PhosCan Chemical: Slow Burn, No Return

There’s something about a net cash stock that gets me excited. I guess it goes back to the old value concept of being offered $1.00 worth of something for $0.50 (or, as you’ll see below, $0.8146). With that in mind, I submit to you PhosCan Chemical Corp. (FOS on the Toronto Stock Exchange, or PCCLF on the U.S. OTC market).

FOS is a Canadian company with only two real assets:

• ~C$57million in cash and short-term investments.
• 100% ownership of a mining claim (called the Martison Phosphate Project) which covers over 20,000 acres northeast of Hearst, Ontario.

The Cash
If we look at FOS as a cash box, netting the cash and short-term investments against total liabilities*, we get net cash per share of C$0.356 as of 10/31/13 (most recently reported financials). Shares closed today at an ask price of C$0.29.

*I am assuming that the ~C$16 million deferred tax liability will never be payable, and will be wiped out by writing off a portion of the mine development costs.



With most “development” stage companies, they burn through cash in the process of research & development, making what appears to be a net cash stock nothing but an illusion. As the above chart shows, FOS has bucked this trend, managing to hold net cash roughly steady over the past two years by offsetting operating costs with (1) interest earned on the investment portfolio and (2) buying back shares (i.e. management is buying $1.00 for $0.80555). A company trading at a 23% discount to net cash and a slow to nonexistent burn rate on that cash is what piqued my interest in FOS.

The Mine
FOS other key asset is the Martison Phosphate mine (as of yet undeveloped) in Ontario. The potential mine is currently valued on the balance sheet at just shy of C$94 million (C$1.5 million for the land, C$92.4 in development costs). That’s right, over the last 30 some years, investors/speculators have poured nearly C$100 million into trying to find and develop a phosphate rock mine (with more recent rumblings about the nioubium potential of the property) on this claim. As of yet, they have nothing ($) to show for it (but Columbus had nothing to show for years of work and preparation the day before he spotted the “New” world, right?).

I’ll be honest – I have very little knowledge of the mine. There are some good arguments for why the mine has value: 

• Expected high grade phosphate deposit at 23.55% phosphate and an indicated resource of 62.2 million tons. 
• Agrium (AGU) is winding down a nearby phosphate mine in Kapuskasing, leaving a gap in local/Canadian phosphate production. 

However, there are good arguments for why the mine has little value: 

• Agrium has already sourced replacement phosphate production from Morocco. 
• Global phosphate reserves are not in short supply (304 years at estimated 2012 worldwide production capacity [assumes 100% capacity utilization] according to 2013 USGS data book).
• The price of phosphate rock is not encouraging to new mine development:

Source: http://www.indexmundi.com/commodities/?commodity=rock-phosphate&months=120

The Conclusion
What I find more instructive than what FOS is doing with its cash (buying back shares in a shareholder friendly manner) is what they aren’t doing. They aren’t returning what is, almost inarguably, an overcapitalized balance sheet to shareholders (observe what Selwyn Resources [SWN.V] did with cash, albeit after a testy and somewhat amusing removal of management by activist investors). This tells me that either: 

1. Management plans to spend cash to fully develop the mine at some point in the unforeseen future.
2. Management plans to continue milking compensation out of FOS for the foreseeable future. 

Either way, without some insight on the mine (of which I have none), sitting and waiting for an undetermined amount of time for management to become benevolent –even with a slow/nonexistent burn rate– does not look like a good risk/reward in my opinion.

The key here isn't the value of FOS (it’s a great value!). The key is the time value of money. “Waiting for an undetermined amount of time” for the return of cash is a speculation. The IRR can span from 23% in year 1 down to 5% if we don’t see any cash until year 4. For me to become interested (no real objective reasoning here), I want to see a 4 year IRR potential of at least 10% (~C$0.24/share for those keeping score at home, and coincidentally ~67% of net cash). Until then, I play the waiting game.

Disclosure: No Position

Harvest Investor © 2014. All rights reserved. The content and ideas contained in this blog represents only the opinions of the author. The content in no way constitutes investment advices, and should never be relied on in making an investment decision, ever. No content shall be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The author may hold positions in the securities and companies mentioned on this site. Any position disclosed on this site may be modified or reversed without notice to you. The content herein is intended solely for the entertainment of the reader, and the author.