bearprowler6

https://www.hellenicshippingnews.com/steel-demand-bouncing-back/ https://www.mining.com/iron-ore-price-correction-delayed-as-global-steel-demand-tops-2bn-tonnes-first-time-ever/ As described by the JPM analyst covering the steel sector...current and projected steel pricing is presenting a "generational opportunity" for steel stocks! Michael Glick, the JPM analyst who made this statement, initiated coverage on Stelco earlier this week with an overweight rating and a price target of $54 (the highest in the street)!

The issue is not whether Fairfax could have anticipated the hot IPO market and the public market price that Vertical Scope (VS) could have achieved. When Fairfax decided to tender its Torstar shares to the Rivett lead NordStar offer it ascribed ZERO value to Torstar's investment in VS. Strange really given that Torstar net investment into VS was $178 million only a few years earlier (see link to article on the investment below). https://www.thestar.com/business/2015/07/29/torstar-buys-stake-in-digital-media-company.html There is simply no way VS was worth ZERO at the time Fairfax tendered its shares in Torstar to the inferior NordStar offer only one year ago! Regardless of Prem's motives here...accepting the offer from NordStar was simply the wrong thing to do and represents yet another example where Prem did not look out for the best interest of the company's shareholders!

Sadly, the Torstar / Vertical Scope saga is just another in a long list of examples where the minority shareholders at Fairfax were disadvantaged! No need to go over all the examples again...any long time shareholder of Fairfax knows them only all too well. As I have stated before, the market has long caught onto Prem and the games he plays and is no longer interested. For any of you who doubt this...just look at Fairfax's share price over the last 8-10 years. It has gone no where and in fact it is even still well below the value on January 1, 2020. Sure the shares have rebounded off the March/20 covid induced low but not any more or any less than a number of other financials and in fact has underperformed several other companies that are discussed else where on this site. There are a number of good things at Fairfax but in my view the bad clearly out ways the good. Good luck to those of you who still believe in Prem and what Fairfax may become. I expect that you will have a very long wait! Paul Rivett got tired of waiting and moved on to greener pastures. I would suggest any existing shareholder would be well served by coming to the same conclusion as Rivett did.

As expected, it was just announced that Stelco (STLC) will be added to the S&P/TSX Composite Index at the start of trading on June 21st: https://www.newswire.ca/news-releases/s-amp-p-dow-jones-indices-announces-changes-to-the-s-amp-p-tsx-composite-index-814863880.html This will bring additional positive focus onto the shares of this company. A good time to remind everyone of the comments made by the CEO Alan Kestenbaum and the CFO Paul Scherzer on May 4th as part of the Q1 2021 earnings release. In an interview on BNN Bloomberg Kestenbaum was quoted as follows: “The Q1 results (adjusted EBITDA of $185 million), which are fantastic, which are 10 times over a year ago and three times the Q4 results, are at a price which is actually half of what steel prices are today. That entire half flows to our bottom line because the costs don’t go up from where they are,” he said. Kestenbaum said the rally in steel prices, unlike with other commodities, is being driven purely by strong demand seen in auto and infrastrucutre sectors. “As you know it’s not a speculative commodity like others: It's real fundamentals,” he said. “It’s been driven by lean inventories, enormous demand in the auto sector, enormous demand in the infrastructure sector and energy is coming back." Kestenbaum said he expects adjusted EBITDA in the forthcoming quarter to rise as much as three times on its first-quarter results, while the third-quarter could be “probably another double from there.” And in the Q1 2021 press release the CFO suggested that Adjusted EBITDA for all of 2021 in excess of $2 billion was not out of the question based on the HRC forward pricing curve, current cost structure, current order book and product mix in place on that date. Staggering really given that the company's entire market cap is a little more than $3 billion. Since the release of the the Q1 results on May 4th the CME's HRC forward pricing has continued to strengthen with pricing up an average of approx 15% for each and every month for the remainder of 2021. Average HRC forward pricing for Q3 now exceeds $1650 and more than $1440 for Q4. HRC forward prices are strengthening into Q1 2022 also. https://www.cmegroup.com/trading/metals/ferrous/hrc-steel_quotes_globex.html If these elevated forward HRC pricing figures hold then the $2 billion EBITDA projection offered up by Kestenbaum and Scherzer on May 4th will be made to look pessimistic which will result in major buybacks and special dividend payments to the company's shareholders.

