PDER - Pardee Resources

[ScottHall]

Hi folks,

 

I apologize in advance for the disjointed nature of this post. I had my wisdom teeth taken out yesterday and I'm high as a kite off the pain meds.

 

I've owned Pardee for a few years, and I know Tim Eriksen owned it at one point as well. It has underperformed the market since I purchased shares, but the underlying business is of a high quality and I have met the management team several times at their annual meetings in Philadelphia.

 

Pardee's main source of revenue comes from its natural resource assets. It owns hundreds of thousands of acres of land and mineral rights (2013 annual report not on hand at the moment, as I lent it to a coworker recently), primarily in the Central Appalachian region.

 

Rather than running their natural resource operations for themselves and taking all of the operational risk that goes along with that, however, Pardee just leases its properties out to others and collects royalty checks from the coal mines and oil gas wells on its properties.

 

This makes the company quite a cash cow, with very high levels of free cash flow that it generally deploys in acquiring additional assets and share repurchases.

 

One thing to note is that Pardee has spent the last several years ramping up its alternative energy business, which basically means they've been buying/building solar projects with long-term deals with relatively creditworthy institutions such as prisons and state universities.

 

The company doesn't really disclose much about that side of the business in its annual or quarterly reports, but the management team is quite friendly if you make the trek to Philadelphia for the annual meetings, and will tell you most of what you would be interested in knowing.

 

For example, I was curious about the sort of returns that the company was getting on its solar projects when compared to its royalty business (high teens over many years), but that information had not been disclosed in the annual reports at the time.

 

Management told me that they were targeting a 10% unlevered IRR on them generally, which it has bolstered by taking on non-recourse bank loans collateralized by the solar projects.

 

I have meant to write about these guys for quite some time, as they are a sharp crew, and quite frankly I view them more as an investment outfit than I do a typical natural resources company.

 

Beyond the core business of what they do, the management possesses several traits that I find very appealing:

 

1. Focused on costs and tax-efficiency like a hawk. When Pardee sold some of its surface and timber acreage last year, they made use of a 1031 exchange to reinvest the profits in to an acquisition of oil & gas mineral interests to defer taxes on the sale.

 

2. Willing to bet big when they find a good opportunity. Spent $60.1 million - nearly their entire cash hoard at the time - last year acquiring 400,000 acres of oil & gas mineral interests, essentially tripling their exposure to oil & gas in the Central Appalachian region overnight.

 

The reason this is so compelling is that, as I found out at the annual meeting, much of these acres were adjacent to acreage the company already owned, so they had a pretty good idea of what it was worth from their own experience.

 

3. Unlevered balance sheet. Only has $5.7 million of debt, all of which is non-recourse to the company.

 

4. Willing to buy in large chunks of shares through tender offers, even though the stock is very illiquid. Back in May, Pardee announced a tender offer for up to 22,600 shares of stock at a price of $265.50 per share. As it turns out, 51,300 shares ended up tendering. Pardee bought them all.

 

That may not sound like much, but given the company's share count (it's in the hundreds of thousands), it actually represents a pretty big chunk of the company.

 

---

 

One thing to note is that Pardee essentially operates as a quasi-privately held business, and does not file with the SEC. The only way to get annual and quarterly reports is by being a shareholder or getting them from a shareholder.

 

Unlike many businesses that operate this way, however (JG Boswell, to name one), the company is actually very shareholder friendly with its capital allocation, cost control, and disclosure.

 

Pardee's annual reports give you all the basic information you'd need to know about their asset base, and they provide a good level of detail about how business has developed over the past year. They're not particularly wonky, though, so there's not a ton of financial metrics shared beyond the basic financial statements and a mention or two about the returns of a project here and there.

 

The quarterly reports are much shorter, and used to look like the pamphlets for local "Mystery House" or other local attraction you'd find at a Motel 6. They've added a little bit more substance to them in recent years, though, but they're still not near as detailed as the annual report is.

 

Neither are as detailed as SEC filings, which is fine with me on account of ~80% of any given SEC filing is filler and legal boilerplate, in my view.

 

I would share last year's annual numbers with you if I had it on me. Fortunately I do have the most recent quarterly on hand, which is actually what reminded me to write this in the first place.

