giofranchi

Well, I thought I answered your question... And my answer is NO! Its multiple would be much higher if it had achieved the same growth rate (thanks to its acquisitions), without using debt… People know they eventually will have to repay their debt, and they are pricing VRX accordingly: as a slow growth company, instead of one of the fastest growing company out there! Gio

I agree. Try also “Competition Demystified” by Bruce Greenwald. Gio

You can always count on the fact that, when something goes up, Gio is somewhere else instead! ;) ;D ;D Gio

Another book I would surely recommend is “Fooling Some Of The People All Of The Time” by David Einhorn. Gio

Well, Margin of Safety taught me the importance of always leaving some room to average down, when I start a position in a public company. And I don’t remember to have seen this discussed in any other book that I am aware of… probably I am mistaken, but Margin of Safety surely is the place where I first encountered this imo very important idea. Through the years I have greatly benefitted from it, and any book with at least one idea we can truly benefit from is worth mentioning! ;) Gio

1) Autobiography + Poor Richard by Ben Franklin 2) The Richest Man in Babylon by George S. Clason 3) Economic Articles And Correspondence Investment And Editorial by John Maynard Keynes 4) Berkshire Hathaway Letters To Shareholders 1965-2012 + The Intelligent Investor 5) Fairfax Financial Letters to Shareholders 6) Poor Charlie’s Almanack by Charles Munger 7) Margin Of Safety by Seth Klarman 8 ) The Most Important Thing by Howard Marks I would add: 9) How To Read A Financial Report by John A. Tracy (the best guide to understand how the balance sheet, the income statement, and the cash-flow statement are linked together, that I know of) 10) Accounting For Value by Stephen Penman (a great book on valuation) 11) Reminiscences of a Stock Operator by Edwin Lefèvre (such a fun to read! For the trader that is inside all of us!) 12) Assorted biographies of great entrepreneurs Hey! What was the title of this thread?! ;D ;D Gio

Hi Liberty, No, actually I have never dug deeper than this first very superficial analysis about ONEX… therefore, of course I have never pulled the trigger… sincerely, don’t know why! ::) I guess something else might have interested me more, I simply didn’t find the time to do more work on ONEX, and after a while I just forgot about it… Gio

Thank you CorpRaider. I wanted to drop a line and thank you because you're officially the first to answer. Frankly, I had hoped for a while that some of the fervent bulls would at least say the obvious ones like Retin-A or even the CeraVe lotion as they seem to be clear candidates. However, for the readers of 10-Ks out here you'd see disclosures like this when the company is talking about the decline in sales for products not related to acquisitions Oh! Com’n! Don’t mistake popularity for durability! If it weren’t for Mr. Buffett, probably less than 1% of world population would have ever heard about See’s Candies… Are they durable enough for you?? By the way, I could name you a lot of products that have not changed in decades, and that you have never heard of! ;) Gio

But why, you might ask, have they purchased, and are going on purchasing, growth with debt, if growth and debt cancel one another? My idea is that Mr. Pearson strongly believes in VRX business model, and wants to get as big as possible (meaning he wants to acquire as many assets as possible), before the soundness of VRX business model becomes clear to everybody else… Then competition will become too fierce and VRX business model will undoubtedly be disrupt! He not only believes the assets he acquires won’t stop being productive… I think he earnestly believes that getting the “VRX treatment” they will become much more profitable! Is he right, or wrong? I repeat once more: that’s the only question that counts. Gio