It might be worthwhile to check in on how the two IPOs (Farmers Edge and Boat Rocker) completed in March are doing: Farmers Edge (IPO completed on March 3/21) IPO priced at $17/share and close yesterday at $9.69/share. Approx decrease in value of Fairfax's investment is $180 million since the IPO. Boat Rocker (IPO completed on March 24/21) IPO priced at $9/share and closed yesterday at $7/share. Approx decrease in value of Fairfax's investment is $50 million since the IPO. Prem and the entire team team are to be applauded for taking advantage of the hot IPO market in bringing these two companies to the public markets. Nonetheless I fear that Fairfax is now stuck with another two public market holdings that will be at best dead money for years with no chance of returning cash to Fairfax or their other shareholders in any reasonable period of time because if history is any guide Fairfax will feel compelled to continue to hold and support these entities over the "long run" and we all know what that means.

A few updates on Stelco (STLC): Steel prices remain extremely strong with HRC futures prices above $1600 through the end of Aug/21 and above $1300 for the balance of 2021. If these prices hold (and nothing suggests they won't) then Stelco will have an insanely profitable year and will accumulate insane amounts of free cash. At these steel prices, the $2 billion 2021 EBITDA projection offered by the company's CFO at the time of the Q1 earnings release will be easily met and likely surpassed. Quarterly index rebalancing is scheduled for June 11th with index additions and deletions being announced after market closing on June 4th. ATB Capital is suggesting that Stelco will be added to various indices including the TSX/S&P composite index. Bring on those index buyers! Analyst's covering the stock continue to upgrade. Latest upgrade is from Stifel analyst Anoop Prihar who initiated coverage with a target price of $48/share --- the highest target price on the street. STLC currently trades at $33.96/share. Also noteworthy---as of May 4, 2021 Fairfax Fairfax holds 12.994 million shares of STLC representing 14.65% of the outstanding shares which is an increase from the 12.2 million shares or 13.7% of the outstanding share count announced by Fairfax via a press release on Nov 19/18.

Too complex?? Hardly. The debate will come down to what is considered a "huge" buy back. CEO Kestenbaum did refer to a buyback of 50%. I think this was more to indicate the magnitude of the free cash flow he expects rather than the size of the buy back itself. But we shall see what develops on this point. As for who would take the other side of this---Fairfax announced its usual normal course issuer bid in Sept/20 and got approval for a buy back of 10% of the outstanding voting shares and was still able to get a counter party to take the other side of the TRS subsequent to that. I can't see why Stelco would have trouble getting a counter party to do the same? In any case---Kestembaum better get going on some plan sooner rather than later. The street is paying attention to Stelco now and the stock price will continue to move higher. Unless he acts soon Kestembaum will end up paying a much higher price for the buy backs or the strike price for the TRS which will leave less cash available for the "huge" special dividend.

What to do with the free cash that builds up throughout 2021? Announce a huge special dividend or massive share buyback? Why choose between the two? Why not do both? Doing both could be achieved by adopting a page from the Fairfax play book by having Stelco enter into a TRS with a counter party for a block of the company’s own shares. Stelco could separately announce a share buyback to commence soon in order to take advantage of the current share price. Start the share buy back now at current prices in anticipation of a rise in the share price as operating results for the remainder of the year come in. Enter into the TRS at the current share price and then cash out and record a large gain should the expected share price increase occur. Use the proceeds from the closing out of the TRS to pay a huge special dividend or continue with the share buyback. Shareholders are rewarded in three ways---i) outstanding share count reduce through the buy back ii) receipt of a large cash payout from the special dividend and iii) Company's balance sheet remains very strong since a majority of the free cash flow achieved through the expected $2 billion in EBITDA to be earned in 2021 is retained (except of course the portion used for the buyback at current prices). Thoughts?

Stelco's CEO discussing the Q1 results: https://www.bnnbloomberg.ca/video/stelco-says-it-could-generate-adjusted-ebitda-of-2-billion-amid-steel-boom~2195513 The CEO reiterated the comments made earlier today on the Q1 earnings call which were summarized by petec. This is a home run for Prem and the team at Fairfax and also for investors holding Stelco directly and most importantly given the current/expected state of the steel market it appears that things are only getting started. Its worth noting that the CEO did not provide an update on the status of the land banks acquired by Stelco a few years ago so this asset remains a hidden undervalued gem on the company's balance sheet.

