Author Topic: PDER - Pardee Resources  (Read 81084 times)

thepupil

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Re: PDER - Pardee Resources
« Reply #10 on: November 12, 2014, 06:50:59 AM »
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.
« Last Edit: November 12, 2014, 06:59:18 AM by thepupil »


writser

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Re: PDER - Pardee Resources
« Reply #11 on: November 12, 2014, 07:34:29 AM »
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.
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oddballstocks

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Re: PDER - Pardee Resources
« Reply #12 on: November 12, 2014, 08:03:10 AM »
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.
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thepupil

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Re: PDER - Pardee Resources
« Reply #13 on: November 12, 2014, 08:05:36 AM »
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.


 
« Last Edit: November 12, 2014, 08:07:21 AM by thepupil »

Hielko

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Re: PDER - Pardee Resources
« Reply #14 on: November 12, 2014, 08:35:31 AM »
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

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Re: PDER - Pardee Resources
« Reply #15 on: November 12, 2014, 08:52:29 AM »
Thanks Scott. Will have to look deeper.

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

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Re: PDER - Pardee Resources
« Reply #16 on: November 12, 2014, 09:24:49 AM »
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

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Re: PDER - Pardee Resources
« Reply #17 on: November 12, 2014, 09:51:26 AM »
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

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Re: PDER - Pardee Resources
« Reply #18 on: November 12, 2014, 09:55:23 AM »
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

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Re: PDER - Pardee Resources
« Reply #19 on: November 12, 2014, 10:03:08 AM »
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.