PIF.TO - Polaris Infrastructure

[petec]

OK thanks.

[peterHK]

What people underestimate here is that PIF's project supplies 15% of Nicaragua's grid, and it's financed by the World Bank, Canadian government, and a bunch of other international bodies.

 

Ortega is not stupid, he may be a violent dictator, but he knows that in order to reduce the country's reliance on oil (which is a national security concern NOT just a "save the planet" concern, and is thus in his self interest as a dictator to do) he has to develop projects like this. Nicaragua can't do that without outside help, and they need outside capital to really develop these assets in the future, and nationalizing a project that was funded by key (and very powerful) international organizations is a surefire way to ensure you never get let into the development club again.

 

Finally, you can look at Latin America as a whole in the 70's vs. today. Everyone nationalized things in the 70's, nobody does that today. I think it is erroneous for investors to assume this is a repeat of the 70's.

 

I think additionally you can look at commentary out of the company where they've said they've seen no impact from the protests at all, and that was as of late June, and to my knowledge, things have not gotten appreciably worse since then (ie there were already multiple deaths, barricades, protests etc.).

 

I DO agree that the company's valuation will be discounted as a result of this; I have always been of the opinion this should trade at a healthy discount to comps as a result of the geographic exposure. There are a few ways to fix this however: the company can initiate an NCIB, and they can be a platform to roll up other assets in Latin America. Of the two, I think the 2nd is more attractive, especially given the limitations on an NCIB that Canada imposes.

 

 

[SafetyinNumbers]

I don’t think that an NCIB and an acquisition are mutually exclusive.

 

An SIB, might be however. We could get an announcement on an SIB when they report in a few weeks. I believe about US$25m of the cash is unrestricted and with that you could easily buy 10% of the float at say C$15 and have cash left over.

[petec]

What people underestimate here is that PIF's project supplies 15% of Nicaragua's grid, and it's financed by the World Bank, Canadian government, and a bunch of other international bodies.

 

Ortega is not stupid, he may be a violent dictator, but he knows that in order to reduce the country's reliance on oil (which is a national security concern NOT just a "save the planet" concern, and is thus in his self interest as a dictator to do) he has to develop projects like this. Nicaragua can't do that without outside help, and they need outside capital to really develop these assets in the future, and nationalizing a project that was funded by key (and very powerful) international organizations is a surefire way to ensure you never get let into the development club again.

 

Finally, you can look at Latin America as a whole in the 70's vs. today. Everyone nationalized things in the 70's, nobody does that today. I think it is erroneous for investors to assume this is a repeat of the 70's.

 

I think additionally you can look at commentary out of the company where they've said they've seen no impact from the protests at all, and that was as of late June, and to my knowledge, things have not gotten appreciably worse since then (ie there were already multiple deaths, barricades, protests etc.).

 

I DO agree that the company's valuation will be discounted as a result of this; I have always been of the opinion this should trade at a healthy discount to comps as a result of the geographic exposure. There are a few ways to fix this however: the company can initiate an NCIB, and they can be a platform to roll up other assets in Latin America. Of the two, I think the 2nd is more attractive, especially given the limitations on an NCIB that Canada imposes.

 

I spend a lot of time looking at Latin America and while every situation is different and you may be right, there is also a significant risk that you are wrong.

 

Several Latin American countries, led by Chile, have made great strides out of the 1970s. Others have categorically not done so - Venezuela being the prime example but there are less extreme examples too. For me the critical factor is that the kind of president who moves from elected leader to violent dictator tends to be motivated by one thing only: staying in power. Higher motivations - doing what's right for the country, answering to the people, reducing dependence on oil for national security reasons - all get subordinated to the overall goal of staying in power, and damn the consequences.

 

I am not an expert on Nicaragua specifically but there are some massive red flags in what Ortega is doing. Doesn't mean PIF won't be a great investment, of course, but personally I think there are easier ways to make money.

[peterHK]

What people underestimate here is that PIF's project supplies 15% of Nicaragua's grid, and it's financed by the World Bank, Canadian government, and a bunch of other international bodies.

