Aberdeen International AAB.TO
August 18, 2008 - 8:04am EST by
john771
2008 2009
Price: 0.40 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 41 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

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Description

Aberdeen International is a natural resource merchant banking fund with strong management, an attractive portfolio, and it currently trades at less than half of its NAV. AAB may be of particular interest if you ever invested in Endeavour Mining Capital.

BASIC FACTS

Symbol:
TSE: AAB
OTC: AABVF
Last Trade
$0.40
Basic Shares Outstanding
102,680,682 at 4/30, company subsequently repurchased 500,000+
Warrants
4.5mm at $0.80 exp 6/6/9
37mm at $1.00 exp 6/6/12
Options
5.9mm avg $0.80, all currently out of the money
Market Cap
$41mm
Average Daily Volume YTD
198,871 shares
Major shareholders
RAB Special Situations
QVT Financial
Website
Investor contact
Scott Moore – Corporate Development 416-861-5875
smoore@aberdeeninternational.ca


MANAGEMENT & PORTFOLIO

Aberdeen's management is led by Stan Bharti and George Faught drawing on the staff of their private Forbes and Manhattan merchant banking group as needed. Their most significant past successes have been:

  • Desert Sun Mining
  • First Uranium
  • Consolidated Thompson Mines

Aberdeen's strategy is to invest in companies where F&M management and consultants can play a significant role in helping a company realize value within a relatively short time frame (goal is 18-24 months). This usually means a substantial resource that was poorly managed, poorly financed, or poorly promoted. Review of the projects shows a focus on high grade resources with good feasibility and robust economics.
 
Here's a brief introduction to Aberdeen's largest holdings. Note: total portfolio is about $116mm and all amounts shown are Canadian dollars unless otherwise noted.

Simmer and Jack/First Uranium debenture and royalty
Investment Amount: $12mm
Estimated Value at 8/15/2008: $53mm
Company website: http://www.simmers.co.za/sjfu/view/sjfu/en/page14 and
http://www.firsturanium.com/cws/projects/firsturanium/index.jsp

Investment thesis - Aberdeen provided a US$10mm convertible loan that enabled Simmers to acquire several South African mines at bargain prices from DRDGold when it was in severe financial distress. The loan is convertible into Simmers shares at 0.8 Rand. Conversion requires shareholder approval and if denied then Aberdeen receives a 1% NSR over the life of the assets acquired from DRDGold. Following the initial purchase, Simmers remained short of capital so F&M facilitated the spin-out of two projects into a Toronto-listed entity, First Uranium (FIU). FIU's Mine Waste Solutions project falls under Aberdeen's 1% NSR. The FIU listing was a huge success generating tremendous value for Simmers. Simmers shares now trade around 4 rand, far in excess of the debenture conversion price. Simmers and First Uranium have expanded their resources and production forecasts. Due to the huge appreciation in its shares Simmers shareholders are unlikely to approve conversion of the debenture so Aberdeen will receive repayment of the debenture (US$10mm) by 12/31/08 and the 1% NSR. Aberdeen's current plan is to sell the royalty. Aberdeen currently carries it on the balance sheet at a fair value of $49mm calculated using Simmers and FIU production forecasts, a long-term gold price of $700/oz, a 5% discount rate, and a CAD/USD rate of 1:1. Aberdeen has had preliminary discussions with potential buyers and says they are willing to be more aggressive with the gold price assumption, may be conservative with the discount rate, and may be willing to pay some premium for Simmer's potential to expand production. Aberdeen expects to reach agreement and receive sale proceeds in 1Q09.

Quinto Mining shares + warrants
Acquired by Consolidated Thompson Mining
Investment Amount: $4mm
Estimated value at 8/15/08: $8mm
Company website: http://www.consolidatedthompson.com/index.asp.htm

Investment thesis - Aberdeen management has been closely involved in the development of Consolidated Thompson from a $2mm junior into a $760mm company on the verge of opening a significant iron mine at Bloom Lake in Quebec. The most attractive aspect of this development is proximity to high quality rail and port infrastructure. Quinto (QU) owned claims close to Consolidated Thompson's property. Aberdeen made an initial investment in Quinto alongside CLM. Aberdeen's investment was then converted into CLM shares + warrants when CLM acquired QU. On the last cc Aberdeen said it believes CLM shares are undervalued, but Aberdeen would also like to recycle its capital into new positions, perhaps by selling some CLM shares and retaining the warrants. CLM is well-financed with $335mm in cash and no debt. Total expenditures to bring Bloom Lake into production are budgeted at $410mm; it should be no problem to find debt financing for the unfunded balance.

