Arabian American Development ARSD
February 19, 2008 - 10:26pm EST by
grant387
2008 2009
Price: 6.95 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 158 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

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Description

If this idea wasn’t so compelling I’d just post an update on the thread of my previous idea. However, ARSD deserves a stand-alone write-up at this point due to the number of changes that have gone on over the past 6 months that have materially increased the value of the Company. 
 
What was once perceived as primarily a story stock is now a bona fide value investor’s special situation.  An existing business reasonably priced.  An expansion plan that apparently is completely un-noticed.  And a base metal mine that Mr. Market seems to think is a zero. 
 
I will give you a brief update on the story side, but I refer you to my previous write-up for historical background. 
 
Then I will run through the numbers of the existing business. 
 
Lastly – I will point out that there remains one last hidden asset in ARSD that provides a further upside. 
 
In regard to the above I know many will look at the stock chart and get a bit antsy, however, I think I will demonstrate that the while the story has been playing out the stock price has not changed enough to reflect everything that is going on. 
 
 
 
Quick Refresher
ARSD’s operating subsidiary - South Hampton Refining Company - owns and operates a 97 acre petrochemical facility located in Texas.   40 acres are currently in use allowing the Company ample expansion opportunities.  The Company produces high purity petrochemical solvents and other petroleum based products – it produces a very nominal amount of motor fuel products and other commodity type products commonly sold directly to retail consumers or outlets.  85% of revenue relates to products sold as intermediate components to manufacturers in various markets such as expandable polystyrene (Styrofoam), polyethylene, adhesives, foams, synthetic rubber and food processing.  10% of revenue is oil related and consists of gasoline blends sold to the majors or other miscellaneous products such as degreasers / flow enhancers, etc.  5% of revenue is for toll processing to customer specific needs.
 
ARSD also owns a 50% interest Al Masane Al Kobra Mining (ALAK), a joint venture that is developing a poly-metallic (copper, zinc, gold, silver) mine in Saudi Arabia. 
 
 
 
 
Update on Story
 
The “story” before was:
 
a)      existing chemical business getting fixed and results should dramatically improve reported numbers
b)      chemical business capable of growing materially with expansion
c)      Company story about base metal mine opportunity in Saudi Arabia needs to “get out”
d)      Company needs to get off the bulletin board and onto national exchange
 
So let’s see what happened:
 
a)      chemical business operating efficiently and growing organically and for 2007 producing on a normalized basis around $17 - $18 million in ebitda.
b)      Board approved expansion to double capacity.  Company currently turning away new business that would use up 25% of that capacity immediately.  Permitting process in progress and development work has been completed looking for Q2 start of operations for new capacity.
c)      Well, well.  Bunch of stuff here.  I’ll give the snippets and then if you want you can dig the stories out. 
 
First there’s this:
 
DALLAS, Oct. 24 /PRNewswire-FirstCall/ -- Arabian American Development Co. (OTC Bulletin Board: ARSD - News) today announced that it has received official notification that the Ministry of Commerce and Industry for the Kingdom of Saudi Arabia has approved the formation of the Al-Masane Al-Kobra Mining Company (ALAK).
 
Then this:
 
DALLAS, Jan. 18 /PRNewswire-FirstCall/ -- Arabian American Development Co. today announced that the Company's joint venture, Al-Masane Al-Kobra Mining Company (ALAK), has received its official Commercial License dated January 15, 2008 from the Saudi Arabian Ministry of Commerce. The license formalizes the establishment of the joint stock company and allows it to conduct business in the Kingdom. ALAK has scheduled a meeting of the Board of Directors for January 26, 2008 in Jeddah, Saudi Arabia.  (Enables the JV to Contract with Construction Companies, Finalize Financing, Transfer Mining Assets and Appoint Independent Auditors )
 
And actually the Company had been busy before that as this article explains:
 
December 21, 2007 (Lexis/Nexis article)
CGM to tap polymetallic mine in Saudi Arabia
The China National Geological & Mining Corp. (CGM) has entered into an agreement with Al-Masane Al-Kobra Mining Co. to jointly develop the Al- Masane polymetallic mine in Saudi Arabia, a CGM official told Interfax Wednesday.

"CGM recently concluded negotiations with Al-Masane Al-Kobra Mining to develop the copper, zinc and gold exploration project, which is the first mining project a Chinese company has undertaken in Saudi Arabia," a CGM official, who asked to remain anonymous, said.

The Saudi company will inject $95 million into the project, while CGM will be responsible for project implementation. CGM first approached the Al-Masane project in early 2006, China's Ministry of Commerce announced recently.

The Al-Masane mine was discovered in south Saudi Arabia in 1967 and contains 7.2 million tons of proven resource reserves, including grade 1.42 percent copper, grade 5.31 percent zinc, grade 1.19 grams-per-ton gold and grade 40.2 grams-per-ton sliver.  State-owned CGM is affiliated with the China Geo-engineering Corporation under the State-owned Assets Supervision and Administration Commission, and engages in geological exploration and
resource development.