 

Ortega is not stupid, he may be a violent dictator, but he knows that in order to reduce the country's reliance on oil (which is a national security concern NOT just a "save the planet" concern, and is thus in his self interest as a dictator to do) he has to develop projects like this. Nicaragua can't do that without outside help, and they need outside capital to really develop these assets in the future, and nationalizing a project that was funded by key (and very powerful) international organizations is a surefire way to ensure you never get let into the development club again.

 

Finally, you can look at Latin America as a whole in the 70's vs. today. Everyone nationalized things in the 70's, nobody does that today. I think it is erroneous for investors to assume this is a repeat of the 70's.

 

I think additionally you can look at commentary out of the company where they've said they've seen no impact from the protests at all, and that was as of late June, and to my knowledge, things have not gotten appreciably worse since then (ie there were already multiple deaths, barricades, protests etc.).

 

I DO agree that the company's valuation will be discounted as a result of this; I have always been of the opinion this should trade at a healthy discount to comps as a result of the geographic exposure. There are a few ways to fix this however: the company can initiate an NCIB, and they can be a platform to roll up other assets in Latin America. Of the two, I think the 2nd is more attractive, especially given the limitations on an NCIB that Canada imposes.

 

I spend a lot of time looking at Latin America and while every situation is different and you may be right, there is also a significant risk that you are wrong.

 

Several Latin American countries, led by Chile, have made great strides out of the 1970s. Others have categorically not done so - Venezuela being the prime example but there are less extreme examples too. For me the critical factor is that the kind of president who moves from elected leader to violent dictator tends to be motivated by one thing only: staying in power. Higher motivations - doing what's right for the country, answering to the people, reducing dependence on oil for national security reasons - all get subordinated to the overall goal of staying in power, and damn the consequences.

 

I am not an expert on Nicaragua specifically but there are some massive red flags in what Ortega is doing. Doesn't mean PIF won't be a great investment, of course, but personally I think there are easier ways to make money.

 

Reducing the reliance on oil for national security reasons DOES help him stay in power; that is precisely my point. It gives the international community one fewer levers to pull to influence him and to cause unrest in the country by cutting off Nicaragua's imports via sanctions. I think this rationale is exactly why this is an important project; I'm not so naiive as to suggest that Ortega wants to save the planet. He doesn't care about the planet, he cares about his own skin, and this is directly related to that goal.

 

The risk is he nationalizes the project because it is so important. However, I believe that would be shortsighted as Nicaragua still imports oil, and lacks the ability to really build out the grid on its own, so at the very least, it's in Ortega's interest to not nationalize it, incent foreign capital to develop the grid over the next 5-10 years, and THEN nationalize the whole thing if he was going to nationalize anything at all.

[peterHK]

http://www.cndc.org.ni/consultas/reportesDiarios/postDespachoEnergia.php?fecha=18/07/2018

 

Under Postdespacho, PEN3 and PEN4 are San Jacinto; you can see generation by hour and by day. No impact from the events in Nicaragua.

[NorteCapital]

I don’t think that an NCIB and an acquisition are mutually exclusive.

 

An SIB, might be however. We could get an announcement on an SIB when they report in a few weeks. I believe about US$25m of the cash is unrestricted and with that you could easily buy 10% of the float at say C$15 and have cash left over.

 

According to the Q1 Financial Statements, 25.8m out of the 34.7m are commited to San Jacinto activity leaving around 9m of unrestricted cash (03/31). This number should be a little bit higher by now. But yes, they could buy back 6-8% of the company in the next few months. They could repay debt as well. We'll see.

[wisowis]

Alluvial Capital discusses it a bit it in their Q2 letter: http://alluvialcapital.com/wp-content/uploads/2018/07/Alluvial-Capital-Management-Q2-2018-Letter-to-Partners-7.20.2018.pdf

[petec]

Reducing the reliance on oil for national security reasons DOES help him stay in power; that is precisely my point. It gives the international community one fewer levers to pull to influence him and to cause unrest in the country by cutting off Nicaragua's imports via sanctions. I think this rationale is exactly why this is an important project; I'm not so naiive as to suggest that Ortega wants to save the planet. He doesn't care about the planet, he cares about his own skin, and this is directly related to that goal.

 

The risk is he nationalizes the project because it is so important. However, I believe that would be shortsighted as Nicaragua still imports oil, and lacks the ability to really build out the grid on its own, so at the very least, it's in Ortega's interest to not nationalize it, incent foreign capital to develop the grid over the next 5-10 years, and THEN nationalize the whole thing if he was going to nationalize anything at all.

