As investors, we’re always on the lookout for good companies, especially at cheap valuations. Aberdeen International [AAB:TSX] is one such company. On its website the company describes itself as a “global resource investment company and merchant bank focused on private, micro and small-cap resource companies.” When we first found out about Aberdeen International, we saw the opportunity to gain exposure to the resource sector via a deeply discounted vehicle. Aberdeen’s lines of business include acquiring royalties, providing merchant banking services (such as short term investments, bridge financings etc.) and seeding private resource companies whilst taking an active role in the management of the company in the hope of taking the company public one day. In October 2009, the company welcomed former gold mining analyst David Stein from Cormark Securities as President & COO. We were fortunate enough to interview Mr. Stein recently and you can find the transcript of our interview below. Enjoy!
Biography: David Stein was most recently a senior partner at Cormark Securities Inc., where he was a gold mining equities analyst, director and member of the executive committee. Mr. Stein joined Cormark’s predecessor Sprott Securities Inc. in 2001 and was a publishing analyst for nine years, as well as gaining experience with corporate finance and marketing. Mr. Stein holds a Master of Science degree in Economic Geology and Bachelor of Applied Science in Geological Engineering from Queen’s University, and is a CFA charter holder.
Q: As an overview, Mr. Stein, can you tell us a little bit about Aberdeen International in terms of its business plan and progress till date?
A: The “modern” business plan for Aberdeen evolved in mid-2007, when the Company raised $60 MM to become an investment company and merchant bank to provide retail and institutional shareholders with access to the proprietary deal flow from Forbes & Manhattan, one of Canada’s largest and best-known resource houses. The credit crises in 2008-2009 hit Aberdeen and the companies that it invests in very hard. Fortunately we were able to do some excellent deals during the crises with what funds we had available, and three gold deals in particular (Crocodile Gold, Avion Gold and Sulliden Gold) have allowed us to more than fully recover from the crash (as of April 30, 2010—our latest quarterly results). Despite our portfolio fully recovering from that period, our share price has not. Going into the crisis Aberdeen was trading in the $0.60-range, and lately we have been trading in the $0.40—this despite a share buy-back and the value of our gold royalties arguably are even higher today than they were in 2008 due to the higher gold price. This is one of the key reasons I decided to get involved with Aberdeen in October 2009—the company has excellent fundamentals and opportunities, but I felt I could help turn the Company around (in terms of the share price) over time.
Q: As of June 15, 2010, Mr. Stein, Aberdeen’s shareholders’ equity or NAV was $104.1 million, or $1.19 per share. Given this, why do you think Aberdeen’s stock price, which is sitting at around C$0.36 cents, is so far removed from your NAV? In other words, what are investors not seeing?
A: To be fair, and compare apples to apples, let’s look at our share price on April 30, 2010 (end of our last quarter) - it closed at $0.45. That is still a huge discount vs. our shareholders’ equity of $1.19. I think a great part of the discount is our own doing. Very little effort has gone into promoting our story and value proposition to investors since the original $60 MM was raised. That is a big part of my role today. It is not something that changes overnight, but we are making good progress. Another reason is likely our small size. Its a chicken and egg scenario, but if you look at other similar companies listed on the TSX—they are much bigger in terms of market capitalization to us and trade at a tighter discount to NAV. Part of the blame also must go to the overall markets—the market for small-cap mining-related stocks has improved, but there is still a lack of willingness to invest in riskier asset classes, which includes us. Finally, there are some complicated parts of our asset base that I think the market gives us little value for; including our gold royalties and there is a legacy lawsuit on our balance sheet that we hold as an asset (we are the plaintiffs and hearing is scheduled for November 2010). Nevertheless, our investment portfolio value, which was $0.80 per share on April 30, 2010, is pretty solid with little room for dispute; so trading at such a severe discount to that is disappointing, and something we must strive to improve.
