Saturday, November 15, 2014

Analysis of Mongolia Growth Group



Please read the disclaimer here:http://greedydragoninvestment.blogspot.com/p/about-greedy-dragon.html. Enjoy the article, bitches!




Greeting and salutations value investors. In this article, I’ll try to explain my rationale for investing in Mongolia Growth Group (MGG). MGG is a property investment and development company in Ulaanbaatar, Mongolia. The stock trades in Canada (stock code: YAK) and in the U.S. (stock code: MNGGF). I’m investing in this stock with the knowledge that I may have to hold it for a long period of time before being able to reap the rewards (if any). Mongolia is also a very young emerging economy, so there might be additional risks associated with investing in stocks with exposure to the country. The stock price can be very volatile, but I’ve eaten a lot of spicy curries in my life so I’m pretty sure that my stomach can handle a little volatility (I don’t consider volatility to be a risk, but a lot of people do. Whatevs..). The stock has declined significantly since I bought it. When I invested in the stock it was trading at Canadian Dollar (CAD) 1.60 per share. It closed Friday at CAD 1.25 per share.


I want to get exposure to Mongolia because there’s potential for Mongolians to get a lot richer as the country has large natural resource reserves. In fact, there are already enough rich Mongolians to attract luxury brands such as Louis Vuitton and Burberry to set up shop in Mongolia. Don’t get me wrong, there are still a lot of poor people in Mongolia. The potential for growth resides in the poor people getting more job opportunities to lift themselves out of poverty; this can only be achieved in a significant way if the government moves towards being a free economy that respects property rights. Central Ulaanbaatar’s retail space is also concentrated in a small area. According to MGG Properties’ Q1 2014 Central Ulaanbaatar Retail Space report, “In central Ulaanbaatar, retail space is concentrated: there are only 5 km of active retail streets.” According to the report, the most valuable street is Fountain Street with market price per square meter of between USD 4,200-4,600. You can read more about the market prices and rental rates of the various retail streets in Central Ulaanbaatar in the report.


For the 6 months ended June 30, 2014, MGG had a net profit of CAD 5.24 million or CAD 0.15 per diluted share. Excluding unrealized gain on fair value adjustment on investment properties and gain on disposal of investment properties, the company experienced a loss before tax of CAD 2.29 million or CAD 0.06404 per diluted share for the 6 months ended June 30, 2014. In terms of the company’s ability to continue as a going concern, the loss isn’t as bad as it seems as there was $0.95 million in share based payment which is a non-cash expense. Management is also trying to reduce costs. According to this press release, “the Company has identified annual expenses of approximately CDN $500,000 that will be reduced or deferred until the Company shows positive cash flow.” Apart from cutting costs, the company can try to reduce its losses by generating more revenue (#basic stuff you can learn from running a lemonade stand #trolling). About 35% of MGG’s investment properties portfolio consists of land and redevelopment assets that should start contributing to rental revenue once redevelopment is complete. Also, according to the Management Discussion & Analysis for the quarter ended June 30, 2014, recent lease renewals have seen sizable increases in lease rates. So, rental revenue could increase if the company is able to renew expiring leases at significantly higher rates. “In terms of our core commercial portfolio rents on a same ‐ property basis on properties owned 12 months or longer, we reported revenue growth of 36.8%, 28.8% and 32.3% in April, May and June compared to 2013’s results in Mongolian Tögrög” (source: Management Discussion & Analysis for the quarter ended June 30, 2014). But because Mongolia has experienced high inflation and a plunge in FDI recently, the Mongolian Tögrög has weakened significantly against the Canadian Dollar. Therefore, the increases in rental in CAD terms are nowhere near as significant as the increases in rental in the local currency. 


Note: I’m well aware that in terms of profitability, share based payment is just as much an expense as any cash expense as it ultimately results in less money for existing shareholders. But as I said, I made this investment for the super long-term and I accept that the company may lose money for some time. 


