My two biggest concerns about this company right now are
1. The metric that everyone points to when saying this company is cheap is book value, but I have become extremely skeptical of this figure and the way the company is calculating it.
2. Michael Smith seems to be running this company strictly to benefit himself and his friends and seems outright hostile to shareholders.
Has anyone taken the time to dig into the book value calculations? The more I look, the more suspicious I get. And given that many investors here are holding MIL primarily based on this metric...that could be trouble.
Smith will position himself and the company as is necessary to insure it's success and by result his own.
2014 will be a big growth year and while I believe the divy will remain at 24 cents I believe that it will increase next year and going forward.
Steve.wayne58 - Both your concerns are well founded.
Regarding book value; as of Q3 it was 735.3m or 11.71/share
The Wabush mine with a 2012 YE book value of 168m will clearly be written off – assume its 163m or 2.60/sh. (I assume 2013 D of c.5m). This takes the book down to 572m/9.11sh in any event.
That 572m figures includes some, but not all, of the more obviously fuzzy items:
- 223m or 3.55/share related to a post-acquisition write-up to the value of Compton Petroleum (up until Q3 it is losing money, as it was prior to MFC’s purchase).
- 30m or 0.48/share related to the very questionable purchase of a Ugandan cobalt refinery and power plant from a company in which Smith was the CEO, CFO and apparently owned 10% of the equity – 28m purchase + 2m write-up.
- 17m or 0.27/share related to a 50% interest in Pea Ridge, a closed iron-ore mine they are hoping to restart. Costs are capitalized here so book actually rises even though there are no sales and only expenses. Iron ore prices don’t suggest it will open in which case it’s a complete write-off.
- 5m or 0.08/share in Chinese eye centres. Who knows!
A total of at least 275m or 4.38/share of the book value looks very questionable. There is little doubt that these “assets” are grossly overvalued. A value closer to 0 would be more appropriate I believe. If that were true, MFC’s book would be less than 5 per share, at best. Thus MFC looks like its trading at 1.5X or more even an optimistic view of its book value.
The main contributor to MFC's falsely high book value comes from the purchase of Compton. Compton lost a good deal of shareholder money before it was acquired by MFC. A lot of that money was spent by Compton acquiring acreage in Montana's Bakken formation that they could not find a drilling partner to partner with. Compton's book value should have been written down before the purchase, but it wasn't. Compton was purchased at like 20 cents to its book. That's probably what it was worth.
Waardering is incorrect about Wabush being a zero. It won't be written down. Why should it? Iron ore prices are fickle thing. Charges to book occur when there has been a permanent impairment. Here the impairment occurs only from the time value of money. CLF will start up that operation again. Maybe it'll be in ten years. The accounting rules don't require that it be written down, and I would argue that it does not represent the true economic value anyway. There's simply not been any permanent impairment other than from the delay in the cash flow. There's still iron ore is still in the ground. It's just not economic to extract it right now. (Of course, there's also a possibility that this is all just related to the CLF shenanigans as well. So who really knows.)
The same goes for Pea Ridge. Waardering again seems to have missed the boat. Pea Ridge was not bought for its iron ore but instead for its rare earth elements deposit.
Finally, the purchase of the Ugandan power plant was opportunistic, but again waardering has it backwards. Blue Earth is the one that was likely taken advantage of. Blue Earth was in the business of processing tailings from a copper mine in Kilembe. The copper mine had been closed for many years hence the power plant was virtually worthless. Last year, the Chinese got a concession and look poised to reopen the copper mine in Kilembe. Hence, the power plant is suddenly worth something again. It's not a surprise that MFC now owns this asset now.