 

Income Statement, Q3 2014 (Dollars in Thousands)

 

Divisional Revenue:

 

Coal & Minerals: $5,826

Oil & Gas: $3,348

Timber and Surface: $1,615

Alt. Energy: $1,441

 

Total Revenue: $12,230

 

Divisonal Expenses:

 

Coal & Mineral: $614

Oil & Gas: $2,014

Timber & Surface: $733

Alt. Energy: $529

 

Total Expenses: $3,890

 

"Net Operating Income": $8,340

 

Interest and Other Income: $11

General & Administrative: ($1,623)

Interest Expense: ($8)

 

Income Before Taxes: $6,648

 

Taxes: $2,381

 

Net Income: $4,267

 

Earnings Per Share, Quarter Ended 9-30-14: $6.11

 

Earnings Per Share, Quarter Ended 9-30-13: $4.54

 

Earnings Per Share, Nine Months ended 9-30-14: $15.91

 

Earnings Per Share, Nine Months ended 9-30-13: $22.70

 

 

The reason for the year-over-year decline in earnings for the first nine months, despite the strength in the third quarter results, was mostly because of the sale of the timber and surface rights last year, that I already mentioned, combined with the fact that Pardee was still receiving royalties from a mine in Colorado at the time, which has since been exhausted.

 

The third quarter improvement was related to strength at the portfolio properties along with new investments that Pardee had not yet made as of the third quarter last year, including the newly acquired 400k acre property.

 

Here is a summary of the most recent balance sheet, as well, again in thousands except for share count:

 

Assets

 

Current Assets:

 

Cash & Equivalents: $13,290

Accounts Receivable: $6,200

Deferred Income Tax: $447

Other: $797

 

Total Current Assets: $20,734

 

Fixed assets, net of depletion and depreciation:

 

Land & Right of Ways: $23,581

Mineral Rights - Coal: $29,945

Timber: $5,605

Solar Equipment: $28,545

Building & Structures: $234

Timber Operations: $46

Office Equipment: $398

Automobiles: $92

Other Fixed Assets: $327

 

Total Fixed Assets: $88,773

 

Investments:

 

Oil & Gas Investments (Net of Depl. & Depreciation): $62,211

Other: $146

 

Total Assets: $171,864

 

Liabilities

 

Accounts Payable: $2,218

Taxes Payable: $913

Other Liability: $1,142

Non-Recourse Bank Debt: $5,677

Supplemental Pension Plan: $139

Deferred Revenue: $5,051

Deferred Taxes: $17,708

 

Total Liabilities: $32,848

 

Book Value: $139,016

 

Weighted Average Shares Outstanding, MRQ: 698,324

 

BV Per Share: ~$199.07

 

 

One thing to note is that BV per share is materially understated because, as the company put it at this year's annual meeting, most of its timberland was acquired in the late 1800s, and so is recorded well below market prices on the balance sheet.

 

Beyond that, the company contracted Forecon to provide a valuation of Pardee's core 136,200 acres of hardwood timber that was completed at the time, which ended up coming out at $136 million. You can take it or leave it, but it's far above what it is being carried on the books for in any case.

 

http://www.pardee.com/pardee-resources-company-completes-timberland-appraisal/

 

Other than that, the only real thing of interest I have on me at the moment is a chart from the annual meeting in 2013, of the company's pre-tax IRR of its projects going from 1995 to 2013, which by the CEO's calculations came out to 19.3% over that timeframe. There are other charts showing the increase in operating cash flow, EPS, etc. from 2002 but it's getting late and I don't have a scanner anyway.

 

I know some guy uploaded a bunch of old Pardee reports somewhere online, so you can probably find them if you care. I personally view the company as a long-term holding that I don't have to keep an eye on every day. It's not a cigar butt, and I think the management team has proven to be very astute. I suspect it will compound at a satisfactory rate going forward.

 

Perhaps my favorite attribute is that Pardee is a "land trap" that isn't a land trap. Which is to say, it is actually pretty aggressive about extracting the value of its assets and finding new places to reinvest its capital. I like getting exposure to natural resource assets/land in a way that isn't a total sink of opportunity cost.