MGG targets shorter lease durations to reduce its exposure to inflation. As at June 30, 2014, the weighted average remaining lease term was 19.0 months. The company’s commercial property portfolio has healthy occupancy rates of between 93.7-95.2%. At CAD 1.60 per share, the company would be valued at 1.17 times book value based on the balance sheet data as at June 30, 2014 (after taking into account the dilutive effect of stock options). I think that is an alright price to pay for a company that has a lot of potential to grow in the long-term. At the current price of CAD 1.25 per share, MGG would be valued at 0.91 times book value. 79.01% of the company’s CAD 54.96 million in total assets consists of investment properties and 7.86% consists of cash and cash equivalents. The company only had CAD 6.30 million in liabilities.


I like MGG’s goal of eventually establishing property funds that it co-invests in. This will increase the amount of capital the company has access to and hopefully allow it to leverage that additional capital from other investors to earn higher returns for shareholders. The risk that I worry the most about is that the government might expropriate the company’s assets. Political risk is a very real risk in Mongolia. You can read this article here about some of the things that have negatively affected foreign investor confidence in Mongolia. While I think that real estate has less political risk involved than a sector like mining, I accept that there’s a possibility that MGG might get its assets expropriated without adequate compensation. Thank you for reading. Take care and stay rational.

Thursday, November 6, 2014

Risk management series: Country Risk



Hey, how are you doing? I’m quite happy that the Republicans took control of the senate as they generally fuck up less when it comes to the economy as compared to the democrats. In this article I will talk about things I look at when investing in foreign countries. To be honest, there are not many things I look at when evaluating country risk. However, I still think country risk is very important and that an investor can lose a lot of money if he doesn’t pay attention to this risk (speaking from personal experience here).

Update on the Greedy Dragon portfolio: I recently bought shares in Mongolia Growth Group (stock code: YAK). The company owns real estate in Mongolia.

Government debt-to-GDP ratio and budget deficits: I try to avoid developing countries with high government debt-to-GDP ratios and/or large budget deficits. A high debt country might default on its debt which will probably result in it entering an economic crisis. I’m more tolerant of developed countries with a high debt-to-GDP ratio as those countries have an easier time rolling over their debts and investors are less likely to pull out their investments from developed countries. However, investors should still try to avoid investing in developed countries with too much debt and wide budget deficits as those countries might still experience a debt crisis; the European sovereign debt crisis is evidence of that. Since a lot of developed countries have high government debt-to-GDP ratios, investors need to use their judgment to decide whether a specific developed country is able to service its debts or if it will turn out to be a deadbeat.

Other than government debt, investors might also want to look at a country’s consumer debt and corporate debt.     

Inflation: Investors should be cautious of countries with high inflation. Companies operating in countries with high inflation face rising input costs which they might not be able to pass on to the customers. A company’s profits will be affected if it can’t pass on its higher input costs to customers. It’s also not enough for businesses operating in a high inflation environment to just maintain its profits; those businesses need to grow their profits in-line with the rate of inflation or risk impairment to their value in real terms.

Note: Whether a company is operating in a country with high inflation or a country with low inflation, I generally look for companies which I think can grow profits faster than inflation over the long-term.

Political risk: Expropriation of assets and a lack of property rights, disastrous government policies, capital controls and wars are some of the political risks investors need to watch out for. I don’t have a system to analyze political risk. I basically just Google stuff and visit the Heritage Foundation website when I’m trying to get a better picture of a country’s political risk or economic freedom.

While country risk is important to consider, I do invest in stocks from countries with problems if I think the expected returns will compensate me for the risks I’m taking. However, there comes a point where you just say fuck it and walk away because a country is so messed up, regardless of how cheap assets in that country appear to be. Thank you for reading. Take care and stay rational.

Sunday, November 2, 2014

Analysis of Natural Resource Partners Part II of II



Please read the disclaimer here:http://greedydragoninvestment.blogspot.com/p/about-greedy-dragon.html. Enjoy the article, bitches!




