PDER - Pardee Resources

[JAllen]

Re the coal: It could decline quite rapidly.  The company would still be cheap though.  My guess is that their coal production will approximate their current production and revenues: 5-8M tons and $20-$30M in revenues.  This year they're running at ~$21M revenues.

 

 

My perspective is that the coal crisis is and has happened, yet their revenues have largely held up.  A perfect example is this quote in the 3Q update: "During the third quarter, CAPP met. coal production declined approximately 9%, while met. coal production from Pardee's properties increased 1.1%".  Coal headlines are bad, while PDER's actual results are still quite impressive.

 

 

It seems like if someone was going to stop production, they would have already.  Also, sometimes mines do stop, but then they restart a few months later. 

[JAllen]

A good coal reference is Patriot Coal.  They filed for bankruptcy, right last year.

 

 

Well Patriot's Appalachian production declined less than 3% in the year they filed.

 

 

They can't just stop production altogether.  It's like a retailer in bankruptcy: they make their money, however much, from selling stuff, which they don't stop.

[thepupil]

the fact that no one shutting down is the problem with the industry and is holding down prices. But just because they haven't already doesn't mean they won't.

 

To use a bit of a stretched metaphor, let's say a company owns royalties on Atlantic City casinos. Up until recently many of these had been through several bankruptcies, their revenues were in decline, blah blah blah, not unlike coal producers in Appalachia. Powder River Basin = Vegas. Alternatives = online gambling. All of a sudden 5 / 12 shut down this year.

 

If you owned a percentage royalty on the Showboat's revenues, you wouldn't have to spend capex  to maintain it and it'd look like a beautiful high margin declining royalty stream, until it stopped suddenly and was gone FOR EV ERR (Sandlot voice) and is now becoming a college (since the boardwalk is such a great learning environment).  http://www.nj.com/south/index.ssf/2014/11/stockton_college_to_buy_showboat_casino_in_atlantic_city.html

 

If you owned a royalty on the Revel, it would get shut down for a little while and then resume under new ownership (since Brookfield is buying the Revel and it will continue on as a casino)

 

If you owned a royalty on the Borgata, no worries. Also, the Tropicana just grew nicely q over q because it took other's business.

 

So which exact mines Pardee owns matters and where they are on the cost curve really matters in terms of how we value that stuff. Are we taking a revenue interest in the Showboat or the Borgata? Patriot's production may have declined by 3%, but is that because the took all their mine's production down by 3% or shut down 100% of a mine that was 3% of their production. There is a big difference for a concentrated royalty owner.

 

Of course, Pardee has been managing very well. I just won't be surprised to wake up and see royalty revenue down 25% one year.

 

If anyone knows the exact mines and operators, let me know so i can ask my coal analyst friend about them.

 

 

[Tim Eriksen]

While I never bothered (nor saw the need) to learn which mines they own and who operates them, I do know this.  Central Appalachian (CAPP) production fell in half from 2000 to 2013 (268 mm tons to 134 mm tons).  Pardee grew production from 0.3 mm to 6.4 mm tons.  They state they have some of the best CAPP reserves.  Based on their results who can argue.  They noted at the 2014 meeting (per the notes) that most of the CAPP loss was in thermal.  Met coal has held relatively steady.  Reserves were 130 mm tons of met coal and 182 mm tons of thermal (50 years of production).  74 million was permitted (12 years of production).  Coal plants may be decreasing but steel is going to be needed and that requires met coal.

 

If you find the company interesting, read managements annual meeting remarks.

 

[thepupil]

Below $300, it's a case of "you can get a good look a t-bone by sticking your head up a bull's ass but wouldn't you rather take the butcher's word for it"

 

To get to $500 though, I think you need to go mine by mine.

[JAllen]

I do agree with you, Pupil, about the importance of each mine, I just believe that mine shutdowns would have occurred by now, or that if more occur, PDER will still be cheap and that they won't all shutdown at the same time.

 

 

Right now, if you marked the timberland down by 15% and include the gas land they purchased last year, you get everything else for free.  That's $30M of solar assets with long-term contracts, 300M tons of coal, 150,000 acres in the Marcellus shale, other O+G production.

 

 

If you value the timber at appraised value, last year's gas purchase at $60M, the solar assets at $20M (they're young and cost $30M), the existing O+G assets at $10M and the Marcellus upside at $15M and exclude all of the coal assets you get to $375/share.  So PDER should trade at $400 even if you're quite pessimistic about all of the coal.  That would be a MC of $270M which is < 8X OCF.  Assume coal revenues decline by 75% overnight and it would trade at 13.5 OCF, which isn't exactly crazy cheap, but that scenario isn't very probable either.  A 25% decline is probable, however, I agree, and in fact their coal tons produced are down by 20% this year, but they're still generating mountains of cash flow (don't have the report in front of me).