Central Sun Mining shares + warrants
Investment Amount: $7mm
Estimated value at 8/15/08: $5mm
Company website: http://www.centralsun.ca/index.php

Investment thesis - Glencairn Gold suffered a corporate crisis when the tailings dump at its Bellavista mine in Costa Rica became unstable. The company was out of cash and investors were out of patience. Aberdeen and F&M organized a refinancing and a new operational plan that would shut Bellavista, expand the existing and profitable Limon mine, and build a mill at the Orosi project in order to increase gold recovery rates from 38% to 90%+. With these modest developments, CSM will be able to generate high cash flow from 2009. It could be an excellent platform for regional expansion and would also be an attractive takeover target. The stock spent most of this year around double Aberdeen's acquisition price but has recently fallen due to concern about the need to raise about $20mm to complete the Orosi mill development. A feasibility study completed this year showed a 62% IRR on the mill investment and CSM believes that it can arrange debt financing for most or all of the required funding.

Labrador Iron Mines shares + warrants
Investment Amount: $4mm
Estimated value at 8/15/08: $4mm
Company website: http://www.labradorironmines.ca/

Investment thesis - Labrador (LIR) has attractive iron projects about 150km NNE of Consolidated Thompson's Bloom Lake project. Aberdeen's involvement in CLM should provide excellent insight into the potential value of LIR. LIR's initial projects will be low cost redevelopment and expansion of sites that were operated by Iron Mines of Canada from 1954 – 1982. Aberdeen management did not take any role at LIR, but it's possible that at some point CLM will try to acquire LIR. LIR is well-financed with $46mm in cash and no debt. Cash on hand should be more than enough to bring the first phase of the project into production in 2010.

Largo Resources convertible loan
Investment Amount: $4mm
Estimated value at 8/15/08: $4mm
Company website: http://www.largoresources.com/

Investment thesis – Largo has an exceptional Vanadium project in Brazil. The feasibility study released last week shows a 44% IRR on a required investment of $270mm. The high-grade near-surface resource would allow Largo's mine to be one of the lowest cost producers in the world. Largo has excellent partners for offtake (Glencore) and financing (Investec). Discussions with Investec have led Largo to believe that the robust economics of the project will allow $250mm of debt financing to be raised leaving only a modest equity financing requirement.

Other positions disclosed by Aberdeen with current value greater than $1mm are:

  • Avion Resources, redevelopment of a mine in Mali
  • Russo-Forest, private timber company in NW Russia
  • U308, uranium exploration in Guyana
  • Sulliden Exploration, gold development in Peru
  • Longford Energy, shell company for new oil and gas venture
  • Tucano Resources, private Brazil mining start-up
  • Virginia Uranium, private uranium company with large resource
  • Magma Metals, Australian company with exciting platinum development
  • Franc-Or Resources, Peru polymettalic project

DISCOUNT TO NAV

While I believe that many of the positions in the portfolio are attractive, the most appealing thing about Aberdeen is the large discount of the shares to the current NAV. Aberdeen will report second quarter results in early September and I believe these are likely to show an NAV above $1 per share at July 31. The company provides enough disclosure that the NAV can be estimated in real-time and can be tested using various valuation assumptions that show a large margin of safety is built into the current share price.

