Dundee Corporation (DC-A.TO) – Expected Tender Offer – Upside TBD

Current Price: C$1.48

Offer Price: TBD

Upside: TBD

Expiration Date: Q1 2022

This idea was hinted by Nate.

 

This is a fairly speculative idea on the expectation of a near-term announcement of a tender offer at a premium to current prices.

Dundee Corporation used to be one of those long-hated stocks that are now virtually forgotten/ignored by the market. It is a holding company that trades at a 62% discount to reported BV and a 30% discount to cash and public investments, meaning that all of the private investments come for free. The company is in the prolonged turnaround process but has taken a clear direction to monetize non-core assets and return cash to shareholders. Over the last 1.5 years, Dundee has already done 3 major buybacks - all of them shortly after the completion of substantial asset sales. Recently the company closed sale of a major private non-core asset at about 1x BV and is now sitting on a pile of cash (approximately equal to the market cap). Promptly after closing, management updated the corporate presentation highlighting current undervaluation much more aggressively - something that it has not done before. The overall set-up indicates that we might expect a large tender offer in short term. Management owns 8%+ economic and 79% voting power.

Q3 results are due next week and I wouldn't be surprised if an update on the buyback plan was announced simultaneously. Dundee's paid-up capital is way above current price levels, meaning that non-resident investors would not be subject to withholding taxes in case of the tender offer.

The whole investment thesis is summarized by the management in these two slides from the updated presentation:

The slide above wasn't included in the previous presentation - it seems that management is finally starting to be vocal about the undervaluation.

Once again, the idea is speculative and there are several risks/caveats involved:

  • Uncertainty regarding the timing.
  • Given the results of the last tender offer and the average purchase price of the open market buybacks, there is a chance that management won't price the current offer at any meaningful premium to current prices.
  • Valuation. Worth noting that many of the company's investments are high-risk and previously Dundee has traded at even larger discounts to book value - 85% in 2019 and 76% in 2018, however, now that the turnaround has advanced much further and management has demonstrated the ability to perform, I think that current valuation levels are a bit too conservative.

The downside seems to be protected fairly well at these levels, as the share price has settled at around 60%+ discount to BV for quite some time already. So even if the tender doesn't materialize, I expect share price volatility to be limited.

 

Background

The company has 87.5m shares outstanding (listed subordinate voting shares and unlisted common shares - supervoting). On top of that, it has about 1.1m series 2 pref. shares (face value of C$27.7m) and 2m series 3 pref. shares (face value of C$50.4m). Both have par value at C$25 and trade under DC-PB.TO and DC-PR.TO tickers respectively (liquidity is low).

Dundee was founded and is still controlled (8% economic, 79% voting power) by Canadian billionaire Ned Goodman and his family. The company focused mostly on the mining sector and did really well/had many major wins before the GFC. After that, Goodmans made heavy bets on precious metals and hyperinflation, which did not work out. From 2011 onwards the company started expanding its investments into various other industries. The strategy failed, resulting in a messy portfolio, many unsuccessful ventures, and extremely high overheads. This caused Dundee share price to decline from C$21/share in 2014 to C$1-C$1.50/share levels over the last few years. However, in 2018 Ned's son Johnathan returned to the wheel (he previously quit as a CEO in 2014 before the stock crashed) and began a major turnaround program. The portfolio was simplified from over 100 investments to about 30,staff numbers and corporate expenses were significantly reduced - overheads declined by 50% to a current run-rate of C$10m. Management now aims to return to its initial focus on the mining sector and accelerate the monetization of non-core assets. At almost every press release the CEO constantly repeats that they are now highly focused on further cutting G&A expenses rationalizing legacy portfolios and monetizing non-core assets. 

The company has recently done 3 buybacks:

  • June 2020 - after a sale of a 2/3rds stake in DPM, Dundee announced a substantial issuer bid for 76%-88% of its series 2 pref. shares at C$16-C$18.50/share (about 74% par value). Shortly after, the price was raised to C$19.5. The offer was still undersubscribed and only 63% of shares were tendered.
  • December 2020 - the company sold almost all of the remaining stake in DPM and announced a substantial issuer bid for 12%-14% of subordinate voting shares at C$1.40-C$1.60/share. Only one director (Murray Sinclair with a 3% stake) tendered. The offer ended up being oversubscribed and priced at C$1.40/share.
  • February 2021 - announced a normal course issuer bid (open market buyback) for 10% of subordinate voting shares and both pref. share stocks. In H1'21 so far it acquired about 1m subordinate voting shares at an average price of C$1.40/share.

Given that pref shares are already trading at/above the previous tender price for series 2, it's likely that any upcoming tender will be done for the subordinate shares instead of preferreds.

Over the last few months, the company has completed (here and here) a sale of its major non-core asset Blue Goose (production and sale of natural beef) at 1x BV or $76m gross proceeds.

 

Some comments on valuation

The company's financials are still somewhat messy and a substantial amount of the portfolio is in private investments. However, at current share price levels, the downside is protected fairly well by pro-forma cash and public investments (see slide above).

Public investments:

The company has virtually no debt, while preferred stock amounts to around C$78m (C$0.89/share).

So Dundee trades at around 0.72x pro-forma cash (C$1.5/share) and public investments (C$1.31/share) less preferred stock (C$0.89/share).

