Author Topic: PDER - Pardee Resources  (Read 81088 times)

Tim Eriksen

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Re: PDER - Pardee Resources
« Reply #20 on: November 12, 2014, 10:14:35 AM »
The coal business generates $20 million per year in cash flow and requires no capex as it is all royalties.  Coal reserves are near 300 million tons and they get around $3 per ton.  Permitted reserves are much smaller.  Less than 80 million tons I believe.  It is still ten years worth of production.  I think a 10 year DCF using a modest discount rate is appropriate.   

When they did the timber appraisal I was really hoping they could sell the timber rights for anywhere near $136 million.  It generates $2 to $3 million in annual cash flow.  They could reallocate proceeds to a business that generates better cash flow.   

The director fees are absurd.  That was the first negative I have encountered. 


JAllen

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Re: PDER - Pardee Resources
« Reply #21 on: November 12, 2014, 10:15:55 AM »
ok, attached is the inside cover to the book. 


Also, another cool thing is that a shareholder letter update from the 70s was mistakenly included in the book when I received it.  It was dated 3/14/79 and written by William G. Foulke, and was similar to today's folded updates. The company had a subsidiary that owned a small resort/grocery store on the island of Vinalhaven, off of Maine at the time called Osprey, Inc.


Also, I had forgotten this about the book, but it's signed by William Foulke himself (dated 9/27/79) on the inside cover and was originally sent to a great-grandson of Calvin Pardee who lived in Wisconsin at the time.  I have no idea how many copies of this there are.

Tim Eriksen

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Re: PDER - Pardee Resources
« Reply #22 on: November 12, 2014, 10:19:26 AM »
I found a copy of the book just now on Amazon and purchased it.  eBay may have some too.  Not cheap, but it is not Klarman's Margin of Safety either.

thepupil

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Re: PDER - Pardee Resources
« Reply #23 on: November 12, 2014, 10:31:42 AM »
Reserves in the ground only matter if the mine is going to be used. Let's say one Pardee mine is throwing off $3MM / year in royalties and will shut down permanently in 7 years (this is not an absurd assumption giving the stress and outlook for the industry). It's worth $21MM gross (7X cash earnings) and less on a PV basis.

I really hope you guys are right about the durability of the coal royalties. If so, this will be a truly spectacular investment and we'll all benefit. But I really take issue with DCF'ing royalties from mines unless you know where they are on the cost curve, what the operators think about each mine in relation to the rest of their assets, etc. It's like a franchise royalty. You need the franchisee to be profitable in order for the royalty to exist in perpetuity. I own some ANR Leaps (in VERY small size, most liquidity and uber levered ) and am by no means an all out coal bear.

The overhead is high as a percentage of assets and equity. I know they are actively building value, but a substantial portion of the asset base is legacy stuff from a hundred years ago; they pointed it out in one of the letters how a big portion of the coal royalties were from a property that was purchased forever ago. So I think it is pretty easy to make the case that the company is a little bloated.

 

thepupil

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Re: PDER - Pardee Resources
« Reply #24 on: November 12, 2014, 10:35:46 AM »
and I like the annual reports too; one adorns my coffee table.

JAllen

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Re: PDER - Pardee Resources
« Reply #25 on: November 12, 2014, 10:53:20 AM »
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

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Re: PDER - Pardee Resources
« Reply #26 on: November 12, 2014, 10:56:06 AM »
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

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Re: PDER - Pardee Resources
« Reply #27 on: November 12, 2014, 12:25:42 PM »
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.

« Last Edit: November 12, 2014, 12:30:16 PM by thepupil »

Tim Eriksen

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Re: PDER - Pardee Resources
« Reply #28 on: November 12, 2014, 01:05:25 PM »
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

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Re: PDER - Pardee Resources
« Reply #29 on: November 12, 2014, 01:11:47 PM »
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.