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Added a position in Aberdeen Int’l (AABVF)

March 9, 2012

I’ve recently added a small position in Aberdeen International (AABVF). The idea is not original; it comes directly from Kelpie Capital. View his post here for background.

I’ve been wanting some exposure to gold and, now that everyone is cooling to the precious metal, I think its just the time to take the plunge. My reasoning is based on a macro view that goes something like this. We have abundant liquidity in US markets now and are likely to continue to enjoy this state of bliss at least until the elections next Fall. Equities should therefore do OK barring any unforseen global negative event, like say an Israeli incursion into Iran. Such an event is unknowable so I remain positioned with a positive bias to the market in the short term. However, once the election is done I think somewhere in the next couple of years the global economy will be forced to confront the growing problem of debt that we have collectively been kicking down the road for the past decade. I’m still convinced that Greece will have to default even after the huge bailout package currently being prepared. That may not be the event that triggers a market maelstrom but it is a symptom of the worldwide problem. I’m figuring that just when joe investor gets sucked back into the market something will precipitate the market downturn. At that point it will be a good time to be holding cash or perhaps a little gold or gold-related equities, so I’m beginning to prepare now.

Why the position in Aberdeen and why now? Well, I could buy physical gold. But I kind of agree with Buffett that gold just sitting in a vault somewhere doesn’t really do much except shine. I want something that throws off cash or at least has some operations, and I want to buy it cheap. Gold has a market price and no one is going to sell it to me for a discount. On the other hand, gold miners can be bought for less than their intrinsic value. But the problem is that I know nothing about how to value them. Aberdeen is an interesting alternative. It’s kind of a closed-end fund with investments in small cap and microcap resource companies (at the moment primarily junior gold mining cos) and mineral royalties. It is managed by Forbes & Manhattan, a fairly successful Canadian natural resource investment bank. Most importantly, it is selling at a substantial discount to its book value and net asset value. As of Oct. 31, 2011 (the latest quarter for which detailed information is available) Aberdeen had an investment portfolio of about CAD $80 million, $8 million in cash, $8 million in loans and $6 million in receivables plus royalties valued on the books of $27 million. Against this there were $14 million in tax liabilities. Shares outstanding were 87 million, plus 7 million options and 38 million warrants. Because the warrants have an exercise price of $1 and expire in June 2012, I consider them non dilutive and likely to expire worthless. Excluding the warrants, book value per fully diluted share is about CAD $1.23 or about USD$1.20. With the ADRs selling below USD $.60 on the pink sheets this means a discount of over 50%.

Usually I’m a bit skeptical of closed end funds since management’s interests are not well aligned with those of shareholders. Management is generally compensated based on a percentage of assets under management (AUM). This means growing the assets under management is first priority, but not necessarily growing them organically. When returns are sub-par, and therefore assets under management are declining, management is often tempted to raise capital to stem a decline in fees. Unfortunately sub-par performance often leads to a fund trading at a discount to NAV. If the capital raise is done through a rights issue, shareholders are confronted with an uncomfortable choice; either subscribing and dedicating a larger percentage of their funds to an underperforming asset or seeing their interest diluted. If the capital raise is done through a private placement, even worse; the current shareholders can’t avoid being diluted. In the case of Aberdeen, this structural issue is somewhat mitigated. Forbes & Manhattan own about 15% of the shares. Thus, management has to balance out their interest as shareholders against their interest as managers receiving a fee.

Aberdeen management laid out their goals in a presentation last month. Priority one is to get rid of the value gap between NAV and market price (we like that). If you look at their charts, however, the gap has existed for the past 5 years and the strategy they have laid out to reduce the gap, “tell our story”, is a bit weak. Priority two is to grow assets under management (to $250-300 million). They list organic growth, the warrants and selling the royalties as a means to do this. Unless I am missing something, it appears to me that the warrants will not be exercised as they expire in less than 3 months at a price significantly above today’s market price. Let’s see if they are able to sell the royalties at anything resembling book value. Priority three, manage capital structure, seems a bit at odds with priority two. Here they list share buybacks (which reduces AUM, rather than increasing it), increasing the dividend (which also reduces AUM) and ‘pursuing other corp. growth opportunities’, which is not particularly specific.

Despite the shortcomings of management’s stated strategy and the fact that NAV declined significantly during the first 9 months of fiscal 2012, I still like this opportunity. Of course, I’m looking to build a position at prices lower than my initial purchase so that the margin of safety is even greater. But before that my next step is to look more closely at the investment portfolio, which I’ll do in a subsequent post.

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10 Comments
  1. I took a look at AAB.TO a few months ago as well (http://alphavulture.com/tag/aab-to/), and decided not to invest. They for example recently changed management bonus compensation so that the NAV high water mark resets yearly, something that is imo beyond ridicoulous (same happend at an related company). Stan Bharti also seems more interested in getting paid a lot of money, and not doing a lot for share holders. Just check on how many companies he is on the board, and how much he gets paid for that.

    And as a final remark: AAB discloses how their investment portfolio looks, and the discount to NAV is a lot smaller than you are thinking. If you look at the market prices of the securities they hold you will see that most have dropped ~33% since October 31.

