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Edited Transcript of DC.A.TO earnings conference call or presentation 15-Nov-19 3:00pm GMT

Q3 2019 Dundee Corp Earnings Call

Toronto Dec 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Dundee Corp earnings conference call or presentation Friday, November 15, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John Vincic

Dundee Corporation - Head of Investor & Media Relations

* Jonathan Carter Goodman

Dundee Corporation - Chairman & CEO

* Robert Mark Sellars

Dundee Corporation - Executive VP & CFO

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Conference Call Participants

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* Andrew Hood

M Partners Inc., Research Division - Research Analyst

* Brett Reiss

Janney Montgomery Scott LLC - SVP of Private Client Group & Financial Advisor

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Presentation

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Operator [1]

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Good morning. My name is Julianne, and I will be your conference operator today. At this time, I would like to welcome everyone to the Dundee Corporation Q3 2019 Conference Call and Webcast. (Operator Instructions)

Mr. John Vincic, you may begin your conference.

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John Vincic, Dundee Corporation - Head of Investor & Media Relations [2]

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Thank you, operator. Good morning, everyone, and welcome to Dundee Corporation's 2019 Third Quarter Results Conference Call and Webcast. The company's financial results were issued last night and are available on our website at dundeecorporation.com.

Before we get started, please be advised that the information discussed today is current as of September 30, 2019, unless otherwise indicated, and that comments made on today's call may contain forward-looking information. This information by its nature is subject to risks and uncertainties, and as such, actual results may differ materially from the views and expectations expressed today. For further information on these forward-looking statements, please consult the company's relevant filings on SEDAR. Also, please be reminded that all currency amounts discussed on today's call are in Canadian dollars unless otherwise stated.

Our presenters today are Jonathan Goodman, Dundee's Chairman and Chief Executive Officer; and Robert Sellars, Executive Vice President and Chief Financial Officer.

And now I'd like to turn the call over to Jonathan Goodman. Jonathan?

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Jonathan Carter Goodman, Dundee Corporation - Chairman & CEO [3]

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Thank you, John, and thanks to everyone for joining the call this morning. During the third quarter of 2019, our focus at Dundee was squarely on cost containment and capital allocation. To that end, I'm happy to report that we are seeing significant reduction in our G&A run rate since I returned to the company in the first quarter of 2018. As we continue to streamline our business and execute our strategic pivot, lowering our costs is critical as we lay the foundation for future success at Dundee. Year-to-date, our G&A at the corporate office is $16.8 million compared to $23.1 million in the same period of 2019. Both of these numbers contain severance costs and a number of onetime costs, and our goal corporately is to get that number down to around -- our interim goal, I might say, is down to around $12 million a year.

We've been able to achieve these reductions by reducing our real estate footprint, lowering our headcount and decreasing our interest expenses, most notably through the conversion of our Series 5 preferred shares earlier this year. Looking ahead, we see more opportunities to reduce costs and our interest rate expense.

As many of you know, since returning to the company, I've been very focused on instilling more discipline into our capital allocation process. In the third quarter, we initiated a normal course issuer bid for our Series 2 and Series 3 class shares. Both of these trade at a significant discount to their face value. By implementing a share buyback, we're providing liquidity for these shareholders while also lowering our interest expenses and strengthening our balance sheet. A total of 64,800 Series 2 and 3 prep shares were purchased and canceled during the quarter, resulting in a total cash outlay of around $947,000.

As noted in our Q3 news release, we are now contemplating the implementation of a normal course issuer bid for our Dundee Corp. Class A subordinate voting shares, which is subject to the approval of the Toronto Stock Exchange. We think this is a prudent measure to take, and having the NCIB in place gives us additional flexibility as we consider the most effective means by which to deploy our capital.

Now let me turn to Dundee Precious Metals, our largest portfolio holding. During the third quarter of 2019, Dundee Precious Metals achieved record gold production, 65,642 ounces. This record performance was underpinned by the new Ada Tepe mine, which achieved full design capacity as planned during the quarter and produced 25,314 ounces of gold compared with strong performance -- combined with strong performance from Chelopech, which produced 40,348 ounces of gold and 10.1 million pounds of copper. DPM is on track to achieve its full year guidance for 2019.

