Surveying the Net Net Landscape

This morning, right after I brushed my teeth, I went to my trusty Bloomberg terminal and punched out “Bloomberg, Bloomberg, computer on my desk, who’s the fairest of them all?” (10 points* if you knew that was an Other People’s Money reference).

What Bloomberg brought back to me was the following list of of net current asset value stocks. Criteria:

• Stocks Trading on North American Exchanges
• Domiciled in either Canada or the United States
• Market Cap greater than $5 million
• Market Cap is 120% or less of NCAV
• Net Current Asset Value = (Cash & Marketable Securities + Accounts Receivable + Inventory – Total Liabilities – Preferred Equity – Minority Interests).

Please note, I have done no due diligence to check or verify this data. Financial data may be out of date, there may be multiple share classes, or (and I don’t mean to alarm you) there may be a bogeyman or bogeymen in the details. In other words, do your own research.

A few interesting facts:

• According to Bloomberg, there are 62 companies in the U.S. and Canada trading below NCAV (with market caps >$5 million).
• Of the 95 stocks in the table (trading at or below 120% of NCAV):
• 49 are Canadian (51.6%) and 46 are U.S. (48.4%)
• 32 (33.7%) are in the Materials sector, with the vast majority of those in the mining/gold/silver sub industries.
• The average market cap of the group as a whole is $28.5 million, with the largest company being Buhler Industries at $156 million.

And now, with no further delay, the table. Happy hunting!