 

Whether you're interested or not is up to you all, but given the relative lack of coverage of this company, I thought it was worth bringing up.

 

http://www.pardee.com/

 

 

[ScottHall]

Apparently Nate (oddballstocks) also profiled this one recently, so I'm linking for reference.

 

http://www.oddballstocks.com/2014/10/value-investing-seminar-recording.html

[thepupil]

own and love, a real gem particularly when you compare to the alternative ways of getting US timber exposure (DEL, RYN, WY, whatever Plum's ticker is that I can't remember). With Pardee you buy a big piece of timber and a bunch of cash flowing assets. It's like a positive carry inflation call option that is well managed.  I intend to hold for a long time.  Nate's profiling and a few SA articles along with a tender offer increased the liquidity and price nicely.

 

Since it sounds like you've done a lot more DD on this than I, do you know from which exact mines they get their coal royalties? When first researching, I tried to figure out the names of the mines and to which operators they were leasing, but I never did after a few hours of google searching; I can't go to the annuals because of my job commitments. I know one is a Patriot mine since they mentioned a bankruptcy that coincided with theirs. I have a contact on the sell side who would have a good idea of an individual mine's prospects, so I wanted to bounce those off of him.

 

I've struggled with how to discount the coal royalty stream and fear that the decline there may resemble a step function downwards as mines are shut down, rather than a slow and gradual beautiful decline (more Blackberry than Altria). That said, so far they've done a great job of buying assets and growing their share of a declining pie.

 

The price is such that a pretty quick decline in coal won't break the company, and the big o&g acquisition helped diversify, but getting a better handle on the coal would certainly help gauge the risk reward more accurately.

 

Also, did you happen to do any checks on the veracity of the timber appraisal. They sold a substantial chunk  very low mark relative to the average per acre value of the appraisal; I trust them when they say their remaining is of higher quality, but just curious if you had any thoughts.

[thepupil]

Also the VIC article has a link to collection of old annuals and meeting remarks

 

https://www.mediafire.com/?lcuk79ri1m52n

 

http://www.valueinvestorsclub.com/idea/PARDEE_RESOURCES_CO/97301

[Tim Eriksen]

I have owned it since 2005 in order to get reports (that is how they found there way online).  I periodically buy and sell depending on valuation.  I still own a modest position in the fund.  It is a wonderfully managed steady business.  I briefly profiled it at the Value Investing Congress Workshop in New York in September.  This is a royalty business with 65% operating margins, including depreciation.  If you added back depreciation margins are probably above 80%.  It builds up cash quickly and uses it wisely.  What more could you want?   

 

The only reason it is not a bigger position is I look for 20% plus annual returns and it "only" averages in the  mid teens.  If I ever managed a closed end fund for micro caps or unlisted stocks it would be a core holding.  If anyone wants to help me start one...

[Hielko]

I own this as well, bought it earlier this year when they ended up purchasing all shares tendered in the tender offer.

 

For those interested: have compiled 10 years of historical financials in this google drive sheet: https://docs.google.com/spreadsheets/d/1LriZKr0QFv7zdrzNr9FJ4KjQnD4lHyws1SGjrZDZYXw/edit?usp=sharing

[CorpRaider]

own and love, a real gem particularly when you compare to the alternative ways of getting US timber exposure (DEL, RYN, WY, whatever Plum's ticker is that I can't remember). With Pardee you buy a big piece of timber and a bunch of cash flowing assets. It's like a positive carry inflation call option that is well managed.  I intend to hold for a long time.  Nate's profiling and a few SA articles along with a tender offer increased the liquidity and price nicely.

 

Since it sounds like you've done a lot more DD on this than I, do you know from which exact mines they get their coal royalties? When first researching, I tried to figure out the names of the mines and to which operators they were leasing, but I never did after a few hours of google searching; I can't go to the annuals because of my job commitments. I know one is a Patriot mine since they mentioned a bankruptcy that coincided with theirs. I have a contact on the sell side who would have a good idea of an individual mine's prospects, so I wanted to bounce those off of him.