In spite of the recent pullback in DPM share price, I continue to believe that the company is in the midst of a re-rating. Gold prices remain strong, and the growth prospects for DPM are compelling. More importantly, DPM is entering a significant phase of free cash flow generation, and in the third quarter alone, the company generated $21 million of free cash flow. This is in spite of the fact that during the third quarter, the company's production [increased] exceeded sales by around 20,000 ounces of gold. This gold will be sold in the fourth quarter, and we are excited about the prospects for the fourth quarter of Dundee Precious Metals as well as the year-end results.

I'd like to now take a brief moment to discuss Android Industries, one of our core portfolio holdings. Android Industries is based in Michigan and is an automotive assembly company. Like DPM, Android is emerging from a period of significant CapEx investment and is poised to embark on what we believe will be an accelerated period of growth. The company has secured a number of long-term contracts, and management is forecasting a significant ramp-up in business beginning in 2020. As a major investor in Android, we are very impressed with the management team and believe their interests are appropriately aligned with shareholders. And we believe that they have the team in place to generate meaningful EBITDA growth in the coming years.

Now I'd like to turn the call over to Bob Sellars for a review of our financial performance during the quarter. Bob?

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Robert Mark Sellars, Dundee Corporation - Executive VP & CFO [4]

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Thanks, Jonathan. For the third quarter, we are reporting a pretax loss of $29.1 million compared to $50.9 million loss in Q3 2018. The net loss for the quarter after discontinued operations and taxes was $29.7 million compared to a loss of $55.5 million in 2018. During the quarter, there was a $15.7 million net loss on investments, of which $14.9 million was a portfolio loss or mark-to-market loss on Dundee Precious Metals. Compared to other net losses -- with other net losses [of] $2.1 million gain for reservoir mining, investment losses for the prior year were $31.5 million.

We also had a $948,000 gain in UHIC to revalue the royalty and consideration and to a total of $161 million after adjustment for the contingent consideration.

At Blue Goose, we incurred a loss of $9.4 million in the quarter, which included a $10 million decrease in the valuation compared to a 2018 loss of $4.6 million. There was a fair value increase in the livestock of $1.1 million compared to $3.3 million in the prior year.

GCIC had a loss of, a small loss of $100,000 in the quarter compared to $144,000 in the prior year. Our equity accounted gains were $2.2 million compared to a $7 million loss in the same period in the prior year. Prior year loss was primarily Parq Vancouver mark-to-market.

Consolidated G&A for the quarter was $9.6 million compared to $11 million in the prior year that reflected continued reductions in headcount and operating costs, and we incurred some severance expenses in the quarter.

Let me now provide a year-to-date summary on our results. Year-to-date, we are reporting a pretax loss of $10.1 million compared to $152 million loss in the prior year. Year-to-date loss after discontinued operations and taxes was $23.3 million compared to $159.6 million in the prior year. Net gain on investments was $17.8 million, of which [$31.3] million was Dundee Precious, with other offsetting items that are reducing net loss like the Eurogas International Reservoir and Parq.

Year-to-date gain on UHIC was $10 million compared to $11 million in the prior year, so fairly comparable. If you recall, when we converted to Series 5 in the first half of the year, we had a conversion gain of $9.1 million.

Blue Goose incurred a year-to-date loss of $17.3 million, which recognizing a $10 million impairment to market net assets down to $70 million. This compares to a $19.1 million loss in the prior year, and it reflects the continued downsizing and expense reductions done in that entity. The year-to-date fair value increase in livestock was $2.1 million compared to $1.3 million in the prior year.

At GCIC, you'll see that the year-to-date losses were $851,000, which compares to a $4 million loss in the prior year, and the prior year had the wind-down of the Private Client division.

Year-to-date equity accounted losses are $1.1 million compared to $55.8 million in the prior year, and the prior year was primarily Parq. Consolidated G&A was $27.9 million year-to-date compared to $43.2 million in the prior year.

