giofranchi

twacowfca, the author of the article I posted yesterday sees 2014 after-tax earnings from Cathedral at around $90 million... LRE purchased Cathedral for $425 million... That would translate into an unbelievably low multiple of just 4.72... for a company that has a long track-record of 26% ROE annual... How is this possible? ??? Thank you, Gio

Ok then, let’s say they are investment managers… Yet, they themselves describe their business as composed by two parts: 1) Mineral Exploration Project Generator 2) Royalty creation and investment Therefore, if we agree on the fact they are investment manager, we should at least recognize that the first part of their business is much more similar to what venture capitalists do, rather than to what Onex, Leucadia, Fairfax, etc. do… Am I completely wrong here? And venture capitalists usually invest small amount of capital, in ALS case it is intellectual capital and the cost of explorations, in many different “ventures”, which have the possibility to become multi-baggers. Most of them go nowhere in the end… a few, if they know their job well, actually become multi-baggers! What’s clear imo is that also in many years of doing business their track-record will continue to be tied to just a few very successful ideas… It is just the nature of the first part of their business… Therefore, if we require to see many successful investment ideas, we might never be able to invest in ALS. The second part of their business is more similar to what Onex, Leucadia, Fairfax, etc. do, and is what I call the “new” part. It is this new part that prompted me to take a closer look at ALS, and finally to invest in the company. Why? Because, although it is not where the big winners will reside (to borrow from Mr. Buffett), it is the part that keeps giving free cash and therefore stability and predictability to the whole business. To summarize: ALS starts as a project generator, employing little capital in opportunities that might become big winners. Then it keeps the proceeds from those very few opportunities, which actually have become big winners, invested in a royalty portfolio that generates a significant amount of free cash flow. The fist part is where juicy gains will be achieved, the second part is where stability and predictability of results will be attained. A business model I like a lot! :) Dazel, ap1234, am I understanding ALS correctly? Thank you, Gio

Ap1234, thank you very much for the time and work you devoted in answering my questions… Though, what I asked was: 1) Is your calculation of present NAV for ASL different from mine? 2) How are you acting? What’s your position in ALS, and are you going to average down? I think what you say about their track record is not completely true… I agree they were helped by a secular bull in commodities taken at the start… but I don’t agree with the fact they are not proven, because they have encountered a 300x bagger… Imo this is not how their business model works… They are not fund managers… They are “project generators”… Like original mungerville has rightly said, their business model generates a lot of free cash, without the need of much capital. And when they find the right project, they obviously try to squeeze every penny possible out of it. You wouldn’t say KO is not proven, because the great majority of its business is based on selling one kind of soda… Or that Apple is not proven, because the great majority of its revenues is tied to the i-phone and the i-pad… right?! ALS business is based much more on an intangible asset, that is their skillfulness in projects generating, than on the tangible equity or funds they manage. In other words, what they do is to try different projects at almost no cost, let’s say 20 different projects, out of which only 1 gets the green light… Then they spend years developing that single greatly successful project and reaping the rewards. If you need to wait for 10 or 15 such outcomes, to finally declare they are a proven team, you might risk waiting for decades… As far as the secular bear in commodities is concerned, you already know what I think: that’s the true reason why I assumed a slower growth for the next 15 years… Even if I think men will go consuming more and more minerals and I don’t think Mr. Grantham’s thesis could be easily dismissed… Gio

+1 ;D ;D Gio

Dazel, I am not sure I have understood well… NAV or equity is not fair value. If you foresee a CAGR in equity per share of 15% for the next 15 years, the discounted present value of equity (discount rate 9%), or what I call fair value, is little more than 2 x NAV. Therefore, my question is: $500 million is fair value for ALS, or its present NAV? If $500 million is fair value, I was not completely off the mark... If $500 million is present NAV, Mr. Market has gone totally crazy…!! ;) Thank you, Gio

Ross, what do you think about my assessment of present NAV for ALS? The one without assigning any value to future projects (Kami included)? I arrived at $230 million. Do you have a different number? If so, could you please tell me what it is and how you got there? Besides, if it is true, like Dazel says, that rights to Kami’s and JL’s future production could be sold today in the market, why not to add at least that value to my calculation of present NAV for ALS? $250 million??? Or am I completely missing the mark?! Thank you, Gio

