Dundee Corporation (TSE: DC.A) is a Toronto based diversified holding company with investments in wealth management, resources, agriculture and real estate. Dundee Corporation is a public Canadian independent holding company, listed on the Toronto Stock Exchange under the symbol DC.A.
Under the leadership of its founder, Ned Goodman, Dundee Corporation had enjoyed an illustrious history of developing, managing and monetizing value accretive projects in the commodity space as well as in real estate. However, since 2014 the company has found itself in a consistent slide of value destruction.
After a series of missteps and bad decisions, the company is now at a point where investors are debating the likelihood of Dundee likelihood of surviving. Is Dundee a multi-bagger turnaround story or a classic value trap, heading towards a liquidity event?
A History of Value Creation
Founded by Ned Goodman in 1957, Dundee Corporation began as an investment club. Ten years later, the investment club had been expanded to the management of client pensions and the launch of mutual funds.
After the financial crisis of 2009, Ned Goodman made large bets on commodities, betting that the Quantitative Easing programs enforced by Central Banks globally would lead to inflation.
His persistence of sticking to that position eventually lead to his son, John Goodman, who served as a director, to leave Dundee. After a series of misjudgements and bad calls, the market capitalization has fallen down to its current levels of just over CAD 84 million, at the time of writing.
John Goodman Returns
In early 2018, Ned Goodman was forced to take a medical leave from Dundee Corp. His son, John Goodman returned to the company and now serves as CEO and Chairman. He is tasked with leading the repositioning and rationalization of the Dundee portfolio.
At the time of John Goodman’s return, the investment portfolio of Dundee Corp. included securities of more than 100 companies. The turnaround plan of Dundee have been focused on 4 main pillars:
- Streamline the investment portfolio, by right-sizing it.
- Non-core assets have been moved outside of the portfolio.
- The management has moved decisively to reduce expenses. As an example, the office space has been reduced by 75%. Head office count has also been reduced drastically, to about 70 persons.
- Focus on Capital Allocation discipline. More focus is being placed on capital allocation at the corporate level. Investments are being evaluated on their merit and their ability to be self-funding and to generate positive cash flow.
Dundee 2018 Annual Shareholders Meeting
On June 4th, Dundee Corporation held its annual shareholders’ meeting. During a lively Q&A session, John Goodman discussed the actions that had been taken since his return and how the company is working on its turnaround.
Presenting his renewed vision for Dundee Corp, John Goodman plans to restructure the company and effectively turn it into a Merchant Bank that focuses on the Junior Mining Sector. The company sees unique opportunities in the sector as the gap between commodity prices and mining company valuations have reached unprecedented levels. Since 2011, the equity valuations for Junior Miners are down by more than 80%.
Dundee Corp 2Q2018 Financial Results
On the 14th of August, Dundee Corporation reported its 2018 second-quarter results. Tempering any expectations that the company is turning things around, the results show that the company is still a total mess, burning through over CAD 100 million in the first half of the year.
As a result, the company burned through 16% of its common equity, bringing book value per common equity share from $10.36 at the end of 2017 to $8.70 at the end of June 2018.
Liquidity and Capitalization
At the holding company level, Dundee Corp still has around $37 million in cash and cash equivalents. With a current cash burn rate at around $5 million, the situation might seem manageable. This is not the case though.
Dundee Corp Current assets:
- Holding Company Cash: 37 million
- Portfolio of listed securities: $185 million
- Total: $222 million
Several of the company’s subsidiaries have been burning cash, in particular, Dundee Corp’s investment in Parq Entertainment, a newly built casino and real estate development project that has not yet lived up to its promise. Dundee has been forced to inject cash into Parq, in order to keep it compliant with its loan covenants and avoid default.
On top of that, Dundee issued Preferred Shares that will be redeemable in June 2019, representing a total liability of $82 million. The management still has time to convert assets to cash and to negotiate with the holders to extend the maturity. One option that the company has is to redeem the Preferred Shares by converting them into common equity at a conversion rate of $2 per common share. This leaves out another set of Preferred Shares with a par value of $130 million that will become redeemable in September 2019.
Point of Maximum Pessimism?
Understandably, the market is extremely pessimistic about the prospects of Dundee Corporation. The shares currently trade at around $1.77 per share, which corresponds to a market capitalization of $109 million. With Shareholders Equity at $640,408 at the end of June 2018, this means that the common shares are trading around 80% discount to the book value of common equity.
Dundee Corp. is a collection of assets and at the discount that the common shares (as well as the preferred shares ) are trading at currently, the market is already assuming severe value destruction.
Although the pessimism is well warranted, the company still have various leavers to work with. This, in fact, is what makes this such an interesting situation. At the moment, almost everything has been going wrong for the company. However, for the shares to be undervalued not everything has to go right. Just some of them.
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