Now let me move to a review of the investment portfolio, which was valued at $291.6 million at the end of September compared to $270 million at year-end. Proceeds of disposition were $6.8 million in the quarter and $21.9 million year-to-date. Some of the significant dispositions were Canadian Security Exchange earlier in the year of $9.7 million, Reunion Gold of $3.3 million and Osisko at $2.6 million. Dundee's marketable securities portfolio was at $203 million at the quarter end, with DPM accounting for $161.5 million of that total.

Now let me turn to a review of our liquidity, which we continue to monitor closely. At the end of the quarter, we had approximately $30 million of corporate cash on hand. We continue to work hard at increasing our overall liquidity by reducing costs and disposing of noncore assets. Year-to-date, we had funded subsidiaries for a total of $13 million. Subsequent to year-end, we paid a CRA reassessment for a 2014 audit, a total of $12 million. We are filing -- we have filed a notice of appeal on this reassessment, and we'll continue to work with CRA to plead our case.

We continue to work at increasing our overall liquidity by reducing costs and disposing of noncore assets. Our annual dividends for 2019 should be $9 million with an additional tax of $3.6 million. Dividends in 2020 are projected to be $6.9 million with a further $2.8 million in dividend tax.

Our year-to-date head office expenses in 2019 was $18.8 million, including $1.9 million of consulting fees relating to the Series 5 conversion, legal fees relating to Parq refinancing and continued severance costs of $3.3 million, along with stock-based comp of $2.4 million. Head office expense was $5.8 million compared to the prior year quarter of $6.6 million.

As stated last quarter, we still forecast -- we are still forecasting a continued reduction in our normalized [annual] run rate, and as Jonathan mentioned, our target of $12 million in -- on an ongoing go-forward basis. We will still incur further downsizing costs on top of that.

As we have previously disclosed, we are continuing to have tax discussions with CRA, and we had disclosed in the contingency note the amount that we ended up paying at $12 million, which we paid in October.

This concludes my financial review, and I will turn the call back to Jonathan.

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Jonathan Carter Goodman, Dundee Corporation - Chairman & CEO [5]

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Thank you, Bob, as always for your thorough and comprehensive update. Before we take your questions, let me provide a brief summary.

Dundee Precious Metals has continued to deliver improved results and is in the midst of a significant re-rating opportunity. There's clear momentum in the business, and we expect to see continued strong results in a robust gold price environment. As noted last quarter, we are continuing to explore avenues to identify potential buyers for both Blue Goose and TauRx at acceptable prices. At Parq Vancouver, we are encouraged by the strong results during the summer tourist season and the continued ramp-up of operations.

Dundee Goodman Merchant Partners is active in the deal flow, and our technical team is evaluating numerous investment opportunities in the junior mining sector. We are laying a very strong foundation on which we will build a strong platform capable of investing in attractive opportunities across the sector.

And finally, we remain focused on optimizing our capital structure. Much work has been done to strengthen our balance sheet, lower interest rate expenses and reduce costs in our business. Most importantly, we're more disciplined on how we allocate our capital, and this will serve us well as we move forward with the execution of our growth strategy.

On that note, I'd like to thank all of our employees and shareholders for their continued support. And now I'd be happy to answer your questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Brett Reiss from Janney Montgomery.

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Brett Reiss, Janney Montgomery Scott LLC - SVP of Private Client Group & Financial Advisor [2]

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I just want to make sure I've got the numbers right. If -- when you get the G&A down to $12 million and then your anticipated annual dividends on the preference preferreds are $9 million and the taxes are $3.6 million, so basically your nut to cover is about $24 million, $25 million?

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Robert Mark Sellars, Dundee Corporation - Executive VP & CFO [3]

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Yes, the dividend, that $9 million was for 2019 and included the 2 quarters on the Series 5 were gone. So I think my comment was that in 2020 going forward, the dividends will be $6.9 million plus $1.8 million in tax.

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Brett Reiss, Janney Montgomery Scott LLC - SVP of Private Client Group & Financial Advisor [4]

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Okay. So it's more like maybe $20 million, $21 million is the nut you have to cover.

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Robert Mark Sellars, Dundee Corporation - Executive VP & CFO [5]

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Yes.

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Brett Reiss, Janney Montgomery Scott LLC - SVP of Private Client Group & Financial Advisor [6]

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Okay. The $18.3 million in new or existing positions that you invested in the last 9 months, can you break that out a little bit? Or give us some color on -- where were you investing money?