NCAV Securities as of June 18, 2014

Ticker	Name	Country	NCAV	Market Cap	Market Cap / NCAV
UNRH	UNR HOLDINGS INC	US	$83,759,418	$19,571,840	23%
KGHI	KAISER GROUP HLD	US	$16,639,000	$5,084,752	31%
CLWA	CALLWAVE INC	US	$32,406,000	$10,388,392	32%
AAB	ABERDEEN INTL IN	CN	$37,660,350	$12,665,666	34%
HERB	YASHENG GROUP	US	$382,362,961	$130,902,168	34%
LKII	LAZARE KAPLAN	US	$44,982,000	$16,422,831	37%
ALSC	ALLIANCE SEMICON	US	$71,248,000	$28,090,700	39%
SRTI	SUNRISE TELECOM	US	$11,273,000	$5,134,906	46%
KZX	KAZAX MINERALS I	CN	$19,020,073	$8,722,319	46%
SPCO	STEPHAN COMPANY	US	$12,328,000	$5,953,745	48%
TAIT	TAITRON COMPONEN	US	$11,043,000	$5,373,564	49%
BXLC	BEXIL CORP	US	$36,822,806	$18,555,432	50%
UPGI	UNIVERSAL POWER	US	$16,280,000	$8,283,000	51%
BAT	BATERO GOLD CORP	CN	$16,128,889	$8,796,129	55%
LN	LONCOR RESOURCES	CN	$9,300,400	$5,140,781	55%
TSPT	TRANSCEPT PHARMA	US	$67,885,000	$39,218,728	58%
ARL	AFRICO RESOURCES	CN	$55,532,501	$33,873,736	61%
PDQ	PETRODORADO ENER	CN	$27,086,067	$16,889,148	62%
SPGZ	SPECTRUM GROUP	US	$27,793,000	$17,652,448	64%
TWMC	TRANS WORLD ENTM	US	$163,232,008	$103,897,384	64%
SVU	SPUR VENTURES	CN	$29,187,887	$18,726,228	64%
NUX	NEW PACIFIC META	CN	$25,483,641	$17,069,248	67%
DNV	DUNAV RESOURCES	CN	$11,670,345	$7,889,375	68%
NRE	NAMIBIA RARE EAR	CN	$13,155,038	$8,950,278	68%
MUN	MUNDORO CAPITAL	CN	$13,073,487	$9,121,723	70%
INV	INV METALS INC	CN	$21,052,514	$14,826,293	70%
KRN	KARNALYTE RESOUR	CN	$49,040,879	$34,623,552	71%
TSRI	TSR INC	US	$8,410,689	$5,945,048	71%
ORG	ORCA GOLD INC	CN	$85,898,869	$61,221,280	71%
KXM	KOBEX MINERALS I	CN	$34,138,818	$25,140,932	74%
RYG	RYAN GOLD CORP	CN	$20,338,569	$15,228,192	75%
AMR	AMAROK ENERGY IN	CN	$21,647,702	$16,312,676	75%
IDEA	INVENT VENTURES	US	$9,158,679	$7,053,286	77%
MWC	MEDWELL CAPITAL	CN	$12,230,000	$9,467,366	77%
MSN	EMERSON RADIO	US	$61,967,000	$48,019,804	77%
OEG	ONENERGY INC	CN	$15,885,000	$12,556,398	79%
RDU	RADIUS GOLD INC	CN	$13,613,703	$10,834,452	80%
STC	SANGOMA TECH COR	CN	$10,275,470	$8,216,496	80%
PRLS	PEERLESS SYSTEMS	US	$11,873,000	$9,523,083	80%
IGOI	IGO INC	US	$11,385,000	$9,275,827	81%
SODI	SOLITRON DEVICES	US	$10,973,000	$9,071,203	83%
JLMC	JLM COUTURE INC	US	$6,909,564	$5,718,955	83%
SPRS	SURGE COMPONENTS	US	$8,757,133	$7,257,071	83%
PTNT	INTERNET PATENTS	US	$29,299,000	$24,418,648	83%
CRV	COAST DISTR SYS	US	$20,442,000	$17,094,982	84%
ECC	ETHOS GOLD CORP	CN	$8,731,667	$7,388,015	85%
SWD	SUNWARD RESOURCE	CN	$29,261,302	$24,907,284	85%
MBS	MOBIUS RESOURCES	CN	$14,834,000	$12,673,688	85%
RELL	RICHARDSON ELEC	US	$159,301,000	$140,253,328	88%
TCCO	TECHNICAL COMM	US	$9,502,425	$8,514,204	90%
IDC	INTL DATACASTING	CN	$6,397,125	$5,850,629	91%
STLY	STANLEY FURNITUR	US	$43,303,000	$39,635,320	92%
ZC	ZIMTU CAPITAL	CN	$7,307,772	$6,759,292	92%
COSN	COSINE COMMUNIC	US	$19,938,000	$18,865,714	95%
CRG	CORONA GOLD CORP	CN	$10,124,632	$9,635,355	95%
ADI	ADRIANA RESOURCE	CN	$28,886,625	$27,571,992	95%
SN	SENNEN POTASH CO	CN	$8,041,069	$7,780,039	97%
MSV	MINCO SILVER COR	CN	$60,367,081	$58,415,924	97%
UGD	UNIGOLD INC	CN	$7,489,165	$7,311,397	98%
CNDO	CORONADO BIOSCIE	US	$80,217,000	$78,863,000	98%
GENC	GENCOR INDS INC	US	$104,459,000	$103,743,824	99%
ELR	EASTERN PLATINUM	CN	$93,425,000	$92,818,784	99%
PARF	PARADISE INC	US	$15,594,532	$15,691,920	101%
CDCO	COMDISCO HOLDING	US	$19,952,000	$20,144,756	101%
VII	VICON INDUSTRIES	US	$11,556,038	$11,710,101	101%
DCTH	DELCATH SYSTEMS	US	$25,620,000	$26,158,662	102%
BSHI	BOSS HOLDINGS	US	$23,260,000	$23,895,528	103%
GIC	GENTERRA CAPITAL	CN	$13,798,496	$14,217,792	103%
EPL	EAGLE PLAINS RES	CN	$6,485,414	$6,699,094	103%
SDOI	SPECIAL DIVERSIF	US	$23,578,000	$24,392,062	103%
ORBT	ORBIT INTL CORP	US	$12,832,000	$13,341,849	104%
GRG	GOLDEN ARROW RES	CN	$8,634,103	$8,981,204	104%
BEV/H	BENEV CAPITAL IN	CN	$67,968,188	$71,740,960	106%
AEY	ADDVANTAGE TECH	US	$28,510,396	$30,453,292	107%
BLT	BRILLIANT RESOUR	CN	$10,491,009	$11,209,108	107%
SMGI	SMG INDIUM RESOU	US	$17,597,740	$18,836,394	107%
HCI	HARTCO INC	CN	$38,901,000	$41,649,628	107%
LVN	LEVON RESOURCES	CN	$46,520,825	$50,013,604	108%
HMM/A	HAMMOND MANUF-A	CN	$15,236,000	$16,434,734	108%
FRD	FRIEDMAN INDTRY	US	$50,786,076	$55,484,144	109%
AXTI	AXT INC	US	$61,276,000	$68,470,408	112%
BUI	BUHLER INDS	CN	$139,210,992	$156,000,000	112%
PCO	PHOENIX CAN OIL	CN	$7,087,715	$7,970,527	112%
DL	DANIER LEATHER	CN	$32,380,000	$36,421,888	112%
MLR	MELIOR RESOURCES	CN	$21,574,998	$24,318,928	113%
SMIT	SCHMITT INDS	US	$7,391,043	$8,374,548	113%
GDL	GOODFELLOW INC	CN	$73,631,000	$83,789,560	114%
ATX	ARGENTEX MINING	CN	$5,241,142	$5,970,570	114%
TRGT	TARGACEPT INC	US	$122,479,000	$140,206,048	114%
OPST	OPT-SCIENCES	US	$11,939,854	$13,689,075	115%
FOS	PHOSCAN CHEMICAL	CN	$41,946,905	$48,596,944	116%
HYD	HYDUKE ENERGY SE	CN	$14,597,455	$17,028,384	117%
BVSN	BROADVISION INC	US	$40,715,000	$47,950,592	118%
SUP	NORTHERN SUPERIO	CN	$6,320,701	$7,546,196	119%
SVT	SERVOTRONICS INC	US	$14,418,000	$17,286,616	120%

Full Disclosure:  Author may hold a position in securities listed in the table.