 

I've struggled with how to discount the coal royalty stream and fear that the decline there may resemble a step function downwards as mines are shut down, rather than a slow and gradual beautiful decline (more Blackberry than Altria). That said, so far they've done a great job of buying assets and growing their share of a declining pie.

 

The price is such that a pretty quick decline in coal won't break the company, and the big o&g acquisition helped diversify, but getting a better handle on the coal would certainly help gauge the risk reward more accurately.

 

Also, did you happen to do any checks on the veracity of the timber appraisal. They sold a substantial chunk  very low mark relative to the average per acre value of the appraisal; I trust them when they say their remaining is of higher quality, but just curious if you had any thoughts.

 

Neat idea guys thanks.  PCL is the ticker for Plum Creek.  I just read their most recent transcripts and noted that Rick Holley ( PCL CEO) was discussing his view that private value timber transactions are going for prices above the implied value per acre of the timber reits, specifically PCL (he was discussing a plan to potentially divest timber and buy back stock).  They have a good/decent track record for guaging the heat in the timber markets, as an analyst on the call pointed out, they basically top ticked the market with some large dispositions prior to financial crisis.  I don't own any because it seems like management gets paid too much.  I've followed it since WEB sold it off as a stock pick for charity way back when.

[writser]

Great research by all of you. I'm fully invested now but have been looking at this as a potential replacement for my portfolio. One thing I couldn't quite get comfortable with (just as thepupil) is that net income still is >60% coal royalties despite their push into other areas. So aren't you effectively making a bet on coal mining not declining? Is this something you are taking into consideration? How relevant do you think this is?

[oddballstocks]

Yes, very much like this one as you can see from my link above.  Own a good position here, I've occasionally added, on the lookout for more.

 

I'm content with mid-teens returns.  I know Tim shoots for the stars (and gets there), but I'm ok with lower returns, I have no fee hurdle to overcome.  We're all forever indebted to Tim for getting those results online!

 

In terms of coal, that's the worry everyone has.  A few notes on the coal.  They discuss at length how they have been able to extract coal profitably when others can't.  There is also a potential to export coal due to their location.  And finally natural gas has quickly been taking the place of the coal.

 

The largest revenue drop related to coal already happened.  This is as their Colorado property was exhausted. 

 

In my mind these guys are natural resource value investors.  They purchase resources cheap, lease them or sell them when overvalued.  They have an excellent track record of success, so I'm going to trust their expertise going forward.

[Hielko]

Great research by all of you. I'm fully invested now but have been looking at this as a potential replacement for my portfolio. One thing I couldn't quite get comfortable with (just as thepupil) is that net income still is >60% coal royalties despite their push into other areas. So aren't you effectively making a bet on coal mining not declining? Is this something you are taking into consideration? How relevant do you think this is?

While coal is a large part of their current earnings it's a smaller piece of the company in terms of intrinsic value, mainly because the land/timber segment isn't creating a whole lot of earnings currently but it does have a lot of value (at least if we trust the 2013 appraisal). And the other segments probably have more value further away in the future. They have 10 years of permitted coal reserves, but the timber and land will have inflation adjusted returns 100 years from now.

 

I think the coal segment is approx. 30% of the intrinsic value of the whole company, but the price of coal will obviously still have a big impact on the company, despite the diversification.

[thepupil]

Great research by all of you. I'm fully invested now but have been looking at this as a potential replacement for my portfolio. One thing I couldn't quite get comfortable with (just as thepupil) is that net income still is >60% coal royalties despite their push into other areas. So aren't you effectively making a bet on coal mining not declining? Is this something you are taking into consideration? How relevant do you think this is?

While coal is a large part of their current earnings it's a smaller piece of the company in terms of intrinsic value, mainly because the land/timber segment isn't creating a whole lot of earnings currently but it does have a lot of value (at least if we trust the 2013 appraisal). And the other segments probably have more value further away in the future. They have 10 years of permitted coal reserves, but the timber and land will have inflation adjusted returns 100 years from now.

 

I think the coal segment is approx. 30% of the intrinsic value of the whole company, but the price of coal will obviously still have a big impact on the company, despite the diversification.

 

I agree, timber is about 50% of total assets by my calc (my NAV is about ~$370 / share) but the timber makes nothing in cash and Carleton, Linda and crew cost money!

