Dundee Corporation | A Race to the Bottom

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.

dundee_corporation_logo

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.

Dundee 2Q2018 Earnings

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 Capitalization

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.


The Fundamental Finance Playbook is a publication dedicated to the Fundamental Research of Stocks and Security Analysis. We publish thoughts and opinions on individual publicly traded stocks as well as our thinking on methodologies for finance and investing practices in general.

All publication on the Fundament Finance Playbook is provided for informational and entertainment purposes only and does not constitute a recommendation to any particular security, a portfolio of securities, or an investing strategy.


More Fundamental Research


 

5 thoughts on “Dundee Corporation | A Race to the Bottom

    1. I assume you meant 2019 and not 2018.

      So, Dundee holds a 20.38% interest in Dundee Precious Metals (DPM) which is a gold miner. DPM has a total market cap of $800m at current levels. That makes Dundee’s stake in DPM worth about $160m.

      Dundee Corp itself currently trades at a very low Price-to-Book multiple. The total market cap of the common shares is around $80m.

      Let’s imagine a scenario where gold increases significantly in value. Let’s assume that this gets reflected in the value of DPM and that the market value of DPM increased by 50%. This would increase the value of Dundee Corp’s stake by $80m, which is equal to the entire market cap of the Dundee’s common share.

      So, yes. Dundee has exposure to gold.

      1. Gisli, Despite of what you mentioned about Dundee Corp holds DPM. I have learned that Dundee is in talk with creditor for Parq Hotel interest payment on its loan for Parq Hotel. The same time , in June one of Dundee Corporations’ series shares will expire and that means Dundee has to come with $80 millions in payment. Please correct me if I am wrong. And yes I meant 2019:)))
        Thank you,
        Macpoor

      2. Dundee common equity had a balance sheet value in excess of $520m at the most recent filing. Those same shares trade at a total market cap of $80m.

        Think of Dundee as a leaking ship, trying to make it to shore. If they reach it, the ship will have salvage value. We’re saying we think the hull is big enough and the leakage small enough for them to reach land.

        The Parq debt is non-recourse to Dundee, but we are not expecting Dundee to salvage anything from its equity investment in Parc.

        With regards to the preferred shares, there are other possible scenarios than paying them out. They could negotiate an extension or use an option to convert them to common shares at a valuation of $2 per share. This is accretive relative to the market value, but dilutive relative to the stated book value per share.

Leave a Reply