EGD - Energold

[ItsAValueTrap]

The purchases were for a meaningless amount of money for the CEO.  I'm sure his cash salary far exceeds his share purchases.

 

Let's look at things that matter:

 

1- Energold may be selling for less than the value of its drilling rigs.  Is this something in your circle of competence?

P/B is 0.54.

 

2a- The junior exploration market is *extremely ugly* right now.  In the next year or two, very very little discretionary exploration drilling will be done.  These companies do not have the money to drill because they can't raise money.  If they are raising small amounts of money, most of that will be eaten up by overhead fees.

 

Even some of the senior miners are cutting back on exploration.  The gold miners won't explore with the price of gold being lower.  Cliffs is cutting back big-time because iron ore prices have slumped.

 

Energold will not have good earnings in the next year.

 

2b- Sometimes you want to buy when things are ugly.

[Liberty]

Up over 20% today. Quite volatile lately.

 

It'll be interesting to see the Q2 results, which are more mineral-heavy than Q1, to see if things have stabilized on that front.

[premfan]

Liberty,

 

All that matters is the earning potential in 2015 when the company is done paying off the Bertram bros. I pray they don't do anymore deals until they pay them off. The earning potential is extremely strong in 2015. Diluting the shareholders with another deal with be a horrible mistake. Win the first battle then move to the next battle. They have given up ALOT of the company to acquire the Bertram division. This years earnings don't matter.

[Liberty]

Liberty,

 

All that matters is the earning potential in 2015 when the company is done paying off the Bertram bros. I pray they don't do anymore deals until they pay them off. The earning potential is extremely strong in 2015. Diluting the shareholders with another deal with be a horrible mistake. Win the first battle then move to the next battle. They have given up ALOT of the company to acquire the Bertram division. This years earnings don't matter.

 

By deals, do you mean bought deals/issuing equity, or acquisitions?

 

I think the Bertram deal was quite good for many reasons, and they didn't overpay IMO. I would be open to new acquisitions if they are as good as Bertram and Dando as long as they pay cash and don't issue new stock at these prices.

 

They paid ±$150k for Dando + added a couple millions to beef up working capital. That business will earn millions once they have sold enough rigs and can do more high-margin servicing (kind of like the car industry -- they make more on the service than selling the vehicles themselves). Passing on more deals like that would be crazy if they can find them.

[thelads]

Hi Guys,

 

Very interesting discussion, thanks. Not sure if anyone still reading this, but just in case. I hear the positive and negative arguments for the company. Full disclosure I own some of the common, bought in the 1.50's, so I am no doubt biased.

 

1st, I don't think the company has a big if any competitive advantage in minerals. But I do think they seem to have acquired well with Bertram and Dando.

 

2nd, to itsavaluetrap, I read your blog post. All very valid points. It didnt appear you were terribly positive or negative. Just objective. Was a very interesting read, thanks.

 

From my own point of view I was more excited about the price it was available at, along with accounting that probably confuses people at first blush.

 

At 1.50 a share the company was valued at 67.5mm. Well below working capital, and with 30mm in cash. So call it 37mm for the three business. And that's assuming the inventories at 57mm are worthless. Ordinarily I would discount heavily on those, but in this case the inventory seems to be reserve and replacement parts that was stockpiled over the last 6 years as they freeE the drill count. At least some part of that should be convertible to cash. It looks like they did that the 1st six months of this year with about 2.5mm effectively converted. Lets say they can keep that up for 3 years, that would be 15mm added, and is a low recovery on inventories, but would leave the three operating business's as worth 22mm.

 

I think they paid 15mm plus earnouts for Bertram. Assuming the Bertram recovery is a mirage, or they could sell it there now (which given performance I think they could), that's leaves 7mm for dando and the mineral side, which seems cheap if only to liquidate the 144 rigs.

 

Of course, the price now is 1.92 or so, that adds another 18mm to the valuation but it still doesn't seem crazy. And again that assumes huge write offs in inventory, which may be very penalistic. If one assumes 80% recovery on those things look a lot better.

 

From an earnings perspective, they have expenses somewhere in the region of 700k per rig to the income statement over the past six years. That's 108mm. The accounting is unusual vs what I have seen. I think it's neither good nor bad, but I do think it makes things look far worse optically in screens etc. assuming they stop or slow making the drills, that drag on earnings should stop. In addition, the earnout on Bertram has hurt earnings the past year and a half. A year to go on that. With those two gone, earnings should look a lot better.

 

Last, and I have no idea on this, but there is huge bottom line growth potential /operating leverage in the mineral business to either or both of an increase in meters drilled and revenue per meter. The company is currently in a trough for both, but not losing money in that division. Recovery in both would add substantial earnings, which could adjust valuation meaningfully, make for an easy exit.