 

 

Probably the best way to value it if you're super pessimistic about coal is reduce the coal by half and you'll still get to $20M OCF, which is basically FCF, includes G+A and cash taxes, and you'd be paying 8.5X FCF - half the market multiple for a 100 year old business.

[bmathews03]

Hey Scott -

 

Excellent write-up. I'd love to spend hours debating the true value of Pardee's timber land or the viability of various mines with you, but I'm really busy right now starting up a Sears Hometown Outlet Franchise...

http://www.ownasearsstore.com/retail-franchise-why-sears.php

 

Best of luck with this investment and please pass along my regards to Walter Foulke if you see him. He is a really good dude. 

 

Best Regards,

Brendan

[ScottHall]

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.

 

Hi Pupil,

 

I didn't ask about which coal mines are theirs.

 

The timber deal was discussed in pretty great detail at the annual meeting, though. There were a couple dozen people there (mostly employees + a handful of outside shareholders), and they were discussing a Seeking Alpha article that had recently been published.

 

Apparently they think the Seeking Alpha article is way off on the value of the timber. The way they phrased it is that the stuff they sold was among the lowest quality timber they have, and was hard to harvest because it was really "out of the way," so to speak. They were happy to sell it. Considering the quality and how hard it was to harvest the stuff, they said they didn't think the price they got for it reflects on the value of the rest of the timber at all.

 

That said, I haven't done any independent analysis. Just taking their word for it.

[JAllen]

They had an appraisal done on most of their remaining timberland:

 

 

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

[thepupil]

https://www.proxydocs.com/0/000/879/863/pardee_resources_company_04242015.pdf

 

Here's the annual report and proxy, still think the S,G, & A is a little high and that may become a problem as the coal runs off, but it is quite attractively priced and otherwise well run.

[oddballstocks]

https://www.proxydocs.com/0/000/879/863/pardee_resources_company_04242015.pdf

 

Here's the annual report and proxy, still think the S,G, & A is a little high and that may become a problem as the coal runs off, but it is quite attractively priced and otherwise well run.

 

Did you scan and upload this?  I've never seen a copy online in the past.  I receive mine via mail.

 

The company has an interesting business model, I like how well the resources are managed as well as the long term view.  I've continued to buy shares.  While I wish this were something that would double, I have more of the expectation that in 10-15 years I'll still own PDER, but shares will be considerably higher and there will be a lot less shares to purchase as the company continues to gobble them up.

[Hielko]

I got this link in my mailbox today as well. Think IBKR put it online to make it possible to vote electronically for the AGM.

[ScottHall]

I'm going to the annual meeting in Philly again this year. I may post with updates, if there's anything of interest that wasn't covered in the annual.

[bizaro86]

Scott, if you're at the meeting, would you mind asking if there's any update on the plan to repace the mine closing on the Tioga tract with a new mine on the Pardee and Curtin tract?

 

[oddballstocks]

I'm going to the annual meeting in Philly again this year. I may post with updates, if there's anything of interest that wasn't covered in the annual.

 

Cool, looks like we'll meet.  Planning on attending as well.

[ScottHall]

I'm going to the annual meeting in Philly again this year. I may post with updates, if there's anything of interest that wasn't covered in the annual.

 

Cool, looks like we'll meet.  Planning on attending as well.

 

Sounds fun. Make sure to let them know you'll be coming, if you haven't yet. They like to get RSVPs for seating arrangements, name tags, etc. since they usually don't get many people coming by from outside the company.

[ValueHippie]

The proxydocs link seems to be broken. Could somebody upload the latest annual report somewhere? I would appreciate it :)

[gfp]

Worked for me - I'll try to attach it here.

 

The proxydocs link seems to be broken. Could somebody upload the latest annual report somewhere? I would appreciate it :)

pardee_resources_company_04242015.pdf

[ValueHippie]

Worked for me - I'll try to attach it here.

 

Thanks a lot  ;)

[writser]

Slightly less positive write-up on Pardee: http://seekingalpha.com/article/3145506-pardee-resources-is-a-cheap-steward-of-capital . Always good to read the "bear case". Nevertheless the author still arrives at $300 / share with potential upside. The valuation of the coal royalties was interesting - though I think a bit too conservative.

 

I more or less agree with the back-of-the-envelope calculation JAllen made a few months ago, except I would make a ballpark ~$70m adjustment for corporate overhead. Pardee seems to be well managed but $7m in corporate overhead / year is quite a bit.

 

If you value the timber at appraised value, last year's gas purchase at $60M, the solar assets at $20M (they're young and cost $30M), the existing O+G assets at $10M and the Marcellus upside at $15M and exclude all of the coal assets you get to $375/share.  So PDER should trade at $400 even if you're quite pessimistic about all of the coal.  That would be a MC of $270M which is < 8X OCF.  Assume coal revenues decline by 75% overnight and it would trade at 13.5 OCF, which isn't exactly crazy cheap, but that scenario isn't very probable either.  A 25% decline is probable, however, I agree, and in fact their coal tons produced are down by 20% this year, but they're still generating mountains of cash flow (don't have the report in front of me).

