MFC Industrial Ltd

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:

http://seekingalpha.com/article/290755-15-for-15-years-michael-j-smith-s-outstanding-track-record

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:

From http://www.mfcindustrial.com/Overview

“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

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

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.