Approach
More Conservative
Method
Conservative
Method
Market
Method
Asset



Cash
100%
100%
100%
Debenture redemption
100%
100%
100%
Royalty 2008 income
Assume 25% lower production, $800 gold
Target Production, $800 gold
Target Production, $800 gold
Royalty Long-term
10% lower production, $700 gold, 10% discount rate, C$=0.9US$
Target production, $700 gold, 5% discount rate,C$=0.95US$
Target production, $700 gold, 5% discount rate,C$=0.95US$
Publicly Traded shares
20% discount to market
10% discount to market
Market price
Warrants on public shares
Intrinsic value only
Black Scholes model adjusted for dilution, 50% volatility
Black Scholes model, 50% volatility
Private shares
50% of cost
75% of cost
At cost


I estimated Aberdeen's 8/15/08 balance sheet and valuation under these different approaches. Amounts in C$mms. Sums may be slightly off due to rounding.
Approach
More Conservative
Method
Conservative
Method
Market
Method
Assets



Cash
$10.0
$10.0
$10.0
Debenture redemption
$10.5
$10.5
$10.5
Royalty 2008 income
$4.2
$6.2
$6.2
Royalty Long-term
$23.6
$36.2
$36.2
Publicly Traded shares
$31.5
$35.5
$39.4
Warrants on public shares
$4.0
$5.4
$7.4
Private portfolio
$2.9
$4.3
$5.8
Total Assets
$86.7
$108.1
$115.5
Liabilities



Accruals and Payables
$2.8
$2.8
$2.8
Tax Accrual
$9.5
$14.7
$15.8
Total Liabilities
$12.3
$17.5
$18.6




Net Assets
$74.5
$90.6
$96.9




Shares
102
102
102
NAV per share
$0.73
$0.89
$0.95
Cash & Royalty per share
$0.47
$0.62
$0.62

The most appealing aspect of the current valuation is that the current share price is well-supported by the value of the cash and royalty only.

CORPORATE GOVERNANCE

Stan Bharti describes Aberdeen as a vehicle for investors to join his deals at the earliest stage when potential returns are greatest, but the companies may be illiquid and public information may be limited.

Compensation: Aberdeen pays corporate overhead and the management earns an incentive fee equal to 10% of realized profits. The fee has been accrued in the financial statements. Management has also been granted options to purchase Aberdeen shares at $0.80

Share Repurchase: Aberdeen has an active share repurchase plan. It was disclosed in June that 1.2mm shares have been repurchased this year and I believe repurchases continued in July.

Insider Trading: Stan Bharti says that he feels restricted from purchasing AAB because he is always involved in negotiation of material transactions. Nevertheless he did purchase 125000 shares at $0.455 in February and a director purchased 40000 shares at $0.60 in March. Bharti's coinvestment with Aberdeen in portfolio companies presents an obvious potential conflict of interest over which the company has no formal policy. Bharti explains that the exit strategy for these investments is a corporate transaction rather than open market sales. He also points out that he does not actively trade his investments and SEDI records show that his sales have been rare at the companies he is involved in. In fact he has not reported any sales in 2008.

Investment Policy: At this time Aberdeen has no formal limits on the type of investments it can make.

Disclosure: Aberdeen provides generous disclosure about its investments and strategy.

COMMODITY RISK

Aberdeen's biggest commodity exposure is currently gold through the value of the Simmers/FIU royalty. Fortunately Aberdeen has recorded the royalty at a reasonable valuation and operating performance of Simmers and FIU seems to be good this year. Obviously the price of gold has been weak recently. I believe the chance of gold appreciation over the remainder of 2008 is strong due to a mixture of the following factors:

  • Gold production is falling. Mine supply is down 6% in the first half of 2008 compared to 2007 in spite of record high prices. This is the worst supply performance of any major commodity.
  • Gold has value in a crisis. When faith in banks and central banks declines, the value of gold rises.
  • Gold is fun. Strong economic conditions in the Middle East, China, and India support discretionary buying of gold jewelry.

The worst case development for Aberdeen would be a continued decline in the price of gold to a point where Simmers and First Uranium reduced their production targets.

The second commodity risk is iron through the investment in Consolidated Thompson and Labrador. Global steel and iron demand has been strong but could be vulnerable to a recession in OECD countries and any slowdown in spending on construction and infrastructure in emerging markets.

TIMING

I believe the most significant event for shareholders will be realization of the value of the Simmers debenture and royalty by 1Q09. Aberdeen will receive a lot of cash for new investments, share repurchase, and hopefully greater awareness of the potential gains from its investment approach.

Catalyst

1) Proceeds of approximately $50mm from Simmers/First Uranium debenture and NSR
2) Performace of portfolio investments
3) Discount to NAV
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