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The Quandry of MFC Industrial (MIL)

May 20, 2014

I just read (and reread) the transcript of MFC’s 1st Quarter conference call, and, besides the usual typographical errors that show up in all seeking alpha transcripts, I find it simply baffling. I know I should listen to the actual call but I simply can’t bring myself to do it. Am I the only one or does everyone find the MFC calls totally sophomoric? Despite now having a new deputy CEO, new CFO and new Treasurer (all, apparently, roles that Michael Smith previously filled) they don’t seem to be able to provide any information. It’s as if they hired a bunch of actors to play the parts of deputy CEO and CFO but then forgot to give them a script so that everyone just has to ad lib without any knowledge whatsoever of the business. OK, OK so maybe its just me. My expectations about what a quarterly call should be might be a bit too high, but really…. Why not just eliminate the calls?

That gets me to my real point. The only interesting moment of the call was when a question was asked about whether management shouldn’t be doing something like buying back shares given the continuing chasm between book value ($11) and market price ($7-8). The answer is hilarious, if somewhat telling. Michael Smith’s says that investors need to give them time now that they have a new management team in place. Um, Michael, why did we have to wait years to get a new management team if they were the key ingredient to earning a decent return on book (or buying back shares if that couldn’t be done)?

Yes, I’m still holding my position in MFC Industrial… for the moment. And, yes, I will be giving the new management team some time to show that they can produce a decent return on equity. But I’m getting near the tipping point. MFC under Michael Smith made what now appears to be one good investment (Compton) in the past 3 years and that’s it! And that was just fortuitous as no one could have predicted the rebound in natural gas prices. Peter Kellogg take note! I want to see some positive cash flow here (and I bet you do too).

  1. Wabush is getting shut down so the market value of that royalty is much lower than the book value. I haven’t worked the rest of it out, but I suspect that MFC isn’t trading much below intrinsic value. And I don’t think that Michael Smith is very good at value creation at all, despite what many people say. Most of the spinoff gains is due to hiding value in the spinoffs through accounting tricks.

  2. Robert_Y permalink

    It’s not just you. These conference calls are bizarre. I’m not convinced Compton is necessarily a good investment. The company was shopped around the Canadian oil patch for years with no takers on the part of knowledgeable buyers. To think that some “outsider” from Vancouver/Hong Kong/Vienna is going to find value where others could not takes a bit of a leap of faith.

    My only reason for maintaining a modest long is the possibility of a split of MFC into a trading company and a “rest of Michael’s junk” company.

  3. ron_W permalink

    I have attached a recent article published in the local newspaper in Feb were MFC currently holds thousands of well sites and MFC is not paying land owners surface rights rent and forcing them to take legal action in order to collect. I would have to agree that Compton wasn’t a good investment because the company assumed several hundred wells that are within the city limits of Alberta’s biggest cities and their lease payments are due to skyrocket as they get reset every 5 years.

    MFC has an oil and gas battery on my site, which is 1/2 from the Calgary city limits. We have been fighting for over a year and the issue will be resolved shortly in court and we expect their lease payments will go up by 2,000% because the land they are on is no longer farm land but industrial land. I am just one of thousands of people who will be entitled to fair market rent. The other issue that is a concern to their cash flow is the cost to clean up the site when the well is abandon. At least a $150,000 per well site. That’s why they got a deal on the purchase as noted when they reported the purchase on their balance sheet. The old shareholders were happy to unload this nightmare.

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