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Robert Mark Sellars, Dundee Corporation - Executive VP & CFO [7]

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It's -- well, we invested in -- Maritime. It's across a significant amount of investments. It also includes putting some money into Parq because we did put money, $1 million, in the Parq at the -- I think in May -- sorry, in early July.

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Jonathan Carter Goodman, Dundee Corporation - Chairman & CEO [8]

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Into eCobalt?

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Robert Mark Sellars, Dundee Corporation - Executive VP & CFO [9]

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Yes.

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Jonathan Carter Goodman, Dundee Corporation - Chairman & CEO [10]

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We also had a number of divestitures. Most of the things we did were funded through portfolio sales.

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Brett Reiss, Janney Montgomery Scott LLC - SVP of Private Client Group & Financial Advisor [11]

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Right, right. How much -- I know Blue Goose has to be resolved and the TauRx. Between those 2 and other things, how much more in potential sales is left to be done?

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Robert Mark Sellars, Dundee Corporation - Executive VP & CFO [12]

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Well, we continue to look at the whole portfolio of what to sell, and we've got some other things that we're lining up trying to sell that we feel are noncore. We also could look at doing some financing if we needed to. We've been -- we've had some offers on financing. We haven't really hit the bid on any of them. But...

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Jonathan Carter Goodman, Dundee Corporation - Chairman & CEO [13]

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One point, but there's a significant number of things that we are exploring the idea of selling with. Obviously, some of them we're not yet ready to talk about because we're -- until we get to a point where we feel there's enough balance there that we think we're going to -- there's a decent probability of getting a deal done. But there certainly are a number of [noncore assets] we can potentially sell.

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Brett Reiss, Janney Montgomery Scott LLC - SVP of Private Client Group & Financial Advisor [14]

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Right, right. Now the $12 million tax settlement, which we may get lucky and win on appeal, but is that it? Is that -- is there any other contingent liability from that issue?

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Robert Mark Sellars, Dundee Corporation - Executive VP & CFO [15]

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That's for 2014, they're coming in to start auditing 2015 and '16. There may be a little bit more relating to those years, and then we're looking at subsequent years on what sort of tax losses we can utilize and carry back if we get reassessed on any of those. But they're not -- net-net, they're not a significant number.

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Brett Reiss, Janney Montgomery Scott LLC - SVP of Private Client Group & Financial Advisor [16]

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Okay. When you look at your array of assets, this $20 million, $21 million that you have to cover for G&A and dividend on the preference preferreds, where is the cash flow going to come to cover those expenses?

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Jonathan Carter Goodman, Dundee Corporation - Chairman & CEO [17]

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Well, Brett, the answer is it's either going to come from new investments. So we have cash flow, existing investments that we kind of mentioned that if some of them choose to pay some dividends, we will be the beneficiary of that. And if not, we will use some of the proceeds to reduce the numbers, which would reduce our interest expense.

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Brett Reiss, Janney Montgomery Scott LLC - SVP of Private Client Group & Financial Advisor [18]

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Right. The -- how optimistic -- do you think you'll get approval from the Toronto Exchange to be able to do that issuer bid?

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Jonathan Carter Goodman, Dundee Corporation - Chairman & CEO [19]

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Yes, we believe we will, but I don't think we should ever be so arrogant to just suppose. But we don't see any reason why we wouldn't.

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Brett Reiss, Janney Montgomery Scott LLC - SVP of Private Client Group & Financial Advisor [20]

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Right. And if we're successful there, how much of an appetite -- how big will the potential buyback be?

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Jonathan Carter Goodman, Dundee Corporation - Chairman & CEO [21]

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Well, the likelihood is we'll be limited. In a normal course issuer bid, I think you're limited to 10% of the float over a 12-month period, and there's monthly restrictions as well. But it gives you the ability that when -- to go in the market from time to time when the stock represents a very opportunistic opportunity to take advantage of that. If you want to do a more significant one, you'd have to do what's called a substantial issuer bid. There's the -- as we make asset sales and as we can build more cash, we would look at that on both the press and the comments, but at this stage, we're just putting in a normal course issuer bid for both.