Aside from that, Dundee portfolio has private equity investments, real estate joint ventures and various debt/warrants - together these amount to c. C$1.7/share of additional value (excluding already announced asset sales). Most of those are risky, VC-style investments into early-stage companies. However, there are signs that some of the assets might be on the books at conservative valuations. One investment I found particularly interesting is TauRX (Q2 MD&A) - a pharma company that develops a treatment for Alzheimer's and is currently in phase 3. Dundee values its 4% stake at 2015-2016 VWAP levels (issued from the treasury) - around US$55/share. The carrying value on the Dundee balance sheet is C$69m. However, the market value of this stake could be much higher. In Oct'20 TauRx signed a commercialization partnership agreement with Korean Medicorum Pharmaceuticals after which the partner acquired 25k TauRx shares for US$5m. That amounts to US$200/share price per TauRx share or 4x the carrying per-share value on the DC balance sheet.

6 COMMENTS

  1. tony

    Thanks for this excellent write-up. Can you please explain this point a bit further:

    “Dundee’s paid-up capital is way above current price levels, meaning that non-resident investors would not be subject to withholding taxes “

    3
    1. Lukas

      This would apply only in case of the tender offer. If paid-up capital is greater than the announced tender price, no withholding taxes will be paid. Otherwise, non-resident shareholders would be subject to withholding taxes on the difference between the tender price and paid-up capital.

      2
  2. Ilja

    A bit more details on Dundee’s private investments (unfortunately, not much info is available, as indicated by Nate):

    – TauRx (private equity investment) – development stage pharma company. Dundee owns 4% stake, valued on the balance sheet at C$69m (C$0.79/share). Real value could be multiple times higher (based on the latest private transaction with Mediforum), however, it all comes down to Phase 3 results and FDA approval of its drug. Phase 3 results should be ready in mid-2022.
    – Android Industries (equity accounted investment) – high tech-enabled assembler and sequencer of complex assemblies for the automotive industry. Dundee owns 20% interest, valued on the balance sheet at C$22.2m (C$0.25/share). Android seems to have turned profitable recently and Dundee recognized C$0.7m earnings from its stake in H121 (vs. C$0.9m loss same period last year). So Android is valued on the balance sheet at around 16x run-rate PE. Android is now able to fund ongoing capital requirements from its own operating cash flow (instead of taking significant debt like in 2017-2018). However, Android is impacted by a worldwide shortage of micro-chips, and visibility into when the shortage will be alleviated is low. Its website doesn’t provide any news since 2019. https://www.android-ind.com/news/
    – United Hydrocarbon – Canadian junior exploration company focused on O&G. Dundee owns 84% stake, which carrying value is calculated at C$20.2m (C$0.23/share). United’s main asset is bonus rights and royalties in O&G project in the Republic of Chad (Africa). United is entitled to up to US$50m bonus upon achieving commercial production and 5%/10% royalty upon specified cash flows. The project saw material impact from COVID and oil price crisis, which resulted in delays and now pose “material operational and financial risk”. First estimated oil production was delayed by two years to 2025. On top of that, Chad’s political situation is quite volatile (the president was killed in April by rebel groups).
    – Goodman & Company, Investment Counsel (GCIC) – registered portfolio and investment fund manager + exempt market dealer across Canada. Carrying value – C$16m (C$0.18/share). Includes CMP flow-through fund (raises money from Canadians who need tax deductions generated from mineral exploration, etc.), New Venture Equities Fund (VC style), and private equity style mining investments. Generates revenues from management fees, performance fees, and financial services. C$73m AUM. In H1’21 operated around breakeven.
    – Debt investments – after the monetization of Eight Capital’s debt (C$15m), this investment should amount to C$11.6m (C$0.13/share).
    – Agrimarine Holdings – fish farming using proprietary aquaculture technologies. The farm is located in British Columbia. Dundee owns a 100% stake in Agrimarine, which is valued at C$10.8m on the balance sheet (C$0.12/share). Agrimarine is still burning cash and trying to get profitable (about C$1m EBITDA loss in H1’21 and H1’20).
    – Real estate joint ventures – C$7.1m (C$0.08/share).

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  3. dt

    Dundee announced Q3’21 results.

    Nothing was said about capital return – the last tender at the end of 2020 was announced together with Q3 results. Management also mentioned continued investments in mining sector. So I think this diminishes the chances of any imminent capital return announcement. Some further info might be provided on the call.

    On the balance sheet side Dundee recorded C$41m decline in investment, most of which was on the TauRx side based on pricing from TauRx’s latest fully subscribed rights offering. Although not core to the thesis, I am guessing Nate’s comment regarding TauRx current valuation being multiples of balance sheet value is no longer valid (of course that might change again if Phase 3 results prove successful in mid 2022). As a result of these non-cash impairments Dundee’s BV/share declined from C$3.67 to C$3.13.

    My quick impression is that despite higher share price, this is not working in the right direction.

    Nate, any further thoughts?

    2
    1. Nate

      Agree. Q3 was a disappointment with no tender announcement and write-off on TauRx. Clearly not what I was expecting. I have no strong opinion on current/planned investments in mining industry. Write-off of TauRx clearly adds questions on valuations of other assets in the private investments line. My trade here was purely on the expected large capital return through buybacks/tender especially after management specifically stressed undervaluation of Dundee shares. Without capital return and continued new investments the discount will likely persist. As Dt noted, last year tender was announced together with the quarterly results – this time buyback might still get announced later, however I am not betting on it. Luckily shares are still above my entry levels (and above write-up levels), so taking a small gain and moving on.

    2. dt

      Per Nate’s comment, we are removing Dundee from active ideas. Expectations for tender offers with Q3 results have failed, and it is not clear if the company will announce tender offer at all – management might continue focusing on new investments in the mining sector. In absence of capital return discount to NAV is likely to persist. However, as the share price is still C$0.2 above the write-up levels, we are closing this at 13% gain in a couple of weeks.

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