CRP - Ceres Global AG

[kab60]

I stumbled across what I think is a pretty interesting company/situation (but maybe not exactly deep value) that I’d bring up and share a couple of notes. I’d love to hear if anybody else has taken a look, I haven’t seen anything written up (except from the biggest shareholder) and I think it's pretty difficult to come up with a valuation.

 

Ceres Global Ag Corp used to be a closed-end fund, but is now operating grain elevators in USA and Canada.

 

It’s a Toronto-based agriculture and commodity logistics holding company with two main investment areas: Grain Storage, Handling and Merchandising unit, anchored by its 100% ownership of Riverland Ag Corp. (low margin business); and its Commodity Logistics unit, which contains a big development projects and a 25 % interest in a small shortline railway in Canada called Stewart Southern Railway Inc.

 

Riverland Ag Corp. is a collection of ten grain storage and handling assets in Minnesota, New York, Wisconsin and Ontario having aggregate storage capacity of approximately 51 million bushels and Riverland also manages two facilities in Wyoming on behalf of its customer-owner.

 

The supposedly game-changer, however, is a new logistics terminal, that connects Canadian farmers to Warren Buffetts BNSF in the states.

 

Investment firm VN Capital (small-midcap equity investor) have been buying shares aggressively for years and ended up with a 30 percent stake in Ceres Global AG. That also meant that VN Capital suddenly found itself in an activist position.

 

During the last 18 months VN Capital won a proxy battle to terminate “an improper management contract, reconstituted the Board of Directors with experienced and knowledgeable new members, abandoned a liquidation process in favor of an “operate/invest/grow” strategy, bought out legacy shareholders for effective control of the company, fired incumbent management, hired a new CEO, and pushed development of the company’s game changing Northgate project (whew!)”. (link: http://www.vncapital.net/assests/Sept%202014%20Quarterly%20Letter.pdf) They also did a rights offering in autumn last year and got 75m USD.

 

Anyway, historically the company hasn’t been doing very well (it doesn’t really have a history in its current form and incumbent management had a hedge fund compensation structure in place which was a drag on earning), but they hope that is about to change now.

 

The key is the Northgate Logistics Hub which is a 90m grain, oil and oilfield supplies transloading site. It’s being built (first trains with grain have been shipped Q1 2015) just on the Canadian side of the US border of Northgate, Saskatchewan. The Canadian Wheat Board used to have a monopoly on selling and buying of wheat in Canada, but that was changed in 2012, and that it what Ceres Global AG hopes to take advantage of, when Canadians farmers get access to BNSFs railway south of the border. Apart from grain, soy and granola there are plans to export fertilizer and oil/natural gas when/if the conditions are right. I suppose the terminal works sorta like a toll booth.

 

According to management however, the origination of wheat, soy etc. at Northgate should altso improve the grain commodity/trading/storage business as well, because they now start originating grain and get direct access to farmers. As stated, the first trains full of grain have already been shipped southwards and in February management announced that they would actually upgrade the planned grain elevator at Northgate so it will be able to handle more different crops. Managements is targeting a low-mid teen ROE for the logistics hub (90m investment), while the company is selling below book (214m equity, 159m marketcap + 134m debt).

 

Book value consists mostly of current assets (157mUSD grain, 86m cash (some of it dedicated to Northgade Hub) and when you strip out all liabilities you’re left with current assets of around 100m or a bit less than ⅔ of market cap. Rest of book value is mostly the grain elevators/silos.

 

They sold a grain silo for 6,4m USD last year which apparently was badly performing for around 75 pct. of book value, so it seems like assets protect the downside - if there's demand for the terminal.

 

Strong US/weak CND dollar is a big tailwind for Canadian farmers, while weak oil prices might postpone a decision to build out Northgate with an oil and gas transloading area. However, listening to management, it sounds like the customers in the O&G sector they’re working with aren’t too influenced by the current weak market and see it as a strategic option, because the rail capacity from the middle of Canada is pretty bad.

 

It doesn’t change, however, that it is a commodity business with all its inherent risks - failed harvests, union strikes etc. etc., and valuation is pretty difficult, because the company has been one big transformation.

 

Plus, there’s a lawsuit from a company (that I suppose might eventually make a bid for Ceres Global AG) called The Scoular Company, which is a much larger competitor that was originally tasked with running Northgate on behalf of Ceres Global AG, before the new management and board decided to internalize things.

 

I suppose it’s mostly a bunch of notes I picked up while researching the company, but if anyone ever took a look I’d love to hear more. Maybe even if just about the logistics and grain situation in Saskatchewan - can’t say I’m an expert.