*Points have no cash value, are redeemable for nothing, and in every sense of the word are “pointless.” Now puns on the other hand . . .

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 advice, 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.

Unsolicited Advice for Community Bankers

From time to time I like to pitch a business idea that appeals to me since . . . well, it’s my blog and I can.

One area that I've been thinking about recently is community banking. I've come to the conclusion that many local banks (some much smaller than you’d think) could benefit greatly by expanding into the money management business.

Many of the larger banks (regional, super-regional, money center) have long capitalized on cross-selling services and using investment products to boost fee income (look at a bank like BB&T which boasts a fee income ratio near 44%). Yet, when you look at the smaller, more community based banks, they are lacking in this area. I contend that this is a major misstep for those institutions.

Historically, many community banks allowed 3rd party brokers (such as Investment Centers of America, Inc.) to place offices in their branches. In exchange, the bank received a revenue sharing agreement and the ability to tell customers it had a broker in the bank. Unfortunately, due to the inherent conflicts of interest (not a bank employee, not a customer fiduciary, paid on account turnover, 12b1 fees, etc.), this was equivalent to a doctor telling his patients “great news, I’m now sharing offices with a mortician.” (OK, bad analogy, but I’m going with it nonetheless). Like most 3rd party fixes, it left customers confused and alienated when problems arose.

A better fix, in my opinion, would be for a bank (bank holding company technically) to create an SEC Registered Investment Advisor (RIA). This model, although embraced by some of the larger regional banks (often paired with a trust department) is more downward scalable than most community bankers realize. The benefits for community banks are numerous:

• It’s a low capital intensity / overhead business (high margins). Start up costs are minimal (the registration process is cumbersome, but not expensive) and ongoing overhead (employee costs, compliance) are manageable.
• RIAs are fiduciaries for their clients. They charge fees based on account size, not asset turnover. As such, they are (in theory) incentivized to do as well as possible for clients (higher account size = higher fee).
• For family owned community banks, an RIA subsidiary can basically function as a quasi-family office. Instead of the controlling family having to find an outside money manager, why not have your own in-house RIA that can manage family funds, bank holding company excess capital, the bank’s bond portfolio (more on that below), and portfolios for bank customers.
• By funding the RIA with “seed capital” from the banks owners, the investment advisor immediately starts with an asset base (don’t have their backs against the wall), and it creates a nice selling point to potential customers: “the owners of the bank invest their funds with us, you should too".
• Many banks have to hire outside investment consultants to administer their 401k plans. With an RIA sister company, this service can be internalized (leading to cost savings) and a nice cross-sell opportunity (by doing 401k education with bank employees, the RIA is also educating on the services they can provide to external customers).
• There can be overlap / efficiencies between the banks bond portfolio and investment customer accounts. Too many community banks outsource their bond buying to 1 or 2 brokers (i.e. “I bought a new bond – Vining Sparks said it was cheap”). Having a full time investment professional searching for bonds for the bank as well as investment customers can create a nice cost savings / efficiency gain. 
• Having the bankers and portfolio managers be on the same team (owned by the same company) alleviates (some) conflicts of interest – both are paid from the same pool, so if a client is more comfortable in bank CDs, the RIA sends them there (and vice versa). There is no (or minimal) fighting over customers.
• With the low overhead structure, the RIA business could probably be break even with $10 - $15 million AUM (depending on employee compensation structure, fee schedule, etc.).

Bottomline, for the cost of 1-2 employees (with one of those employees possibly being an already underutilized staffer), a bank can create a new fee income source, create internal cost savings (bond portfolio, 401K management), build brand awareness (new services for customers, all under one roof), and have its own “family office,” all with very little cost/overhead.

I remain confused as to why more banks haven’t taken this route (although am in no way so confident that I don't think there must be a good reason). Obvious reasons in my mind would be:

• A lack of qualified employees / candidates to run the RIA.
• The philosophy (which I usually agree with) that a bank should stick to what it knows best – lending and deposit gathering.

However, as the regulatory environment becomes more restrictive (higher capital requirements), compliance costs skyrocket, and bigger banks continue to pressure community banks on loan rates, a little fee income diversification might not be a bad thing, right? As usual, this is just my off the cuff thoughts on the business. I’d be glad to hear the thoughts of others, especially those in the community banking world.



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.

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.