lu_hawk I am glad a bear on VRX has shifted the discussion from a personal attack on Mr. Pearson, though disguised under the form of an “accounting issue”, to something more interesting: valuation. I have invested many years in pharma companies, before investing in VRX: in JNJ, ABT, and NVS. And I have always looked at: 1) Sales 2) Free Cash Flow But I agree with you VRX is different, because it is much more leveraged than, for instance, NVS. Though, I still think Sales and Free Cash Flow are the right measures to use valuing VRX too. You should look at GROWTH. During the last 5 years VRX Sales growth has been 50% annual, while NVS Sales growth has been 6.7% annual… Yet, VRX is selling for 15x Cash EPS, while NVS is selling for 23.7x Free Cash Flow… Now, let’s suppose VRX Cash EPS inflate true Free Cash Flow per share by 10%, like Vinod suggested… No, let’s say they inflate true Free Cash Flow by 25%… Just in case Vinod has not been conservative enough… Then we get to a multiple for VRX of 15 x 1.25 = 18.75x Free Cash Flow. Therefore, I ask you: how do you reconcile a lower multiple, 18.75x < 23.7x, with much higher growth? Easy: debt! What growth gives, debt takes away! ;) They have purchased, and are going on purchasing, growth with debt, and that growth is not reflected in price… rightly so! In the end what we are left with, if you want, are two companies with similar valuations, but two different business models… And here we go back to what I have always said: it is an entrepreneurial judgment. And the only question to answer is this one: is VRX business model a great one? As I said yesterday, tough question to answer! Gio

Unless my estimation of NAV, that I thought was very conservative (it already considers all ALS iron-ore assets to be worth ZERO...), is instead completely wrong, I simply don’t understand an $11 share price… But, of course, anything can happen! ;) Gio

In my business experience “crooks” and “saints” are hard to find… Instead, I find everyday people who are right and people who are wrong, people who reason clearly and people who live in confusion. So, I much prefer to check the logic in everything, rather than to give some kind of moral judgment… And I find the logic behind Mr. Ackman’s investment thesis to be very sound most of the times… Other times, admittedly, I don’t understand them… Gio

AZ_Value et other bears, ;) I have closed my position in VRX at $130 yesterday, together with my position in ENDP… I needed some capital to invest in my own businesses, and VRX + ENDP simply was the stock investment of mine in which I had the least conviction… But, please hear me, it has nothing to do with accounting! I have more conviction in other stock investments of mine simply because their business model is easier to predict. Period. By the way, I don’t see how your example of Zovirax should work: capital expenditures on “aging machinery” are depreciated, right? But they are not expensed, right? Therefore, to calculate fcf, from net earnings you add back depreciation and subtract capital expenses, right? R&D costs, instead, are already expensed. Then why shouldn’t we simply add back to net earnings patents amortization? Like every other pharma company actually does? I have great respect and esteem for Mr. Pearson (as an entrepreneur of course!), and accounting would be an issue only if Mr. Pearson’s integrity would be put in doubt… But there really is no logical basis to put his integrity in doubt! I have been listening to Mr. Pearson talk about VRX’s strategy for 3 years now, and I have never find anything unreasonable. He has always been very straightforward and sharp about this simple goal: how to rationalize costs in the pharma industry. The only question that really matters is this one: is he right, or is he wrong? If he is right, VRX shareholders will go on making tons of money, whatever you and others say about accounting! No doubt about this. Unfortunately, I must admit I cannot answer that question with the same certainty I answer questions about other stock investments of mine… It is an entrepreneurial question, and I must admit I am not such a good entrepreneur to answer it with great conviction… I needed capital… Therefore, not without regrets I have sold… Gio

I have been buying each day for the last week and a half. Gio

Crip, I really wish I knew how to jump in and out of stocks… But I don’t think I can… I sell a great business (...to correctly recognize a great business is already hard enough!) only if it is wildly overvalued… at 1.3 – 1.4 x BV FFH imo is still undervalued… ;) Cheers, Gio

May 2014 Monthly Report Gio 2014-05-May-Monthly-Report-TPRE.pdf

You see the risk ALS has overpaid for the “Prairies Royalties” and the CDP? Gio

Gio

Well, I am not against the use of debt, even a considerable amount of debt, if you use it to purchase some assets which already generate steady and safe cash flow, abundantly above the interests you must pay on that debt. The CDP, though, do not generate cash flow yet. And they have spent $42 million to buy it. Personally, I think it will be a great source of growth in the future… but of what will happen in the future you can never be 100% sure… Therefore, though some people think they have made a mistake choosing a mix of debt and equity, to finance the “Prairies Royalties” and the CDP acquisition, instead of all debt, I wouldn’t be so sure… Gio