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Robert Mark Sellars, Dundee Corporation - Executive VP & CFO [22]

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And then considering our level of cash after paying CRA, which we paid in early October, I'm going to be very cautious on our cash going out the door and whether it's on the -- any of the issuer bids.

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Operator [23]

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Your next question comes from [Jim Belin] from Aldebaran Asset Management.

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Unidentified Analyst, [24]

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What is the current value of Blue Goose on the books? And if it's losing a few million dollars every quarter, why not just shut it down?

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Robert Mark Sellars, Dundee Corporation - Executive VP & CFO [25]

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Well, the cost of shutting it -- so the net assets is about $70 million, and we've been continuing to try to find a buyer. And shutting it down would be pretty expensive. There's a bunch of ranches out there and cattle, whatnot. And to just turn it into idle land, I don't know how much that would cost us. But we will -- we have continued to -- if you'll see even when Blue Goose lost $9.3 million in the quarter, that included the $10 million impairment. So actually, Blue Goose made a little bit of money in the quarter. So we have gotten the costs down in that entity, and we will continue to manage it until we can get it gone.

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Operator [26]

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(Operator Instructions) Your next question comes from Andrew Hood from M Partners.

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Andrew Hood, M Partners Inc., Research Division - Research Analyst [27]

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So the first thing I'm wondering about, just on the NCIB for the Class A shares, assuming you're approved, do you guys sort of have a preference there on if you have a tight cash balance, whether you're buying back the Class A or the Series 2 or 3?

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Robert Mark Sellars, Dundee Corporation - Executive VP & CFO [28]

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That's a very good question, and I've had discussions with other significant shareholders on that. Like it's compelling to buy the As if you believe that the accretive value for net asset value is going to cause the stock price to move, and there's debate around that. And the benefit to the preferreds is that we take -- the ones we bought, we bought at around $15 [for -- and take -- get rid of a] $25 liability and we save the dividend. So we're going to look at both sides and work, and then we'll make a decision once we raise more cash and we have the ability to fund some of these acquisitions.

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Andrew Hood, M Partners Inc., Research Division - Research Analyst [29]

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Right. And that cash raising is as of now mainly from dispositions? And then you said you're looking at potential financings maybe?

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Robert Mark Sellars, Dundee Corporation - Executive VP & CFO [30]

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Yes. We haven't hit the bid on either. We've got a couple of auctions that we could do if we needed to raise some cash. We're trying to manage our cash without incurring any debt because other than having an interest rate swap to get rid of the debt like the 2s and 3s and incur debt, I'm not certain how that puts us that much further ahead.

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Andrew Hood, M Partners Inc., Research Division - Research Analyst [31]

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Right. Yes, that makes sense. Okay. So just shifting to the CRA reassessment, I'm not sure how much you can tell us here. But I was wondering if we could get any details there and then also why you believe you can get that $12 million back or what your case is exactly.

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Robert Mark Sellars, Dundee Corporation - Executive VP & CFO [32]

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Yes, I'm not going to go into too much details on what the actual issue is. It goes back to a multiple number of years that Dundee was able to treat their disposition as capital versus income. And CRA reassessing, they actually had gotten as far as the 2013. We've been audited every year. 2013 became statute barred. So 2014 was the first year that they could reassess us on it.

We think we have a compelling case that -- to -- because we were following the treatment that historically CRA wanted us to do and had audited us many years on it. And then they did an about-face on the treatment. So I don't know how it's going to ultimately resolve, but we're going to continue to plead our case and see if we can win it on appeal. We put the money on deposits so that we could stop the interest clock.

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Andrew Hood, M Partners Inc., Research Division - Research Analyst [33]

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Right. Yes. Yes. Is this kind of an all or nothing scenario? Or is it possible it gets cut to $6 million instead? Or -- I don't know if you can give insight on that.

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Robert Mark Sellars, Dundee Corporation - Executive VP & CFO [34]

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It's -- I would say probably it's an all or nothing, but whether there's some way -- there's some minor treatment of the portfolio. And then without getting into too much detail, but adjusting what the ACVs could be on some of these investments which would maybe lower that number somewhat. It's not cutting it in half. It's taking some of it off, and we'll see how it shakes out.