 

All sounds very rational and you may well be right. My point though, which I didn't make clearly enough, is that short term expediency can take precedence over long term rationality when it comes to staying in power. Distracting the population (look at those bastards who own Polaris taking profits, how dare they) and solving the "problem" in a nationalistic way (I know, lets nationalise it! That'll show them and anyway the Nicaraguan assets should be run by Nicaraguans) can be a very nice short term fix. Especially if "nationalising" means "giving it to my family" - there comes a point where personally appropriating the most valuable assets floats to the top of a dictatorial mind.

 

A wonderful example of irrationality was Argentina capping the price of gas at about $3 under the Kirchners, to stop electricity bills rising. That's below the local cost of exploration, so guess what, production collapsed. The government ended up importing gas at $11 and losing money hand over fist, but they wouldn't allow prices to rise for political reasons. Wasn't sustainable long term, but they didn't care.

 

The risk may well be price caps rather than outright nationalisation. Their cost of production is very low and they're a big part of the grid, so the incentive is there.

 

I'm not making predictions - you may WELL be right and Ortega may well be rational. But it is impossible to know so for me it is a risk I can't handicap well.

 

 

[SafetyinNumbers]

The few portfolio managers I have spoken to agree that the odds of nationalization are low and that the risk/reward is good but they can’t afford to lose money in the short term. Whatever they own has to be “working” at all times.

 

I’m not making any predictions either, just trying to make high expected return decisions while fully being aware I might be putting odds that are too low on the potential for a 100% loss or odds that are perfectly reasonable for a 100% loss but still getting the same result.

[FFHWatcher]

I assume money/cash in bank accounts is fleeing the country hand or fist. 

 

Don't governments put restrictions or halts on money leaving the Country in some cases to firm up their financial institutions?  In one investment I had, I think it was in Venezuela, they restricted all uses of cash from the company where the cash left the country.  Dividends couldn't be paid, share repurchases couldn't be made, etc.  Cash was frozen.  All required millions of dollars to leave the Country which was not permitted. 

[petec]

Argentina did the same.

[peterHK]

Interesting notes from the call.

 

Only about $1.5mn (~3 months of $500k of cash opex costs) of cash is held in Nicaragua, the rest is repatriated to NYC.

 

Operating results were great.

 

They said effectively they're looking to buy a hydro asset rather than do a buyback or increase the dividend right away. I have mixed feelings on that and can see both sides, but generally Marc has been a wise steward of capital and a good executor and so I trust him with doing this right.

[NorteCapital]

Acquisition by Polaris in Peru. https://www.newswire.ca/news-releases/polaris-infrastructure-acquires-union-energy-group-corp-699097351.html

 

Issuing shares at this price does not look like the best idea at first but the acquisition seems compelling. Geographic and asset diversification.

[peterHK]

Acquisition by Polaris in Peru. https://www.newswire.ca/news-releases/polaris-infrastructure-acquires-union-energy-group-corp-699097351.html

 

Issuing shares at this price does not look like the best idea at first but the acquisition seems compelling. Geographic and asset diversification.

 

They didn't have a choice. The deal was well structured with debt cram down, lots of contingent consideration to offset the development risk etc. And Peru is a good geographical risk. This also gives them a platform with a few permitted/PPA'd but undeveloped projects that they (I'd bet) are hoping to fund with internal FCF and shares issued later at a higher price.

 

That being said, I have questions about why the seller (who built a $1bn asset manager by age 28...) is selling. Nice that he's retaining ownership in PIF, but I wonder why they got this deal in the first place.

 

I'd also ask what they're bringing to the table besides capital? BEP brings operational expertise, construction expertise etc. PIF has no expertise in hydro, or Peru, so what are they bringing to the table here except dollars, and why were dollars such a valued commodity here?

[Nelson]

I'm also a little puzzled about the big positive reaction to the Peru deal. I get that diversifying away from Nicaragua is a good thing, but these new assets are a long way from making a big impact to the bottom line. I suspect Brookfield took a look at it but Polaris offered the better deal.

 

Still pretty happy about the big move in the shares though. It got me back up to within 5% of break-even.