If this is so, then I don’t see how the “Prairies Royalties” and the CDP ain’t worth a lot more than what ALS paid them for. If they are worth a lot more than what ALS paid them for, ALS today is selling below NAV, even if all its asset related to iron ore would be utterly worthless… which, of course, is a ridiculous valuation! ;) Gio

--Mr. David Hay Gio EVA+5.30.2014_NA.pdf

Hi shalab! Yeah… You are right… The website is a bit dated… But we are in the midst of completely renewing it, with the implementation of an e-commerce platform. Through our master courses over the years we have created a good library of technical contents, that are updated each year and that I think might be very useful to a lot of professionals in the civil engineering field. The e-commerce platform is supposed to address those professionals who don't have the time nor the willingness to enroll in a master course which lasts a full year... This way, instead, they will be able to access and download only the contents they are really interested to dig deeper into, and which they know might have a practical use in their daily working life. Of course, the new website will have an English version! ;) Cheers! Gio

No, it seems they are right: after closing the recent equity offering, ALS has 32,238,821 shares issued and outstanding. 32,238,821 x $12.83 = $413,624,073.40 (Canadian Dollars) Please, consider that what I have posted is imo a “worst case” scenario… Think of this: even if Kami and JL are not built, even if all their investments in iron ore plummet to ZERO… It is enough to assign an 11x multiple to the “Prairies Royalties”, to get back to 1.176 x NAV. If you think the CDP is worth some more than what they paid, the gap between market cap and NAV shrinks further. Then, tell me: do you really think risk n.1 is so high, that Alderon will prove to be utterly worthless?? ??? Gio

Ok! Thank you for correcting my mistake! ;) Gio

In the meantime, I keep buying… I bought yesterday… I will buy again on Monday… ;) I find the behavior of the share price really baffling… So, let me review my thesis about ALS: Minerals will always be needed. That won’t change. Am I right? So which are the true risks here? I can name basically two: 1) The cyclical nature of the mining business 2) The use of some minerals gets out of favor Risk n.1, of course, refers to the price of iron ore, and therefore the profitability of Kami and JL. Risk n.2, of course, refers to carbon used to generate electricity, and therefore to a part of the royalties newly acquired. Risk n.2 doesn’t concern me a lot: like ap1234 as always said, it is possible that the purchase of the new royalties was not a great bargain, but it is very difficult to argue against the fact the price paid already discounts the eventual gradual erosion of the electrical carbon royalties… here the adjective “gradual” is key: it is not plausible those royalties will stop producing revenues all of a sudden, instead it will be a slow process of shifting from carbon to natural gas and/or other renewable energies. Risk n.1, instead, is very real: so, what are we left with, if Kami is not built? The way I see it, we will still have: - The “Prairies Royalties” at cost, $240.9 million - The CDP at cost, $42 million - The Voisey’s Bay Royalty, worth $3 million x 10 circa $30 million - Circa $30 million invested with Cranberry Capital - Circa $34 million invested in Virginia Gold Mines - Circa $5 million invested in Callinan Royalties - A portfolio of exploration projects - $44 million in cash ($65 million from the recent offering of common shares - $21 million used to purchase the second half of the CDP) Total Assets: $426 million (assigning no value to the portfolio of exploration projects) Total Debt: $130 million NAV: $426 - $130 = $296 million Today’s market cap: $354 million ALS is selling for 1.2 x NAV… And my calculation of NAV assigns no value to Kami royalties, no value to JL royalties, no value to Alderon shares, no value to Century Iron Mines, no value to Champion Iron options… And my calculation of NAV considers the “Prairies Royalties” at cost, and the CDP at cost… I guess also ap1234 might agree it is a conservative way of valuing those new purchases, even after taking into account risk n.2… And we have a 40 years old entrepreneur, who has a wonderful track record of growth, who surely knows his job, company, and industry very well, and who already has some concrete opportunities for growth in other areas besides iron ore: think for instance at CDP and potash! No matter what the economy and the markets do, people still need to go on eating, right?! So, what am I missing here?! Until I don’t understand where I am mistaken, I will keep averaging down. :) Gio