way back in 1996 and has
gone through many name changes, spin offs, stock splits, rights issues and
dividends since then.
Read all about it here:
If you were patient enough to hold on through all the ups
and downs, you would have been rewarded with at least a 15% compounded annual
return in those 15 years! That works out to over 800% in total return and is a
fantastic performance by any measure.
Here is the company’s version of its own track record:
“The team at MFC Industrial Ltd. has a 25-year record of
identifying undervalued or troubled assets, profitable turnaround
opportunities, and low-risk restructuring methods for problem operations.
More important, it has rewarded its shareholders with spinout, dividends,
returns of capital and other distributions, producing a compound annual return
of 20.4% over the last 10 years. The team has deep expertise in the
resource, basic materials, commodities and logistics business, with unusual
expertise in creative financing and the maintenance of unusually low levels of
risk.”
Given this fantastic track record, I had high hopes for my
investment. How has my investment worked out so far? Basically FLAT for 16
months even counting the 2.x% dividends! This pathetic short term performance while
frustrating in itself, has been compounded by the fact that the company releases
little or no information about itself, and any information when released, is
usually under some obscure subsidiary and buried among mountains of documents
on sedar.com.
I see no need to repeat what Dr Clemens Scholl has painstakingly
compiled in the Seeking Alpha article above. So I will summarize the pros and
cons as I see it:
Pros
a)
MIL is trading at a discount to book. Tangible
book value (BV) is $8.74 per share while the market price is just $7.59.
b)
Intrinsic value is north of $14 per share as follows:
Cash
(net of debt) is around $5.7 per
share
Wabush royalty ($200MM) $3.2 per share
German real estate ($50MM) $0.8 per share
Wabush royalty ($200MM) $3.2 per share
German real estate ($50MM) $0.8 per share
KHD
shares $0.1 per share
= sub-total $9.8
Other operations worth at least $4.2
per share combined, namely
* Commodity trading & supply chain (MFC Commodities)
* Aluminum and Zinc Processing operations (AFM,MAW,Brock)
* CTF MEG (Magneto encephalography)
* Magnum Minerals (Iron Ore mine in India)
* Eye care/ LASIK hospitals
* Various equity stakes (Blue Earth, Somes Dej, Vivactis) and off-take/marketing agreements
* The recently acquired interest in the Pea Ridge iron ore mine
* Commodity trading & supply chain (MFC Commodities)
* Aluminum and Zinc Processing operations (AFM,MAW,Brock)
* CTF MEG (Magneto encephalography)
* Magnum Minerals (Iron Ore mine in India)
* Eye care/ LASIK hospitals
* Various equity stakes (Blue Earth, Somes Dej, Vivactis) and off-take/marketing agreements
* The recently acquired interest in the Pea Ridge iron ore mine
Total is $9.8 + $4.2 or around $14 per
share.
c)
A big chunk of the tangible BV is in cash and
marketable securities of about $560MM. This combined with a) and b) above gives
substantial downside protection.
d)
Michael Smith (MS) has a terrific long term
track record of returning value to shareholders. He has earned himself a long
rope. I will give him the benefit of doubt and trust that he is working towards
doing the same thing for the next several years.
e)
MS revealed in a past conference call that he
controls about 11% of the company. If you invest alongside MS you will do fine
in the long run. (Officially he holds under 5% so we have to assume that the
rest is held indirectly through various vehicles under the names of family members).
f)
The turmoil in Europe and the lingering effects
of the global financial crisis should provide MS with some excellent opportunities.
Tons of cash in the hands of a master capital allocator at a time of great
turmoil. What more could you ask for?
Cons
a)
Long periods of underperformance (as we have
just seen) while MS waits for the perfect opportunity that will match his criteria
for risk and return.
b)
High level of secrecy surrounding MS’s deal
making.
c)
Very little information released by the company.
Very poor PR.
d)
Not loved by Wall Street and justifiably so
because of b) and c)
e)
If you do not invest alongside MS you could get
screwed. I have no reason to believe this is true, but, if, for some reason, MS
decides to shift his family wealth from MIL to some other holding company
unrelated to MIL, we, as shareholders, may not realize the market beating
returns of the past.
f)
The company does not present itself as a compelling
investment if you simply look at the operating earnings. You have to look at
the growth in tangible BV and the growth in intrinsic value. This is hard to
do, especially with a company that is as secretive as MIL is.
g)
The company is MS and MS is the company. If
something were to happen to him, shareholders may to unable to realize the fair
market value of some or all of the numerous investments he has made around the
globe.