 

Any one of these things in isolation compared to Price is probably not all that exciting. But the mix seems to give good risk reward.

 

I am not enormously scared on the operational side, but I do wonder what will happen come December or earlier with tax loss selling. That could get ugly fast and leave a much better entry point.

 

Again, I am biased, so feel free to disagree and please feel free to point out errors, poor assumptions etc i have made.

[premfan]

Liberty,

 

All that matters is the earning potential in 2015 when the company is done paying off the Bertram bros. I pray they don't do anymore deals until they pay them off. The earning potential is extremely strong in 2015. Diluting the shareholders with another deal with be a horrible mistake. Win the first battle then move to the next battle. They have given up ALOT of the company to acquire the Bertram division. This years earnings don't matter.

 

By deals, do you mean bought deals/issuing equity, or acquisitions?

 

I think the Bertram deal was quite good for many reasons, and they didn't overpay IMO. I would be open to new acquisitions if they are as good as Bertram and Dando as long as they pay cash and don't issue new stock at these prices.

 

They paid ±$150k for Dando + added a couple millions to beef up working capital. That business will earn millions once they have sold enough rigs and can do more high-margin servicing (kind of like the car industry -- they make more on the service than selling the vehicles themselves). Passing on more deals like that would be crazy if they can find them.

 

Hi liberty,

 

By deals i mean issuing equity. Issuing equity well below book value is not a winning capital allocation plan. I have no problem with them acquiring contractor drilling companies ONLY if cash is mostly used in the deal.  I agree ultimately in the long term acquiring bertram and dando were good deals.  I think management needs to realize that issuing shares WELL under bv doesnt create shareholder value or increase IV value.  They should study singletons playbook.  Sell shares to the market when the stock is clearly overvalued. Then use free money to buy companies. Also buyback stock when the company is clearly undervalued. By management not buying back stock in the current moment. Shows me they have no clue on how to use capital markets. Its been apparent the market is heavily discounting the company due to management being inept in managing capital.  With that said once the bertram mess is cleared and most importantly the mineral side ultimately bottoms ( this will occur when market consolidation occurs ala the solar industry last year) energold should enjoy HUGE earning power. But if they keep carelessly issuing equity the earning power will get diluted and itwont manifest like it should.

 

 

Hi Guys,

 

Very interesting discussion, thanks. Not sure if anyone still reading this, but just in case. I hear the positive and negative arguments for the company. Full disclosure I own some of the common, bought in the 1.50's, so I am no doubt biased.

 

1st, I don't think the company has a big if any competitive advantage in minerals. But I do think they seem to have acquired well with Bertram and Dando.

 

2nd, to itsavaluetrap, I read your blog post. All very valid points. It didnt appear you were terribly positive or negative. Just objective. Was a very interesting read, thanks.

 

From my own point of view I was more excited about the price it was available at, along with accounting that probably confuses people at first blush.

 

At 1.50 a share the company was valued at 67.5mm. Well below working capital, and with 30mm in cash. So call it 37mm for the three business. And that's assuming the inventories at 57mm are worthless. Ordinarily I would discount heavily on those, but in this case the inventory seems to be reserve and replacement parts that was stockpiled over the last 6 years as they freeE the drill count. At least some part of that should be convertible to cash. It looks like they did that the 1st six months of this year with about 2.5mm effectively converted. Lets say they can keep that up for 3 years, that would be 15mm added, and is a low recovery on inventories, but would leave the three operating business's as worth 22mm.

 

I think they paid 15mm plus earnouts for Bertram. Assuming the Bertram recovery is a mirage, or they could sell it there now (which given performance I think they could), that's leaves 7mm for dando and the mineral side, which seems cheap if only to liquidate the 144 rigs.

 

Of course, the price now is 1.92 or so, that adds another 18mm to the valuation but it still doesn't seem crazy. And again that assumes huge write offs in inventory, which may be very penalistic. If one assumes 80% recovery on those things look a lot better.

 

From an earnings perspective, they have expenses somewhere in the region of 700k per rig to the income statement over the past six years. That's 108mm. The accounting is unusual vs what I have seen. I think it's neither good nor bad, but I do think it makes things look far worse optically in screens etc. assuming they stop or slow making the drills, that drag on earnings should stop. In addition, the earnout on Bertram has hurt earnings the past year and a half. A year to go on that. With those two gone, earnings should look a lot better.

 

Last, and I have no idea on this, but there is huge bottom line growth potential /operating leverage in the mineral business to either or both of an increase in meters drilled and revenue per meter. The company is currently in a trough for both, but not losing money in that division. Recovery in both would add substantial earnings, which could adjust valuation meaningfully, make for an easy exit.