 

p.s.: looking forward to the notes from the AGM, if any. Would like to come but unfortunately it is a few thousand miles too far away.

[bizaro86]

Slightly less positive write-up on Pardee: http://seekingalpha.com/article/3145506-pardee-resources-is-a-cheap-steward-of-capital . Always good to read the "bear case". Nevertheless the author still arrives at $300 / share with potential upside. The valuation of the coal royalties was interesting - though I think a bit too conservative.

 

I more or less agree with the back-of-the-envelope calculation JAllen made a few months ago, except I would make a ballpark ~$70m adjustment for corporate overhead. Pardee seems to be well managed but $7m in corporate overhead / year is quite a bit.

 

If you value the timber at appraised value, last year's gas purchase at $60M, the solar assets at $20M (they're young and cost $30M), the existing O+G assets at $10M and the Marcellus upside at $15M and exclude all of the coal assets you get to $375/share.  So PDER should trade at $400 even if you're quite pessimistic about all of the coal.  That would be a MC of $270M which is < 8X OCF.  Assume coal revenues decline by 75% overnight and it would trade at 13.5 OCF, which isn't exactly crazy cheap, but that scenario isn't very probable either.  A 25% decline is probable, however, I agree, and in fact their coal tons produced are down by 20% this year, but they're still generating mountains of cash flow (don't have the report in front of me).

 

p.s.: looking forward to the notes from the AGM, if any. Would like to come but unfortunately it is a few thousand miles too far away.

 

If you take a ~70MM G&A haircut off JAllen's $270MM, you end up at $200MM, which is only slightly north of the current valuation. Of course, that is pretty harshly discounting the coal, but maybe that's reasonable. My biggest concern isn't even so much the run rate on the G&A, as much as the growth rate. It went up by ~1MM last year, iirc. (Don't have annual with me, but the increase was high). Long here, and think this is probably a good place to be in the long term, but I don't think the upside potential is huge especially on an annualized basis unless they can invest more capital at high rates. Something like the Colorado coal deal they did a few years back would be excellent. (And I've got to think coal royalties are selling at low multiples right now...) I do think there is a margin of safety here, which is why I'm in the stock.

 

I'm really struggling with how to value the coal royalties. I love royalty businesses (am in Altius) but don't like markets that are in structural decline. I'd be curious to see how others are doing it, as it affects my position size. Right now I think there's very little downside, but not much upside either, so its sized relatively small. If I put a 12X ebitda on the coal royalty income or something like that, this looks like a home run, but that doesn't seem reasonable to me. Would appreciate any thoughts.

[writser]

I can't exactly replicate JAllen's numbers. I have $136m for the timber appraisal, $70m for oil & gas & $30m for solar. 684k shares outstanding makes for ~$350/sh. If I capitalize $70m overhead I arrive at roughly the current shareprice.

 

This is all not very precise but the good thing is that I A) assign no value to their unappraised Virginia hardwood and the potential for real estate development B) completely ignore their coal segment and C) use an extremely punishing valuation for corporate overhead (basically saying they are worthless).

 

That's the kind of valuation I like. My only gripe is that I have to blindly trust the timber appraisal. I literally have no clue whether a $1000 / acre valuation for their timberlands is reasonable. I am not really impressed by the cashflow from the segment but I am probably underestimating the long-term (financial) value of owning lots of land covered with trees.

[abitofvalue]

I can't exactly replicate JAllen's numbers. I have $136m for the timber appraisal, $70m for oil & gas & $30m for solar. 684k shares outstanding makes for ~$350/sh. If I capitalize $70m overhead I arrive at roughly the current shareprice.

 

This is all not very precise but the good thing is that I A) assign no value to their unappraised Virginia hardwood and the potential for real estate development B) completely ignore their coal segment and C) use an extremely punishing valuation for corporate overhead (basically saying they are worthless).

 

That's the kind of valuation I like. My only gripe is that I have to blindly trust the timber appraisal. I literally have no clue whether a $1000 / acre valuation for their timberlands is reasonable. I am not really impressed by the cashflow from the segment but I am probably underestimating the long-term (financial) value of owning lots of land covered with trees.

 

You may be able to find recent transactions information in the presentations of the Tiber REITs.  I think Plumtree used to detail transactions and cost / acre which could help you get some sort of ball-park around value of Timber.

[Hielko]

I don't think subtracting corporate G&A from the valuation is the right approach. The assets that Pardee owns aren't passive cash flowing machines that don't need any human management/oversight. Since every buyer of these assets would have overhead the cost of it would for a large part already be reflected in asset prices. Only when Pardee would lack economies of scale or if overhead is too high for another reason it would warrant to trade at a discount.

[writser]

Good point, but should these costs not (at least partially) be covered by the expenses per segment? This might be a stupid question - I'm on holiday and can't really read the AR on a decent computer screen. Same thing holds for board compensation - I remember it was quite high but can't look it up here.