Do you know what would be absolutely terrible for the environment? It’s if those environmentalist extremist assholes were in charge. They irrationally hate fossil fuels when fossil fuels are exactly the reason that the environment has never been better. I don’t judge an environment based on some trees and fresh air, I judge the environment based on the standard of living it allows me to have. And by that standard, the environment is much better because of fossil fuels. I mean I can turn on the air conditioning when I’m hot, I can drive to a good restaurant when I’m hungry and I can look at pictures of cute chicks on Facebook when I’m horny. All of these things are enabled by fossil fuels.   Anyway, in part II of this analysis I’ll be looking at the business divisions of Natural Resource Partners L.P. (NRP) and some of the risks involved with investing in the company. I will also try to value the company. Before I begin, I would like to point out that NRP’s natural resource reserves are located in the United States. So, I don’t think I need to worry about some crazy ass government seizing the company’s properties (at least that’s what I hope).

Note: I know that NRP is a partnership and not a company. I’m just so used to referring to businesses as companies when writing articles about them. So, whenever I refer to NRP as a company, just assume that I actually meant partnership.

Coal

As coal contributed 63.05% of the company’s revenue for the six months ended June 30, 2014, we’ll look at the company’s coal segment first. According to the U.S. Energy Information Administration’s website, coal contributed to 39% of energy generation in the United States. So, Obama can hate on coal as much as he wants. But unless he wants the lights to go out, coal is here to stay.

The price of thermal coal has taken a beating, partly because of cheap natural gas as it’s an alternative to coal for electricity generation. Natural gas prices may start to rise once the U.S. start increasing its exports of natural gas. This could result in coal prices getting some relieve. Like many other commodities, coal and natural gas prices are cyclical. Producers tend to overproduce when prices are high causing an oversupply and declining prices. When the price is low, producers cut capacity by too much eventually causing a shortage in supply and increasing prices. Anyway, even if I don’t know when coal prices will start moving up, I have the holding power. More importantly, I’m not investing in a company that needs significantly higher coal prices to be profitable. NRP is already making pretty good profits (relative to its market value). It may just make even better profits if coal prices increase.  

NRP doesn’t solely rely on thermal coal. According to NRP’s 2013 annual report, approximately 31% of the production and 41% of the coal royalty revenues from the company’s properties were from metallurgical coal. The price of metallurgical coal has also declined significantly from its peak. Metallurgical coal is also a cyclical commodity. And while I don’t know if we’re at the bottom of the cycle, I don’t mind getting exposure to it now since the price is low.            

Needless to say, the company earned lower royalty revenues from most of the regions where it has coal properties because of lower production from the properties and/or lower pricing realized by the lessees. The following is a list of the regions where NRP’s coal properties are located:

Northern Appalachia: For the six months ended June 30, 2014, royalty revenues from the properties in this region was $4.09 million which represents a decline of 55% over the same period last year. 4.47 million tons of coal was produced from the property in the period. As at December 31, 2013, the property had 507.78 million tons in proven and probable reserves. According to the U.S. Energy Information Administration’s annual coal report for 2012, the average recovery percentage at producing underground mines in the U.S. was 56.09%.Unless stated otherwise, we’ll assume that the recovery percentage for the reserves on NRP’s properties will be 56.09% as the majority of the company’s reserves are underground. So, with 507.78 million tons in proven and probable reserves, the property can still be mined for about 30 more years assuming constant annual production levels of 8.94 (4.47  annualized) million tons .

Note: The formula I use to estimate how many more years the company’s properties can be mined for coal is rather simplistic. It’s basically: (Proven & probable reserves * recovery percentage/current annualized production). I could very well be wrong in my estimates of how long coal can be extracted from the properties.     



Mistake update: I made the mistake of adjusting the coal reserves by a recovery percentage. The proven & probable coal reserves reported in NRP’s annual report are recoverable reserves which mean that the recovery percentage should already have been taken into account (at least that’s what I think from reading more about coal reserves). Therefore, the number of years coal can be mined from the company’s properties could be significantly longer than my initial estimates (assuming current annualized production remains constant).
 