Dazel, I don’t think I valued 2 and 3 at 0… I just believed Kami and Julienne Lake were two future projects that couldn’t be sold nor monetized today. That’s why I didn’t count them in my present NAV estimation for ALS. But they certainly were accounted for in my assumption of a 15% CAGR for the next 15 years! If, instead, like you have made me notice, they could be monetized right away, what ALS might be able to sell them for in today’s market should be added to my present NAV estimation. This is a correction I think I have made, getting to a present NAV for ALS of $250 million. Anyway, whoever comes to a different number, please let me know! ;) Gio

ajc in a PM asked me if I think ALS should be looked at via price/NAV or price/fcf. I think it is a good question, therefore I am answering on this thread. First of all, let me say that I like the most conservative valuation metric that makes sense. What do I mean with “that makes sense”? Well, original mungerville has written: Usually, a company that doesn’t employ much capital to generate earnings cannot be looked at via price/NAV, instead should be looked at via price/fcf. Price/NAV for such a company would surely be too conservative and would lead to almost useless information. Now, the fact that we can look at ALS via price/NAV, despite that ALS “generates future earnings through its expertise rather than capital”, and still come up with a reasonable valuation, is imo another, though not often appreciated, margin of safety: the use of a more conservative valuation metric, one that, if applied to most businesses which generate earnings through intangible assets (like expertise), is almost always conservative to the point of making no sense at all. Gio

Lancashire - Money Making Machine With At Least 45% Upside http://seekingalpha.com/article/2079833-lancashire-money-making-machine-with-at-least-45-percent-upside?isDirectRoadblock=false&source=email_rt_article_readmore&uprof=25 Gio

Well, the job and responsibility of each entrepreneur are to know who he is partnering with and to know what he owns and at what price. Then, if he has made some serious mistakes, to bear the burden of the inevitable consequences without complain. ;) Without providing the knowledge of whom was owning and managing that other business, without explaining the quality of that other business, and without clearly showing why the comparison with ALS should be relevant, imo the piece of information inside your post, though maybe a precious one, remains not actionable. Gio

Hi ap1234, thank you very much for your very useful contribution! I will try to answer some points you have rightly brought up: It is not enough to know that we are partners in ALS. Because that tells nothing about position sizing, and about averaging down. For instance, original mungerville has written he will wait for a larger decline, before averaging down. Well, then my calculation of NAV for ALS must be wrong… I have come to a NAV of $233 million and Dazel has said I have lost circa $70 million along the way… Let’s suppose he is way too optimistic about ALS, and that I have lost just 50% of the figure he has mentioned, $35 million. Let’s also suppose that ALS equity portfolio in a market crash might take a 50% hit, so let’s put its value at $60 million instead of $80 million. With these numbers I get to a NAV for ALS of nearly $250 million. With a market cap at yesterday closing of $370 million. A company that has grown NAV at 29% annual for 17 years is selling for 1.48 x NAV, now that it also enjoys a steady and reliable stream of free cash… Even if you assume an annual rate of growth which is half the historical one, because macro conditions will be a strong headwind for a long time, it simply seems a great deal to me… So, why is original mungerville waiting? And what are you doing? I am not rushing in, I never do, but I neither wait. Instead, I have a gradual plan of averaging down, as long as the price keeps declining. In other words, what is your conservative assessment of NAV for ALS? Is it much different than mine? And what is your conservative assumption for future growth? Is it much lower than 15% compounded annual? According to your conservative assessment of NAV and conservative assumption for future growth, which are the actions you have taken (position sizing), and the ones you plan to take (averaging down)? Thank you, :) Gio

Yeah! Much Buffett-like! ;) Gio

Me too, Dazel, me too! Cheers, Gio PS You clearly think my valuation of ALS is lacking more than $70 million... Could you put an exact number on my deficiency? ;) Thank you!

I agree. And I still have eventually much room to average down! ;) Gio

Another example of the power to have a substantial "cash reserve" in times of trouble. Don’t ask me how those people managed to achieve that. Just be aware that they did. ;) Gio

Ah! Ok, now I get what you meant! ;) Thank you! Gio

Dazel, what do you mean exactly? You no longer think Kami will get financing? Let me summarize my valuation for ALS: They have paid $255 million to purchase their share of the PMRL Royalties, adding $27 million in annual revenues. Assuming they have not overpaid, and I don’t think they have, let’s say that true value is the price they have paid: $255 / $27 = 9.44 x annual revenue. Then they have $3 million in annual revenue from the Voisey’s Bay royalty, which could be valued at: $3 x 9.44 = $28 million. Then they have cash and investments worth $116 million. Total Assets: $255 + $28 + $116 = $399. Then they have total debt of $130 million. Therefore, equity is: $399 - $130 = $269. If you believe their equity portfolio is overvalued, like for instance ap1234 seems to believe, let’s say it is only worth 70% of today’s value: $116 x 0.7 = $80 million. Therefore, equity is worth: $233 million. Market Cap is $385 million. ALS seems to be selling for $385 / $233 = 1.65 x its true net assets. This doesn’t mean I think it is pricey… In fact, given its past growth, and most of all given future prospects for growth, I think it is cheap. Yet, I also think Kami is a large part of that future growth… don’t you agree? In their latest presentation they say financing for Kami is to be expected in the months ahead. Do you think, instead, the macro situation has so much deteriorated that Kami’s financing might be jeopardized? Thank you, Gio