 

If the coal were to go away over the course of the next decade, the other assets really have to step it up to pay the ~$7MM of overhead. I own this and really like it, I just think that the coal concentration in terms of what produces the cash flow is important to acknowledge. Otherwise, the big portion of value (the timber) becomes unduly burdened by corp overhead and I have to think about haircutting that significantly.

[writser]

Yes, that's my main concern as well. I believe Nate coined the phrase 'two-pillar stocks', i.e. stocks that are cheap both on earnings and asset basis. Now this looks like a great example of such a stock but if the coal business collapses you could end up owning a bunch of non-performing assets only. On the flipside management appears to be astute so maybe I'm overestimating the chances of this happening. Not to mention that I could be completely wrong about the future of coal mining.

 

How did you arrive at the $370 / share?

 

Back of the envelope asset based evaluation:

 

+ $136m timber lands appraisal

+ $19m 2010 acquisition price of timber lands not included in Appraisal

+ $60m 2013 acquisition price of 436k acres oil & gas rights.

+ $20m implied value of existing 208k acres oil & gas rights (being conservative).

+ $30m book value solar investments.

- $10m excess liabilities

 

Roughly 670k shares outstanding so I end up with $380 / share - excluding coal.

[oddballstocks]

On the coal... From those linked reports that are notes from their annual meetings.  I don't remember the year, but they had a discussion of their coal verses other coal.  They talked about how the market for coal was decreasing and coal production slowing, yet they had experienced dramatic growth at the same time in coal.

 

I'd suggest reading through the annual meeting notes, there are some great comments in there. 

 

In general I try to avoid investing in resource companies because the values seem 'squishy' and commodities follow a different price cycle.  But with Pardee after researching them I came to the conclusion that the guys running the show know what they're doing, and know how to navigate these cycles much better than I do.  The results speak for themselves.  So instead of me trying to time different commodities or hoping in and out of commodity companies it's much easier to invest in Pardee and let them do it.

 

Like wrister posted above, I think there is a MOS in this even if the coal were worth zero.  But the coal is worth more than zero, usage will still be around ~30% for US energy needs.  If one thinks coal is truly going away they'd be shorting railroads as well.  If one is truly worried about coal I'd go long Pardee and short Norfolk Southern.  NS does a giant coal business where Pardee operates.

[thepupil]

I didn't add the existing  oil and gas rights acreage.

 

I think I have a higher share count but my reports are back home; I know I  there are some outstanding ITM options of which to be aware.

 

I value coal @ $45MM, 3X 2013 income minus all corporate overhead. My mental accounting is that the coal pays for the corporate overhead so as long as they make $7MM / year from coal, I don't have to worry about it. I realize they made $5MM last quarter so I'm being pretty punitive here, but Pardee's tenants are on the verge of bankruptcy (or have already gone bankrupt) and there is an argument to be made that some of these mines simply don't need to exist, which is why I have my question about what individual mines these royatlties are from. Capacity needs to come out of the the industry and CAPP and NAPP are the long term losers to PRB and all coal basins are the losers to other stuff.

 

Nate DCF'd the coal royalties in his valuation in his newsletter and did not deduct for corp overhead if I recall and got a valuation of $500+/share. I have an amazing amount of respect for Nate and think he is a spectacular investor, writer, professional, etc. But I thought that a bit Pollyanna (or Panglossian for those who appreciate a snobby literature reference).

 

At my cost of $230 / share, I didn't really have to care about all this and am very comfy at current valuation, but if the stock got to a 3 handle, I'd have to start thinking about it more.

 

 

 

[Hielko]

A good question is how you really want to account for the corporate overhead. Some thoughts:

 

1. Some of the corporate overhead is without a doubt for finding new investments, exiting existing investments when the time is right etc. If they are able to add value doing this - and it seems they are - it's money well spent and it should actually be worth a positive number.

 

2. Another part of the corporate overhead is presumably related to the day-to-day operations of the various assets. For a large part these costs would have to be incurred by whoever the owner of these assets would be, and should therefore (theoretically) also be reflected in the market prices of these assets.