Central Appalachia: Royalty revenues from this property were down by 23% to $ 43.81 million for the six months ended June 30, 2014. 9.66 million tons of coal was produced during the 6 month period. The property had 1.254 billion tons in proven and probable reserves as at December 31, 2013. Assuming constant annual production levels of 19.32 (9.66 annualized) million tons, the properties can be mined for about 35 more years.

Southern Appalachia: The Company’s properties in this region earned royalty revenues of $10.33 million for the six months ended June 30, 2014 which is down 31% from the same period last year. The properties in this region produced 1.93 million tons of coal during the period. The properties had 111.60 million tons in proven and probable reserves as at December 31, 2013. The properties can be mined for about 15 more years assuming constant annual production levels of 3.86 (1.93 annualized) million tons.    

Illinois Basin: Royalty revenue received by NRP’s properties in this region was up by 4% to $ 26.55 million for the six months ended June 30, 2014. 6.53 million tons of coal was produced from the properties during the period. As at December 31, 2013, the properties had proven and probable reserves of 354.76 million tons. The properties can be mined for about 14 more years if annual production levels remain constant at 13.06 (6.53  annualized) million tons.

Northern Powder River Basin: The Company’s properties in this region received royalty revenues of $2.97 million for the six months ended June 30, 2014; a decline of 33% over the same period last year. 1.05 million tons of coal was produced from the properties for the six months ended June 30, 2014. The properties had proven and probable reserves of 97 million tons which are all at the surface as at December 31, 2013. According to the U.S. Energy Information Administration’s annual coal report for 2012, the average recovery percentage at producing surface mines in the U.S. is 90.12%. By assuming a recovery percentage of 90.12% and constant annual production of 2.1 (1.05 annualized) million tons, the properties can be mined for about 40 more years.

Gulf Coast: For the six months ended June 30, 2014, royalty revenues from the properties in this region was $ 1.52 million which represents a decline of 22% over the same period last year. 0.43 million tons of coal was produced from the properties during the period. As at December 31, 2013, the properties had proven and probable reserves of 3.73 million tons which are all at the surface. If annual production levels remain constant at 0.86 (0.43 annualized) million tons, the properties can be mined for about 2.5 more years.  

Transportation and processing assets: NRP received $11.09 million in transportation and processing fees for the six months ended June 30, 2014.This is up 1% from the same period last year. The following is a description of the company’s infrastructure business taken from its website:

In addition to our royalty business, we also manage infrastructure assets. These include coal preparations plants, beltlines for transporting coal, coal load-out facilities and other transportation facilities as well as infrastructures for the aggregates business. We work with our lessees to determine their needs and with the assistance of Taggart Global and others, construct the facilities, contract someone to operate the facilities on our behalf and then, much like our royalty business, we collect either a percentage of the gross selling price or a fixed fee per ton”.

There’s just something so awesome about a business that generates cash from its assets without having to deal with the headaches of operating those assets. I’m as fascinated with such businesses as I am with Elsa in Once Upon a Time. That blue dress is just so perfect on her.  Anyway, back to business..

Wheelage: According to NRP’s website, “wheelage is the term used to describe a fee that we charge other coal companies for transporting their coal across our property in route to their end-user or market”. For the six months ended June 30, 2014, the company’s wheelage revenue was $1.78 million which is down 10% from the same period last year.

Aggregates

If you are wondering what the fuck are aggregates (I know I did), they are crushed stone, sand and gravel that are used in construction. The company earned $ 2.12 million in aggregates royalty revenue for the 6 months ended June 30, 2014. The company’s properties produced 2.14 million tons of aggregates during the period. According to the NRP’s 10-Q report for the quarter ended June 30, 2014, the company owns approximately 500 million tons of aggregate reserves. I don’t know what the recovery percentage is for aggregates. But with only 4.28 (2.14 annualized) million tons in annual production and 500 million tons in estimated reserves, I think that aggregates can be produced from the company’s properties for quite some time.