    • Heilko,
      Yes, thanks for referencing your post. I agree with you about the ugly compensation; it seems to be par for the course in this sector. And yes, you are right Aberdeen’s investment portfolio has been shedding value in the past 3 months, but by my calculation not the full 1/3 you reference. It’s a bit hard to value the warrants they hold as they are not always traded it seems. My main point was that I think management incentives are aligned with shareholders here; Management desperately wants to grow AUM but can’t do a secondary offering without significantly diluting their own interest (unless they ante up). They need to ‘close the [NAV] gap’ in order to get their secondary. Let’s see if they can do it! If we get to within 85% of NAV I’ll be a seller as I think at 90% they will do a secondary. Really, I’m looking for a further decline in price with the next quarterly and then I’ll decide if this becomes a real position in my portfolio.
      Thanks for the comment

    • pallie John permalink

      Too bad Larry King did not use his journalism skills before joining the advisory boad Stan Bharti’s
      http://www.stockhouse.com/community-news/2012/mar/22/stockhouse-movers—shakers–why-mine-financier-s-

      Ducan this is not a good investment unless you work for Forbes or Aberdeen
      a better title would have been Is Aberdeen International a public corporation of a family reunion paid for by shareholders?

      Bonus Reset is not normal – last year based on beginning 2011 so they paid themselves 8 million which is more than the 2 million they gave themselves in 2010

      1. Eurocontrol shareholder loan he has not paid back is almost 2 million dollars
      2. Depending on what many press release all worth a read and laugh valencia ventures Stan Bharti raised over a million then lent his wife and son’s company $700000 did not pay it back and resigned from the company

      On the Aberdeen front read all the loans companies never pay back and you will see Stan Bharti is on their boards over 8 million

      Then Temujin Mining Aberdeen kept lending millions they never paid back and now the company was sold
      But have google translate http://www.cmufund.com/tzzh.aspx as the english button on their website does not show you the real interesting BS
      Genghis Khan Temujin mining companies
      Project based on: the international copper and gold prices continued to rise; copper ore import dependence high; large amount of project resources, the higher grade; strategic investment significance.
      In January 2010, Mongolia, Temujin mining company investment, the investment cost of 0.5 U.S. dollars / share, now the PE price of 2.5 U.S. dollars / share.
      The company listed on the Toronto Stock Exchange in Canada in 2012.
      The current yield is 5 times.

      Dacha just did a Cash loan $3,500,000 to Stan Bharti and his wifes company

      Felix Pinhasov Corre pick is even crazier but way too difficult and long to write
      http://seekingalpha.com/author/felix-pinhasov

      Your comment is awaiting moderation.

  2. Valuing a junior miner is very difficult. To do proper due diligence, a senior miner will twin/re-drill a few of the drillholes among other tasks. This was how the Bre-X fraud was uncovered. (And if you don’t think that type of fraud happens nowadays… look at Bear Lake Gold.) As an investor, you do not have the chance to do this type of due diligence. Even if they are not lying about assay results (which is likely true in almost all situations), there are a number of subtle engineering assumptions that can be tweaked to make a mine or resource look more economic than it actually is. The interpolation method used in the resource estimate will in most cases make a 10-20% difference in resource size. (But it’s not like investors bother reading mine engineering textbooks and know what ordinary kriging, ID2, ID3, etc. are.)

    There are a lot of problems in the junior mining sector. If juniors wanted to create value, they would waste less money on promotion, be properly capitalized in the first place, and reduce overhead (e.g. six figure salaries for the part-time officers who work at a number of other juniors, liability insurance because juniors always do sketchy things, do rights offerings instead of paying underwriters, etc.). At least Aberdeen is a little honest about the pump and dump aspect to the sector:
    “Fourth is telling the story, promoting the stock.”

    That being said, the people who invest in juniors are not the sharpest knives in the drawer. Sometimes these stocks are undervalued enough that they are worth investing in. Or, if you are good a promotion, you can make money by playing the game of selling junk to others (maybe they can also get into the business of selling ABCP, CDOs, etc. etc.).

    2- Stan Bharti is one of the directors of Avion Gold, so of course he is going to say good things about it.

    3- At least they are honest about being greedy. Growing AUM to $250-500M would increase the amount of money insiders will make. It is poor “capital structure” and they know it… of course they are doing the opposite and shrinking AUM by buying back shares and issuing dividends.

    4- I might actually buy this stock. (Yeah yeah.) Thanks for the writeup!

    • Glenn,
      Yes, its the fact that they have been buying back stock that really swayed me; it is shareholder friendly and goes AGAINST their stated goal of growing AUM. It convinced me that the stars were aligned propitiously AT THE MOMENT. They seem to really believe that they need to reduce the NAV ‘gap’ before they raise additional funds. But I do think we’ll have to watch closely to make sure that they continue down the same path. Any variance and I’m out.

      • Hmm if you look at their insider trading, they haven’t been buying back shares recently.

        http://www.canadianinsider.com/node/7?menu_tickersearch=aab

        It’s the same situation at Pinetree, which is similar to Aberdeen. They used to buy back shares… now they don’t. It could be because they are scared (also, Pinetree is insanely leveraged so buying back shares will increase their leverage). I would note that at Pinetree, the CEO buys high and sells low when it comes to insider trading. (It’s perverse I know. But so are his management fees… one year he made over $30 million.)

        Northfield Capital is also somewhat similar (Northfield is almost pure stocks and cash nowadays) and they have been buying back shares for the past several years. Altius is another company somewhat similar to Aberdeen; they also buy back shares.

        http://glennchan.wordpress.com/2012/03/20/aberdeen-aab-pinetree-pnp-northfield-capital-nfd-a/

  3. The only thing I know about this company is that it is under Bharti’s Forbes and Manhattan. My investment in Dacha (DCHAF) is under Bharti and I’m currently having my doubts about this guy.

    I know he is money hungry and he seems to use the companies as his personal bank.

    Watching out for any real signs of trouble to bail from Bharti.

    • Jae,
      I fully concur. Need to be vigilant here. Bharti is all over the place and seems to have a piece of the action everywhere you turn.
      Jay

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  1. Aberdeen International – AABVF - Intellectual Honesty
  2. Dacha Buys Aberdeen International | A Bit of Value

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