Q: Aberdeen is involved in a number of different businesses from merchant banking, equity investing and even investing in royalties. Which of these segments is the largest contributor in terms of revenue and in which of these segments do you forecast the greatest growth going forward? In addition, do you think that if Aberdeen chose to narrow its focus and concentrate only on one of these segments (eg. royalties) then maybe the company’s stock price would align more closely with its NAV?
A: Our investment portfolio by far is our largest segment in terms of our value ($0.80 per share out of $1.19 per share shareholders’ equity as of April 30, 2010), and revenue mix will match that over time. Our royalties and merchant banking revenue are a nice supplement to our business and should more than pay for the basic G&A of the Company this year. If we were to narrow our focus, it is quite possible our stock price would react positively over time, as it would at the very least clear up any confusion about the fundamentals of our asset base. That being said I am not particularly focused on acquiring more royalties, which actually was the business of the Company before 2007. Producing royalties are typically very expensive, and given our discount we could destroy a lot of shareholder value chasing that type of opportunity. In addition we feel you need a critical mass of royalty revenue (usually driven by one big or world-class royalty) to get any shareholder recognition. Our $2.0+ MM/year revenue from our gold royalties is great, but too small to justify a royalty company on its own.
That being said, we do see many growth opportunities by “sticking to our knitting”, which is generating and investing in early stage resource deals—and this is the way I am convinced we will build shareholder value for Aberdeen. We must maintain a long-term focus when it comes to our investment portfolio as the early-stage companies that we invest in take time to build. But as more and more of these opportunities mature, our success should be very apparent to the market.
Q: There seem to be a number of companies in the same category as Aberdeen, Mr. Stein, companies like 49 North Resources, Sprott Resources, Endeavour Financial, Longview Capital. If one were to speculate on why there exists a gap between the NAV of all these companies and their stock prices, perhaps one might argue that it is the lack of future clarity or stability of future earnings that precludes the narrowing of the gap between NAV and the stock price. How would you respond to this statement?
A: Without commenting on the fundamentals of the other companies in questions, one main reason companies should trade at a discount to shareholders’ equity would be that it typically does not factor in future costs of running the company including management compensation (which is often biggest single cost for asset management companies). One could argue this about all types of companies though and this is not unique to the mining investment/merchant banking model. We have seen over the past few years, some of these companies trade at premiums to NAV, usually because they have a desirable asset that investors cannot get exposure to anywhere else.
To be honest I am not concerned with why some of the comparables trade where they do. I think Aberdeen has a strong advantage in that we roll up our sleeves and get involved with our largest investments by being active board members, and in the early stages acting as management (while we help set up an independent management team). This serves to lower our risk while enhancing returns over time, and we are quickly building a resume of successful transactions. Our small size is our main limiting factor, so investors should looking at Aberdeen should see a company with strong fundamentals, but still early in terms of our growth being recognized by the broader markets.
Q: Mr. Stein, what criterion does Aberdeen use to make its equity investments, is it the future outlook for the particular resource, is it strictly based on valuation? In terms of valuation, what exactly are the metrics being looked at? In addition, does Aberdeen ever take on an advisory or activist role in the companies that is invests in, to crystallize value?
A: We have several key criteria, but we definitely do have views on the various commodities. We are bullish on resources in general over the longer-term, but that being said certain metals or resources may give us better returns over the short-to-medium term. We also must consider what commodities make good public companies, because that is a key part of our strategy and how we ultimately achieve liquidity for our investments. With most of our investments we take on an active role, and in fact that is one of the criteria for investment (we rarely make “passive” investments). So far we have been able to do this in a friendly manner as advisors, financiers and board members, to achieve mutually beneficial results. We are involved in the early stages in creation or re-creation of most of our investments which gives us a front-row seat in terms of helping the company succeed and realize value for Aberdeen shareholders.
Q: Aberdeen recently announced the launch of Forbes Coal? Can you tell us a little bit more about Forbes Coal and this transaction? What is your outlook on coal going forward?