Trona mining and soda ash production

According to NRP’s 2013 annual report, the company owns a 49% non-controlling equity interest in OCI Wyoming, L.P., an operator of a trona ore mining operation and a soda ash refinery in the Green River Basin, Wyoming. The company’s share of profits from OCI Wyoming’s trona mining and soda ash production business was $19.2 million for the six months ended June 30, 2014. For the six months ended June 30, 2014, NRP received $25.6 million in cash from its investment in OCI Wyoming’s trona mining and soda ash production business.

Oil & Gas

For the six months ended June 30, 2014, the company generated 16.31% of its revenue from its oil & gas division. I currently do not have enough knowledge to evaluate an oil & gas business. I will try to learn more about the oil & gas business as I hate not knowing about something that I have a financial interest in.

Corporate structure, taxation

NRP is a master limited partnership (MLP). One main benefit of MLPs is that double taxation is avoided. According to NRP’s website, “instead of the partnership paying taxes on its profits (like a corporation), each limited partner is responsible on his or her individual income tax for a proportional share of the MLP's income”. I don’t know about you, but I feel like a badass being called a limited partner when I invest in a MLP; being called a shareholder is so common.
  
From my understanding, as a non-corporate foreign partner I would incur withholding taxes of 39.6% (the U.S. highest marginal individual tax rate) on NRP’s distributions. I don’t think the Malaysian government imposes taxes on foreign dividends, so the withholding tax rate of 39.6% should be my only tax expense. Please note that I’m not a tax expert, and I could very well be wrong. I also don’t really know how U.S. investors are taxed on their income from MLP’s, and I don’t want to get a migraine trying to figure it out. Both U.S. and foreign investors should seek the advice of a tax expert before investing in MLPs.

Risks

There’s a risk that investors could lose more than their capital when investing in MLPs. The following excerpt is taken from NRP’s annual report: “Under Delaware law, however, a unitholder could be held liable for our obligations to the same extent as a general partner if a court determined that the right of unitholders to remove our general partner or to take other action under our partnership agreement constituted participation in the “control” of our business. In addition, Section 17-607 of the Delaware Revised Uniform Limited Partnership Act provides that under some circumstances, a unitholder may be liable to us for the amount of a distribution for a period of three years from the date of the distribution.”

Coal prices could fall even further which could result in the company receiving lower royalties. NRP’s lessees might also decide to reduce production or shut down their mines on the company’s properties if they find that they can’t operate profitability if coal prices fall further (or maybe even if coal prices stays at current low levels). This could also result in the company earning lower royalty revenue. The lessees may also reduce production because of tough regulations.

There’s a risk that taxation laws could change and some MLPs might have to pay income taxes at the corporate level. This could have a significant impact on MLPs’ ability to maintain high distributions to unitholders.  

There are a number of other risks faced by NRP’s businesses. I strongly suggest that you read the discussion of risks in the company’s annual report.

Valuation

The net income after general partner’s percentage interest as reported on NRP’s income statement for the six months ended June 30, 2014 was $ 62.732 million. An important metric for MLPs is the “distributable cash flow” which is the amount of cash a company generates that can be paid out as distributions to unitholders. You can read more about distributable cash flow in this article here. The following is my calculation of distributable cash flow for the six months ended June 30, 2014 (which is a bit different than the conventional distributable cash flow formula): 

Net income
$64,012
Add depreciation, depletion & amortization
$30,997
Less acquisition of plant and equipment
$135
Less oil and gas capital expenditures
$8,123
Less general partner’s percentage interest (2%)
$1,735.02
Distributable cash flow
$85,016

Dollar figures in the table are in thousands

After the next quarterly distribution is paid, NRP’s gross distributions for the year would come in at $1.4 per unit (4 quarterly distributions of $0.35 per unit). As at June 30, 2014, the company had 110,869,513 units outstanding and an annualized distributable cash flow of about $ 170 million. This will give us an annualized distributed cash flow per units of $1.53 and a distribution coverage ratio of 1.09.This might not give the company a large room for error to both maintain distributions at current levels and replenish its natural resource reserves. However, the official distributable cash flow reported in NRP’s quarterly report was $103.87 million for the 6 months ended June 30, 2014. If you annualize the official distributable cash flow, the coverage ratio would come in at 1.33 which I think is decent.     