Kraven, I also don’t like these kinds of threads… If you want to speak about FFH, well then speak about the company! Instead, very few people do so. But, to be clear, imo “macro” has nothing to do with “general market valuation”. I don’t care much about macro (I wouldn’t have invested in ALS otherwise!), yet I am worried about general market prices. General market valuation applied to the S&P500 is no different than trying to value a portfolio of 500 companies. Not easy, of course! ... I guess 500 companies are a lot even for you! But the idea is the same: to compare prices with values. The "headlines" Mr. Buffett speaks about are totally different things. The short-cuts often used to value a market, and that have a long-term track record of reliability, might be somehow questionable… in the end, though, they are nothing but simple means to avoid much trouble and work: that is to value 500 companies, one by one! And you know what? I guess that, if you’d make the effort to study and value each of those 500 companies, you would come to the conclusion that portfolio of 500 companies is not of your liking at all! ;) Gio

Thank you very much for posting this! :) Gio

frommi, I don’t share your concerns about FFH, and here is why: Bonds: FFH bonds portfolio was mainly assembled in 2008-2009 and, like Mr. Watsa has often reminded us: That was at the end of 2012. Today those bonds are certainly much more attractive! I am not saying they are as attractive as they were in 2009, but they are probably yielding around 6%. Not bad! Especially with the leverage FFH is able to use. Unless those bonds default, and most of them are insured by Berkshire, mark to market losses are not all that relevant, and there will be sure and substantial gains. Equities: Why is everyone assuming that FFH’s portfolio will go on underperforming the indices?!?! Just because it has done so last year?! FFH’s equity investments have a long history of outperforming the indices, and they will probably outperform again in the future. What I do see: An outstanding organization that through the opportunistic purchase of insurance companies all over the world is becoming more and more global. So many opportunities for growth. I am exited to see what they will be able to accomplish during the next 15 years. Gio

Profits from equity and equity related investments in 2013 were $1,445 million, while Preferred stocks + Common stocks + Investments in associates at December 31 2012 were valued at $6,359. That’s a return of 1,445 / 6,359 = 22.7% (dividends excluded and BB included ;) ). Given the fact that $1,324 million were realized gains, the annualized return might be significantly higher, depending on when those securities have been sold. :) Gio From the annual letter, he says: In 2013, we had a total investment return of negative 4.9% (versus an average of positive 4.4% over the past five years and positive 8.9% over our 28-year history) mainly because of our 100% hedge of our common stock portfolio. If we had not hedged, our total investment return in 2013 would have been a positive 3.6%. In our 28-year history, we have had negative total investment returns in only three years: 1990 – (4.4)%; 1999 – (2.7)%; and 2013 – (4.9)%. In the past, these returns reversed the following year, as shown in the table in the MD&A! As we said earlier, as of February 28, 2014, we had an unrealized mark to market gain in our investment portfolio of more than $1 billion – after tax, this would have eliminated our net loss in 2013. Yes, that is total investment return. Of which the return from its equity portfolio is only a part. But total investment return suffered from $995 million unrealized bond losses... What's so hard to fathom? Practically every bonds portfolio suffered mark to market losses in 2013. Gio

Profits from equity and equity related investments in 2013 were $1,445 million, while Preferred stocks + Common stocks + Investments in associates at December 31 2012 were valued at $6,359. That’s a return of 1,445 / 6,359 = 22.7% (dividends excluded and BB included ;) ). Given the fact that $1,324 million were realized gains, the annualized return might be significantly higher, depending on when those securities have been sold. :) Gio

Ok guys, the equity hedges have been a big mistake… Sincerely, I couldn’t care less now. Whoever reads this letter and doesn’t see the entrepreneurial global force FFH is becoming, simply lacks entrepreneurial spirit. It is so self-evident! 1) The best way to play the emerging markets story: FFH. 2) The best way to play an European recovery: FFH. 3) Even in North America, despite the headwind of high general market prices, FFH will go on purchasing whole businesses. People have been fixating on these equity hedges and are completely missing the whole FFH story. Nothing else to say. Gio

MM, As I have explained in the LRE thread, I look at LRE as a “strategic” investment. It does something for my firm’s portfolio that simply no other investment (at least that I know of) might do. And I don’t look at LRE as a compounding machine. If you are interested, you find my view on LRE on its thread. Gio

Well… maybe! Anyway, the question remains the same: when will FFH invest aggressively in stocks again? And my answer is: when they will see that those metrics, which compare PRICES to VALUES for the general market (be it the Dow, the S&P, or the Russell), at least stabilize. As long as they keep getting higher and higher, like they are still doing, I don’t think we will see FFH’s equity portfolio become larger. Gio