[petec]

I doubt Brookfield looked. It’s too small. It’s a great deal for PIF: yes it’s small from a near term cash flow perspective but it’s accretive within a couple of years and provides them with a 5-10 year pipeline of projects that massively shifts the mix to a better jurisdiction over that timeframe, if they can get everything permitted. Peru is a great place to do business and btw I’ve heard others corroborate the comment about big players not bothering to build run of river hydro but being willing to buy them at fat multiples when they’re built. The main thing that worries me about the deal is actually the comment that the Generación Andina assets are not finished not just for lack of money, but also because of “construction issues”. I wonder what they were.

 

I had a limit order in today that didn’t get filled. The issue I have is that for the next 5 odd years this will still be an Ortega play so I am happy to be patient for another burst of bad news and a lower price. There’s a non-negligible chance of this stock going to zero if things go really wrong politically, so I need a huge valuation cushion.

[peterHK]

I'm also a little puzzled about the big positive reaction to the Peru deal. I get that diversifying away from Nicaragua is a good thing, but these new assets are a long way from making a big impact to the bottom line. I suspect Brookfield took a look at it but Polaris offered the better deal.

 

Still pretty happy about the big move in the shares though. It got me back up to within 5% of break-even.

 

This is way too small for BAM to even bother with. They're looking to do $100mn+ deals (look at what they just sold 25% of their NA hydro for), not $50mn deals.

[Pelagic]

Here's Polaris' presentation on the acquisition with some pro-forma numbers.

 

http://polarisinfrastructure.com/wp-content/uploads/2018/10/Polaris-Peru-vFINAL.pdf

 

Management's take on the strategic benefits (slide 19) is informative. It's a foot in the door to more deals in the region and eventually diversifying their portfolio away from Nicaragua with a 3+yr goal of roughly 2/3 hydro and 1/3 geothermal in Nicaragua.

 

Essentially they're looking to use their cash flow from Nicaragua to buy and develop hydro projects which will in turn decrease their exposure to Nicaragua. A good deal for them if they can execute on it and it gives them access to similar deals in the future.

 

 

 

 

[Nelson]

I'm also a little puzzled about the big positive reaction to the Peru deal. I get that diversifying away from Nicaragua is a good thing, but these new assets are a long way from making a big impact to the bottom line. I suspect Brookfield took a look at it but Polaris offered the better deal.

 

Still pretty happy about the big move in the shares though. It got me back up to within 5% of break-even.

 

This is way too small for BAM to even bother with. They're looking to do $100mn+ deals (look at what they just sold 25% of their NA hydro for), not $50mn deals.

 

In terms of size I was thinking more of Amazonia, which at 119MW is bigger than the rest of the projects put together. But valid points.

 

I guess even after the big run-up shares just went from outrageously cheap to still really cheap. 5x cash flow with minimal maintenance capex is amazing.

[petec]

How’s it on 5x? From what I can see free cash was $6m or thereabouts in each of the first two quarters and the market cap is $190m. What am I missing?

[peterHK]

How’s it on 5x? From what I can see free cash was $6m or thereabouts in each of the first two quarters and the market cap is $190m. What am I missing?

 

Maintenance vs. growth capex. Maintenance runs at ~5.65mn. The rest is their drilling program which is winding down.

[petec]

Thabks. Does drilling go to zero?

[NorteCapital]

Good results presented by PIF today (as expected).

 

http://polarisinfrastructure.com/wp-content/uploads/2018/11/2018-Q3-Press-Release-2018-11-06.pdf

 

Don't like the dividend tho. I would prefer that they keep the cash for UEG developments or pay down debt.

[SafetyinNumbers]

Good results presented by PIF today (as expected).

 

http://polarisinfrastructure.com/wp-content/uploads/2018/11/2018-Q3-Press-Release-2018-11-06.pdf

 

Don't like the dividend tho. I would prefer that they keep the cash for UEG developments or pay down debt.

 

I don't understand your dividend comment. It's at the same rate it was before. Would you prefer they cancelled it?

 

The debt is already being amortized according to a predetermined schedule and is secured by the Nicaragua assets. I don't think it makes sense to pay down that debt more aggressively as its ring fenced by the project. If they could find a way to restructure the debt to add even more debt and pull equity out, I think that would be a worthwhile endeavour.