[Liberty]

Thanks Scott. Will have to look deeper.

 

Superficially, the land/royalty business makes me think of a smaller Texas Pacific Land Trust (TPL).

[JAllen]

PDER is the Berkshire Hathaway of natural resource companies.  PDER is as old as Coca-Cola is.  It's 30%+ owned by the fourth generation of the descendants of Calvin Pardee. 

 

 

BTW, for those interested, I found a book a few family members wrote about him and the history of the company back in the mid-70s on Amazon about a year ago.  It was a superb read and is now one of the most important books I own, to me.  The depression and difficulties back then caused the family then to become royalty companies, instead of operating themselves, which is inherently hard.

 

 

PDER isn't another company that just owns land and sells the timber and occasionally sells some rural land for $3,000 an acre.  Their assets are much more productive.

 

 

PDER is a royalty company, most importantly.  They generate about $30-$35M of operating cash flow a year ($35-36 if you add last December's gas acquisition cash flows). 

 

 

They really don't need to spend much each year on maintaining these - my guess is it's less than $5M a year.  You can look at their average historical capex over ten years.  You can take a year and see that their average capex is in the neighborhood of $5-15 million.  But that amount of capex has resulted in a sextupling of operating cash flows over the same period, so nearly all of the capex is growth capex - because of the long-term nature of the royalty streams.  This is the most important fact about PDER: that the cash generated accumulates on the BS, is paid out, or used to acquire additional cash flows.

 

 

  The cash flows are very long-term in nature: timber - perpetuity; coal - 20-30 years of production; oil + gas are mostly royalty streams; solar assets have 20 year contracts.

 

 

I agree with Nate that this company is worth $450/share.  Right now, because the company bought back 7% of the stock earlier this year, there are only ~680,000 shares outstanding.  Market cap is $190M right now.  There's $30M of true free cash flow.  Not FCF that you have to spend a bunch of money to maintain - it's cash that accumulates on the balance sheet - which is how they did a $60M acquisition last year with no debt.

 

 

So you're paying just over 6X EV/FCF for a 100+ year old business managed near perfectly, if you ask me. With interest rates where they are, every royalty company should trade at at least 12X FCF.

 

 

About the coal.  Their coal production has gone up 10X in ten years.  Wouldn't you think that the coal production would have dropped off or the bankruptcies would happen over the last three years?

 

 

By the way, if you assume that the coal will continue to be produced, like I do, you can DCF the coal (lots of it is met. coal, BTW) and you get well above the current market cap of PDER.

 

 

Also, they own 200,000 acres of marcellus shale land - not mineral interests - but fee simple land ownership - if  Marcellus production picks up in any meaningful way.

 

 

And also, another really important thing: NRP is the most comparable public company - not TPL or timber companies.  NRP potentially has debt issues, so the price has come down quite a bit over the past year. 

 

 

But anyways, if you price PDER how NRP is currently priced (on a multitude of valuation metrics), I get an average of $534/share  for PDER.  PDER would trade at a premium to NRP if it was SEC-registered because PDER has basically zero debt.

 

 

PDER has been the largest position for us since I 'discovered' it, with Tim's help two years ago.

 

 

In a year, PDER will trade at less than 5X EV/FCF, unless they acquire more cash flow, which will also shrink the multiple.

 

 

Also for 'EPS' which is quickly becoming my least favorite item in financial statements, remember that they've had significant non-cash tax expenses for the solar stuff the last few years and that they take very significant D+A charges for their non-operating gas and coal operations that don't cost them anything to maintain.

[bizaro86]

I'd be very interested in getting the name of that book!

 

I've owned this for a few years, and second or third the thanks for posting the statement online. I get my own going forward, but I very much appreciate the legwork.

 

My only concern here is the overhead. They hired the Mercer group to advice on compensation, which advised them to raise it materially. So now the non-employee directors are getting 50k per year plus a 50k equity award plus meeting fees, whereas they were previously getting 25k per year. Plus they nearly doubled CEO comp and Mercer is now advising on that, so I'd expect it to go up further.

 

I don't like G&A increases. They seem like good operators, but there really isn't anything I can see that would stop them from increasing comp/overhead at any rate they'd care to.