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Andrew Hood, M Partners Inc., Research Division - Research Analyst [35]

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Okay. And then just the last question on the CRA front. What would be the time line on the appeals process? Or what kind of range there?

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Robert Mark Sellars, Dundee Corporation - Executive VP & CFO [36]

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It's not going to be fast. I mean it could be fast if we throw up our hands and surrender. But...

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Andrew Hood, M Partners Inc., Research Division - Research Analyst [37]

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Okay. So that will be in the accounts receivable for a while then?

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Robert Mark Sellars, Dundee Corporation - Executive VP & CFO [38]

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Yes. It's not booked because we didn't pay until October. It's not sitting as a deposit with CRA until the fourth quarter financials.

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Andrew Hood, M Partners Inc., Research Division - Research Analyst [39]

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Right. Okay. Now just shifting to Blue Goose, what was the reason exactly for the impairment of $10 million?

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Robert Mark Sellars, Dundee Corporation - Executive VP & CFO [40]

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Well, because we've got some indicative bids on acquiring Blue Goose at a -- on a price that was in the $70 million range. So we couldn't really continue to carry that $80 million when we have indicative evidence that the market up there maybe is $70 million. If we don't get this deal to go through, we'll do for -- we'll do a long-term cash flow analysis going forward since Blue Goose seems to be starting to make money, and we'll come up with a valuation model at year-end.

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Andrew Hood, M Partners Inc., Research Division - Research Analyst [41]

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Okay. And that $70 million is including the $50 million plus in debt?

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Robert Mark Sellars, Dundee Corporation - Executive VP & CFO [42]

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Yes. The debt [goes] through. So it would take over the net.

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Andrew Hood, M Partners Inc., Research Division - Research Analyst [43]

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Okay. And just the last thing I'm wondering on. So it looks like at Parq, there was some nice expense cutting and revenue improvement over the last quarter. Is there more room for cost cutting there? And also, if you could talk about the contributions of the new equity partners in terms of expertise. I know you're not operating it directly, but I'm just curious what they've added there.

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Jonathan Carter Goodman, Dundee Corporation - Chairman & CEO [44]

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Yes. I think most of what's happened at Parq isn't yet from cost cutting. I think you would comfortably say it's from really the revenue getting better. So the new equity partner adds a lot of value certainly on the hotel and the resort side, and a lot of work is being done. But we really haven't realized all of the benefits that are going to be brought in by the new partner. I mean certainly, a lot of them -- the low-hanging fruits have been realized, but the longer-term stuff, which was a big chunk of that, really only still getting started. So we're very happy to see that Parq is ramping up before a lot of the changes have been implemented.

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Andrew Hood, M Partners Inc., Research Division - Research Analyst [45]

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Right. Okay. I don't have any questions in relation to it, but I will say that we also like Dundee Precious Metals, and then I'll pass the line.

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Operator [46]

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(Operator Instructions) We have a follow-up question from [Jim Belin] from Aldebaran Asset Management.

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Unidentified Analyst, [47]

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You mentioned in the last call that you wanted to raise money for fund to invest in junior miners. I'm just curious what the status of that is, and if so, how much money has been raised.

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Jonathan Carter Goodman, Dundee Corporation - Chairman & CEO [48]

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Well, we haven't even started the money raising. We've been working on putting together all the documents, and we're likely to get -- that's targeted in the new year. So we have not raised any money for that yet, but we are working very hard at it.

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Operator [49]

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Your next question comes from [Luis Hernandez], a private investor.

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Unidentified Participant, [50]

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All right. Well, basically, my question is given that Dundee Precious Metals doesn't produce any cash flow for Dundee Corp., have you considered spinning off the shares to shareholders?

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Jonathan Carter Goodman, Dundee Corporation - Chairman & CEO [51]

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Well, the answer -- the quick answer is no, but recognize that we have the preferred shares. And if we spun out the shares to shareholders, I'm not sure that would be in the best interest of all the preferred shareholders. So yes, the answer is no.

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Operator [52]

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We have no further questions. I turn the call back over to the presenters for closing remarks.

This will conclude today's conference call. Thank you for participating. You may now disconnect.