The author of that SA GNK analysis I posted about here re-ran his model using the updated charter list, below is his response:
"Q4 earnings were inline with what I expected (inline/slight miss with the street as well). GNK (not including Baltic) ended the quarter with $245m of cash and $1.6 billion of debt, so $1.355 billion of net debt. If we include the par value of the convertible notes the Company’s net debt at the end of the quarter was $1.38 billion of net debt, this compares to the net debt figure I have in my analysis above of $1.4 billion, so my balance sheet estimates were very close.
On the charter list update, the Company has continued to fix its expiring vessels onto index-linked charters. As a reminder, an index linked charter means these ships are earning around 100% of spot rate. So, for example, GNK has 3 of its Capesize vessels on index linked charters (one at 100%, the other 2 at 98.5%). So these ships are currently earning about $4,600 per day. GNK now has 22 out of its 49 vessels operating on index linked charters or operating in the spot market. GNK has chosen to do this because they are anticipating a sharp rally in shipping rates in the back half of the year (or sooner). So I think this is a very important point about GNK. There should be no disagreement here, GNK is a levered, spot exposed Company. So to the extent you have a very bullish view on freight rates, then GNK’s strategy is a good thing and you should be long the Company. To the extent you have a negative view on freight rates (as I do) GNK is a short.
As another reminder, I don’t think Cape rates will remain under $5k per day. Instead, I run my models at the current 1-year time-charter rate. As of today, those rates are as follows:
Using these rate assumptions, which for Capes are over 3x current spot rates, I show GNK trading at a non-meaningful PE figure for 2012 and 9x EV to EBITDA. I also show them at over 6x net debt to EBITDA"
****Ironically, TDAmeritrade just upgraded GNK from reduce to hold this morning, have no idea WTF their analysts are looking at or thinking! I'll check their website and see who exactly upgraded GNK and why - TDA combines the opinions of multiple analysts to come up with guidance, so one or more of them must have upgraded GNK individually. I'll head over there now and see what's up, will post what I find.*****
It was said in the CC that the Capes don't last as long as the other smaller ships due to the torqueing, and twisting of the larger laden ships esp in weather. So you say no? Also, they didn't sound like they were "relying on scrapping to be the savior of the drybulk industry"....they just said it would lower supply more this year than ever. Also, they seemed to put as much emphasis on order book slippage as much as anything, esp in a tight lending environ.
True... part of the reason GNK earnings are being crushed is due to this high depreciation due to "book" value of the vessels significantly higher than market values.
The $140M is a non cash expense, so the cash flow will help, but starting in mid-2012, they will have $50M + quarterly debt service payments. They will still burn through cash in excess of depreciation and flirt with insolvency unless they generate signficantly more operating profit, which is not gonna happen at rates projected in this overcapacitized market.
As I've posted earlier, at very healthy rates (capes recover to $25K/day) GNK will show a net operating loss in 2012.
Under that scenario,the only cash flow generated will be from depreciation recapture.
Your right, the vessels do lose value, but the value of GNK's fleet is not going to go down by 140 million a year. That is because they overpaid for assets during the boom.
Using Killer's estimate from a few posts ago, the fleet is worth 1.6 billion with depreciation of 140 million. Which would imply a fleet that will only last 12 more years.
The problem still comes back to using purchase prices on the financial statements (and the depreciation related to them).
and so it's true the bigger the ship, the lower the life. Mgt says we should see alot of Capes scrapped 2011-2012 with scrap prices so firm and co's not willing to invest 3-4 million dollars to shore up a ship for service.