Strong Q1 2021 results reported after the market close earlier today: https://investors.stelco.com/2021-05-04-Stelco-Holdings-Inc-Reports-Triple-Digit-Improvement-in-Adjusted-EBITDA-and-Net-Income-in-First-Quarter-2021 Q1 results summarized: Revenue of $665 million for the quarter, up 57% from Q4 2020 Operating income of $167 million for the quarter, up 328% from Q4 2020 Adjusted Net Income* of $155 million and Adjusted Net Income* per share of $1.75, up 243% from Q4 2020 Shipments* of 675,000 tons for the quarter, up 38% from Q4 2020 Adjusted EBITDA* of $185 million for the quarter, up 208% from Q4 2020 Declared quarterly dividend of $0.10 per share payable on May 19, 2021 Also noteworthy are the following comments from the CFO: Paul Scherzer, Chief Financial Officer, added, "The results we achieved in the first quarter are testament to the hard work of our employees and reflect our continued commitment to controlling our costs and maximizing the financial return on our capital investments. However, this is only the beginning. We have not historically issued guidance, other than shipments, but want to impress upon the market the earnings power of Stelco. Assuming the current forward curve for hot-rolled coil on the CME, level quarterly shipments at our anticipated product mix, and our current cost structure, we could generate Adjusted EBITDA in excess of $2 billion over the whole of 2021. Additionally, the alignment of management with our shareholders remains at the core of our approach and is unique within the North American steel industry. I am pleased that we are in a strong financial position and able to once again provide a quarterly dividend of $0.10 per share. Our strategy has been proven, and we will not deviate from our commitment to maintaining a strong balance sheet and positive cash position."

Boat Rocker IPO details have been finalized. Fairfax will own 45% of BR after the IPO and had to subscribe for $30 million of the IPO to get it done. https://www.newswire.ca/news-releases/boat-rocker-media-files-final-prospectus-and-announces-pricing-of-initial-public-offering-898386001.html

The following articles from local newspapers on the land purchases by Stelco may be of interest: https://www.thespec.com/business/2018/06/05/stelco-signals-plan-for-expanded-steelmaking-with-major-land-purchase.html https://www.thespec.com/business/2019/08/23/stelco-the-landlord-sees-big-bucks-in-leasing-out-surplus-industrial-land.html According to the articles, Stelco seems to be protected from the cost of environmental remediation related to the lands due to the unique structure afforded the land purchases. The cost of remediation seems to fall on the Province of Ontario. I do not hold out hope that great value can be extracted from the redevelopment of the lands due to its location and arguably Hamilton city council being very unfriendly to the business community. Nonetheless, I continue to hold a significant investment in Stelco in order to benefit from a very robust steel market. Any windfall from land redevelopment is not factored at all into my analysis however I am very open to being pleasantly surprised on this front.

An interview from earlier today with Stelco's CEO: https://www.bnnbloomberg.ca/video/we-re-very-bullish-on-the-future-of-electric-vehicles-stelco-holding-s-ceo~2158339

No, I think that time for Fairfax was back in 2003. The decision that we are no longer going to buy crappy insurers and turn them around led to the group of quality insurers they have today. The second part of that was making Andy Barnard in charge of all of the insurers. Even with Fairfax's more eclectic style of investing, the real culprit behind their underperformance has been due to betting against and shorting the market after 2009. They took advantage of the 50% correction, but started hedging and that really hurt their performance. Even with minimal exposure to the stock market, they would have done very well just in their bond investments, conglomerate investments and the equities they did invest in...excluding their shorts and market bets which cost them significantly. Maybe the decision to stop shorting is a step in the right direction...simplifying their portfolio decisions. Cheers! Sanj, please stop describing what FFH did as "hedging." More than 100% of FFH's equity portfolio was "hedged." When your hedge-ratio exceeds your exposure to the underlying (ie, more than 100%) that's called speculation. It was one of the investment decisions where the excessive position sizing reflected poor risk management. SJ +1

LONG TERM Closing Share Prices in Canadian Dollars Dec 31/14: $608.78 Dec 31/15: $656.91 Dec 31/16: $648.50 Dec 31/17: $669.34 Dec 31/18: $600.98 Dec 31/19: $609.74 Dec 31/20: $433.85 Mar 5/21: $517.16 TRADING GAIN FROM LOWS OF 2020 2020 Low Price CAD // March 5/21 Closing Price CAD // % Gain 2020 Low to Mar 5/21 Fairfax Financial: $319.37 // $517.16 // 61.9% Royal Bank of Canada: $72.00 // $$112.57 // 56.3% Manulife Financial: $12.58 // $26.79 // 112.9% Brookfield Asset Management: $31.35 // $52.66 // 68.0% CONCLUSION: My conclusion---Fairfax has been a disaster over the long term and absolutely nothing special from the lows of 2020. Nothing in Prem's latest letter suggests anything will change going forward.