 

That's the only reason I have this as a regular position as opposed to a large one.

[thepupil]

But anyways, if you price PDER how NRP is currently priced (on a multitude of valuation metrics), I get an average of $534/share  for PDER.  PDER would trade at a premium to NRP if it was SEC-registered because PDER has basically zero debt.

 

Awesome defense of Pardee! Glad to see you are a shareholder as well.

 

Do you know how many producing mines do the royalties come from for Pardee versus NRP. I looked at NRP and passed on the credit issues you mentioned, but recall that it was large and diversified. With Pardee I feel like 2 mines could shut down and they'd lose a giant percentage of their royalty (unlike say TPL which owned its royalties over a vast spanse of Texas). That's my ish with the DCFing. A DCF implies linearity, gradualness, whatever word you want to use.

 

The Berkshire Hathaway of natural resources wouldn't send colored glossy quarterlies and annuals and have so many people on staff. I know these guys are great and I do really like them and don't mean to be so crotchety, but this company is a little fat and subscale; you don't need $7MM / year to sit on some timber (which is a very material portion of the asset base).

[JAllen]

They're not 'just sitting on timber'.  They're growing, like I mentioned in my post. Also, their G+A is essentially the same as ten years ago. There's not a lot of fluff there, IMO.

 

 

Berkshire has many subsidiaries; Pardee is the subsidiary.

 

 

I for one love the annual reports.  I'd much prefer sharing too much information with shareholders than not enough!  If they didn't publish those I wouldn't be nearly as comfortable with the stock.  They're very transparent IMO.  The annual reports are better than most public companies. 

[Tim Eriksen]

The coal business generates $20 million per year in cash flow and requires no capex as it is all royalties.  Coal reserves are near 300 million tons and they get around $3 per ton.  Permitted reserves are much smaller.  Less than 80 million tons I believe.  It is still ten years worth of production.  I think a 10 year DCF using a modest discount rate is appropriate. 

 

When they did the timber appraisal I was really hoping they could sell the timber rights for anywhere near $136 million.  It generates $2 to $3 million in annual cash flow.  They could reallocate proceeds to a business that generates better cash flow.   

 

The director fees are absurd.  That was the first negative I have encountered. 

[JAllen]

ok, attached is the inside cover to the book. 

 

 

Also, another cool thing is that a shareholder letter update from the 70s was mistakenly included in the book when I received it.  It was dated 3/14/79 and written by William G. Foulke, and was similar to today's folded updates. The company had a subsidiary that owned a small resort/grocery store on the island of Vinalhaven, off of Maine at the time called Osprey, Inc.

 

 

Also, I had forgotten this about the book, but it's signed by William Foulke himself (dated 9/27/79) on the inside cover and was originally sent to a great-grandson of Calvin Pardee who lived in Wisconsin at the time.  I have no idea how many copies of this there are.

[Tim Eriksen]

I found a copy of the book just now on Amazon and purchased it.  eBay may have some too.  Not cheap, but it is not Klarman's Margin of Safety either.

[thepupil]

Reserves in the ground only matter if the mine is going to be used. Let's say one Pardee mine is throwing off $3MM / year in royalties and will shut down permanently in 7 years (this is not an absurd assumption giving the stress and outlook for the industry). It's worth $21MM gross (7X cash earnings) and less on a PV basis.

 

I really hope you guys are right about the durability of the coal royalties. If so, this will be a truly spectacular investment and we'll all benefit. But I really take issue with DCF'ing royalties from mines unless you know where they are on the cost curve, what the operators think about each mine in relation to the rest of their assets, etc. It's like a franchise royalty. You need the franchisee to be profitable in order for the royalty to exist in perpetuity. I own some ANR Leaps (in VERY small size, most liquidity and uber levered ) and am by no means an all out coal bear.

 

The overhead is high as a percentage of assets and equity. I know they are actively building value, but a substantial portion of the asset base is legacy stuff from a hundred years ago; they pointed it out in one of the letters how a big portion of the coal royalties were from a property that was purchased forever ago. So I think it is pretty easy to make the case that the company is a little bloated.

 

 

[thepupil]

and I like the annual reports too; one adorns my coffee table.