 

Any one of these things in isolation compared to Price is probably not all that exciting. But the mix seems to give good risk reward.

 

I am not enormously scared on the operational side, but I do wonder what will happen come December or earlier with tax loss selling. That could get ugly fast and leave a much better entry point.

 

Again, I am biased, so feel free to disagree and please feel free to point out errors, poor assumptions etc i have made.

 

Good post i agree. The earning power when energold fires on all cylinders will be impressive. The unknowns are :  1.) When the mineral side bottoms

                          2.) Shares outstanding when momentum occurs

                          3.) Will the market believe in the story when it happens or do they need 3-4 years of growth to model things.   

 

I'm worried about # 3 the most. When trust goes it takes awhile of good performance to get believers again. 

[Liberty]

By management not buying back stock in the current moment. Shows me they have no clue on how to use capital markets.

 

I don't know... It's a very cyclical industry, so being conservative with cash is a must.

 

From memory, last time they issued shares was above 4$.

 

edit: fixed typos caused by typing on a smartphone..

[thelads]

My understanding is buybacks in Canada are limited to 10% per annum. They have stated they will continue to drawdown inventories to convert to cash. They built inventories by ~30mm the last 3 years, and have $30mm in cash, so with current market cap, and draw downs a guy back shouldn't do much damage to their liquidity. I am a little concerned they are looking at other acquisitions, but they have done well on that front before and seem disciplined.just wondering what normal cycle earnings are for Bertram and the minerals business. For Bertram maybe 8-10mm ebitda. For minerals, clearly it's choppy, but could be 10-30mm.

[premfan]

By management not buying back stock in the current moment. Shows me they have no clue on how to use capital markets.

 

I don't know... It's a very cyclical industry, so being conservative with cash is a must.

 

From memory, last time they issues sharea was above 4$.

 

Right. I'm thinking management got lucky with the timing there.  Definitely not skill cause the bought deal rates were massive compared what they would have got doing a rights offering. 

My understanding is buybacks in Canada are limited to 10% per annum. They have stated they will continue to drawdown inventories to convert to cash. They built inventories by ~30mm the last 3 years, and have $30mm in cash, so with current market cap, and draw downs a guy back shouldn't do much damage to their liquidity. I am a little concerned they are looking at other acquisitions, but they have done well on that front before and seem disciplined.just wondering what normal cycle earnings are for Bertram and the minerals business. For Bertram maybe 8-10mm ebitda. For minerals, clearly it's choppy, but could be 10-30mm.

 

I have them earning conversatively 50 cents a share in 2015. Even with no trust from the market i cant see energold getting lower than 6x earnings ratio.  Liquidity is not a issue with them its the capital allocation. I hope they dont structure future acquisitions like bertram.  To have parabolic growth they need to show increasing results for 3-4 years. Wall street can then model them and give them a reasonable p/e. If they structure deals like the bertram one in the future. Energold will be stuck in p/e 6 land. Getting in at 1.50 is a amazing price great job. My cost basis is 2.55  :-[

 

 

[thelads]

I got very lucky on entry price for sure. I really do wonder if that opportunity will not present itself again. It's a prime candidate for tax loss selling. I remember that for ksw, DVD, and mpg in the past 3 years. Given daily volume is so low and the lack of coverage, it takes very little to move this around meaningfully. Just witness the last 6 months. Yeah, I would be surprised if they haven't had a year with 50 cents earnings by 2015.

 

You are absolutely right on capital allocation, they got as lucky as I did on timing. I would hope they stop building rigs (as they have done), inventories etc, and let earnings, FCf, and rig utilization get high. But that is probably wishful thinking.

 

In terms of pe, the space is so volatile and momentum driven, who knows what happens if any of those variables (rate per meter, meters drilled) pick up. It's so operationally levered at these levels.

 

I think I will just place orders between 1.00 and 1.50. Good till xmas

[ItsAValueTrap]

Definitely not skill cause the bought deal rates were massive compared what they would have got doing a rights offering. 

 

If your share price is high, you don't want to do a rights offering.  If you own shares of Energold, you would be forced into buying more shares of Energold when they are overvalued.

 

By doing a bought deal, your own shares would get diluted.  You want to be diluted when the shares are overvalued, and don't want to be diluted when shares are undervalued.

 

Also, the brokers will pump your stock if you do a bought deal.  So if you're good at the stock promotion game, you can sell more overvalued shares in the future!  It's like a Ponzi scheme.  This is why you have to be careful with stocks like Energold.  A huge part of the industry is focused on mining investors.  It took me a long time to realize how messed up the TSX Venture is and how messed up Canadian capital markets are.  You need to be careful.

 

That being said, I'd probably rather be long Energold right now than short it.