A: Aberdeen funded the initial costs to acquire two privately-owned coal mines in South Africa. We recently brought in a number of other large investors to help pay for the acquisition, and now we are launching this company with an eye to going public by September 2010. Forbes Coal produces two main products: a high-grade export-quality thermal coal that commands top prices both domestically and on the export market, and an anthracite product that goes into the metallurgical market. Last year the company produced approximately 500,000 tons of saleable coal, with the anthracite mine being closed for most of the year. We intend to grow production to over 1.5 Mmtpa by 2012 with minimal new capital required. In that regard Forbes Coal has already re-opened the anthracite mine and sales volumes are improving. Overall this is an excellent example of Aberdeen’s business model. We were front and centre as this company was being created (to make the acquisition), and have already seen a significant return on our initial investment (136% on our common shares and 373% if our performance shares are vested). But with the growth forecast for Forbes Coal, we think there is still tremendous upside for the company and expect this stock to be core position for a long time to come.
Our outlook for coal is good. Coal is a complex commodity and the fundamentals for the various coal products can be quite different. Overall we see very strong demand for high-quality thermal coal, with prices already near record levels. High-quality thermal coals are cleaner and more efficient and given that coal power generation is not going away, the premium for better-quality coals will likely continue to expand over time. On the metallurgical side we see the rebound from the credit crisis continuing over the long-term, and we are looking at ways to grow our sales into this market.
Q: According to Aberdeen’s website, the majority of Aberdeen’s equity investments are focused in the gold and precious metals sector. Given your prior role as a gold and precious metals analyst with Cormark, Mr. Stein, why has Aberdeen chosen to focus most of its equity investments in the gold and precious metals sector (ie. is it a strategic move)? In addition, if you could put on your analyst hat for just a moment, what is the outlook for gold going forward? Do you have a target price for gold 12 months out?
A: Our focus on gold is somewhat historic, but also not likely to change drastically going forward. The fact that I was a gold analyst at Cormark played a big part in my decision to work with Aberdeen, as I knew about Crocodile, Sulliden and Avion from my time on Bay Street, and I was very (and remain) very bullish on the prospects of these three companies. Our focus on gold in the past has been somewhat opportunistic—we have been able to get involved in some excellent gold assets at the early stages. Also, gold development companies command a premium and are more easily supported by the overall markets (this has been the case for most of the past 10 years) vs. other commodities. That being said, we are primarily focused on buying great resource assets at low prices, and helping them to build value—this can be in any commodity.
Over the next five to ten years, I expect gold to exceed $2000/oz. I do not have any special insight over and above the plethora of gold commentators out there, but we are in the middle of a long term fundamental bull market, where currency is being devalued relative to gold. I expect we will see a moderately strong seasonal rally this fall (as we see almost every year with the gold price). Gold equities generally are not pricing in $1200+/oz gold prices, so I see excellent opportunities in terms of the gold shares and I am more bullish on gold shares than the gold price itself in the near-term.
Q: Mr. Stein, what can investors expect from Aberdeen going forward? Are there any plans to narrow the humongous discount between Aberdeen’s share price and its NAV?
A: Management are the largest block of shareholders that we are aware of, owning approximately 14% of the outstanding shares. Therefore we have a strong incentive to address the discount. The following initiatives will be the focus in the short-to-medium term:
- Improving our marketing and investor relations – In that respect we recently hired a new IR manager and we are re-launching a brand new first-class web site very soon (potentially next week)
- Continue to demonstrate success with our early stage investments – this is important as it shows the sustainability/repeatability of our business model. Forbes Coal was the latest launch but we have several more in the pipeline.
- Selectively buying back the stock. We expect to utilize our entire normal course issuer bid before it expires at the end of January.
- Other corporate activity—without getting too specific, we continue to evaluate opportunities that would be accretive for shareholders or unlock value.
Thank You, Mr. Stein!
[Disclosure: Nobody at InvestingThesis has any beneficial ownership in Aberdeen International]
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