Looking at the historical yields of MLPs, I think I made a good deal investing in NRP. Based on quarterly distributions per unit of $0.35 and a unit price of $11.19 (the price I paid for my units), NRP would have a gross dividend yield of 12.51%. According to the chart of Alerian MLP index’s historical dividend yield, it’s uncommon for yields to be above 10%. You can view the chart on the vector grader website. According to Alerian’s website, the Alerian MLP index is a float-adjusted, capitalization-weighted index that includes 50 prominent companies and captures approximately 75% of available market capitalization. If coal prices stage a significant rebound, NRP’s distributable cash flow should increase which will in turn allow it to increase its distributions. If that happens, then I think there’s a chance that I will make a lot of money from this investment.     

Fuck! I never expected this article to be so long. I hope you guys liked reading the article as I put a lot of effort into it. Thank you for reading. Take care and stay rational.

Saturday, October 25, 2014

Analysis of Natural Resource Partners Part I of II



Please read the disclaimer here:http://greedydragoninvestment.blogspot.com/p/about-greedy-dragon.html. Enjoy the article, bitches!



So, the S&P 500 is up by 4.12% in the past 5 days. It seems like the recent pullback didn’t even happen, huh? Whenever the market rebounds, I feel like a kid who got his fucking candy stolen. Is it too much to ask for a fucking 30+% correction?! But at least I managed to add a position to my portfolio recently, so I don’t feel too bad (although the decline in this stock’s price has much more to do with the crash in the coal sector than with the recent “pullback”).  The stock I bought was Natural Resource Partners (NRP) which is listed on the NYSE. According to the company’s website, “NRP primarily owns coal, aggregate and oil and gas reserves across the United States that generate royalty income for the partnership”. Royalties from coal is by far the largest contributor to NRP’s revenue. The stock went up by about 12% since I bought it. I’m sure some of the haters think I’m making this purchase up to make my portfolio look better for the next performance report, but I don’t fucking care. If you believe me, you believe me. If you don’t, you don’t. Last time National Bank of Greece went up 15-20% between the time I bought it and when I first talked about it on my blog; now I’m losing money on that position. So, there’s always a chance that NRP’s stock price could drop in the future.

I really like natural resource royalty companies as I think it’s a lower risk way to get exposure to commodities. These companies don’t need to invest money to build and maintain the mines which can be very capital intensive. They don’t have to pay for the mine’s operating expenses. They simply collect royalties whenever their reserves are extracted and sold by the mining companies. But because the royalty companies don’t incur capex and operating expenses, the risk of their financials getting fucked up because of falling commodity prices is significantly lower than the mining companies. In fact, royalty companies have very high margins in general and can pay out a huge chunk of the royalties they receive as dividends.

However, royalty companies still do face a significant amount of risk. One way for a royalty agreement to be structured is for royalties to be calculated as a percentage of the revenue received, by the mining companies, for the production from the royalty company’s properties. A company which structures its royalty agreements like that for its thermal coal reserves, for example, could see significantly lower royalties when thermal coal prices plunge. Mining companies may also scale back production during busts when they can’t find enough demand for their production or if the price of the specific commodity makes it uneconomical to maintain current production levels. The lower level of production on the royalty company’s properties can result in it getting smaller royalty checks from the mining companies.   

I guess this concludes part I of this analysis. I know it’s very short, but it was meant to just touch a little about natural resource royalty companies to let you know how awesome they are. The meat & potatoes will be in part II of the analysis where I try to value Natural Resource Partners. Thank you for reading. Take care and stay rational.