And lastly regarding d)  Company is listed on Nasdaq effective 1/23. 
 
So essentially everything has played out.
 
 
 
Next - lets run through the numbers side which I think will show you there is significant upside left in ARSD. 
 
Existing Business
Current Stats:
23 mil shares @ $6.90 = $158 market cap which is also EV as there is no debt (debt on balance sheet is transferred to ALAK). 
 
Normalized ebitda for existing chemical business is $18 million.  The Company is on track for that for 2007 (making adjustments for expansion expenses, expenses with the mine, etc.) and is supported by the fact that over the long term the company expects operating margins to be in the 15% to 16% range. 
 
The implied ebitda multiple is 8.8x.  This multiple is in the range of acquisition multiples in the industry. 
 
So, lets call the current stock price roughly right, reflecting the existing chemical business with normal organic growth.  What else is of value at ARSD? 
 
Expansion Plan
The Company’s expansion plan is in full swing and should be completed in Q2 per Company plans.  Based on discussions with management and from prior press releases the goal of the expansion plan is to double capacity.  Management expects 25% of this capacity to be filled almost immediately and full utilization over the next year to 18 months.  The expansion plan should be marginally more profitable than the existing business, but I’m not factoring that in as the business has been run very lean in the past.  I’m just assuming they can maintain a target operating income of 15%.  This implies that incremental ebitda will be at a $6 million run rate by Q4 of 2008 and by 2009/2010 the business could be producing $15 million in incremental ebitda.  Apply an 8x multiple to these numbers adds $2/share in value this year and over $5 per share in 2009. 
 
Putting this in terms of return percentages that is 25% to 70% upside for the growth opportunity. 
 
 
Base Metal Mine – 50% interest in ALAK
Simple math first.  Based on the formation of the JV with the Saudi partners and using ARSD’s cost to establish the mine this asset is worth $30 million.  But that is not a reasonable indicator of the value given all that has transpired over the past three months which puts the mine on a firm development track.  Thus we need to look at a cash flow based analysis. 
 
Based on the historical studies the operating plan for the mine is as follows:
10 year life. 700,000 tons per year mined.  Yield = 17.5 million pounds copper, 62.6 million pounds of zinc, 22,000 ounces of gold and 800,000 ounces of silver per year.  Operating costs were projected to be approximately $60 per ton. 
 
For purposes of my calculation I am using current metal prices, cash costs plus an inflation factor of 10%, estimating G&A at 8%, and 20% for Saudi taxes.  Using a discount rate of 15% I arrive at a value in excess of $5/share.  Haircutting all metal prices by 20% results in a value in excess of $3/share. 
 
Incremental value to the current stock price for this piece is 40% to 70%. 
 
 
Conclusion for Existing business
 
Current Chemical business value = $150 million.
Expansion plan value = $48 million (2008) - $120 million (‘09/’10)
Base metal mine value = $75 million - $120 million
Total Value = $273 million - $390 million
Per Share =  $12 - $17
 
Incremental value to the current stock price for the expansion plan AND the mine is 70% to 140%. 
 
 
The Last Kicker

From the 10K -
"On June 22, 1999, the Company submitted a formal application for a five-year exclusive mineral exploration license for the Greater Al Masane area of approximately 2,850 square kilometers, which surrounds the Al Masane mining lease area and includes the Wadi Qatan and Jebel Harr areas. The Company previously worked in the Greater Al Masane area after obtaining written authorization from the Saudi Ministry of Petroleum and Mineral Resources, and has expended over $3 million on exploration work. Geophysical, geochemical and geological work and diamond core drilling on the Greater Al Masane area reveals mineralization similar to that discovered at Al Masane."  (my emphasis added)

In talking with management, the additional work was specifically done on two areas inside Greater Al Masane... from the K,

"The Wadi Qatan area is located in southwestern Saudi Arabia. Jebel Harr is north of Wadi Qatan. Both areas are approximately 30 kilometers east of the Al Masane area. These areas consist of 40 square kilometers, plus a northern extension of an additional 13 square kilometers. The Company's geological, geophysical and limited core drilling disclosed the existence of massive sulfides containing an average of 1.2% nickel."


That is a potential WOW.  The current mine at Al Masane is 44 sq kilometers....there’s an opportunity for 2,850 sq kilometers in Greater Al Masane??   And ARSD may have an "in" on this??   Now, before this gets all crazy there are limitations in place in SA that limit the amount of land one entity can control to 100 sq. kilometers.  But that still more than doubles the existing opportunity.  And the company is exploring ways to be part of developing significantly more. 
 
Needless to say that would be stunning.  From discussions with management and IR the Wadi Qatan and Jebel Harr areas would be serviceable from the infrastructure used to set up the existing mine.
 
I’m not even going to attempt to put a value on this right now.  But this is NOT a pipe dream.  My discussions with IR suggest that management intends to try to fully exploit the whole area given their position as one of the “discoverers” of the region.  It hasn’t been discussed much because the Company wanted to get the JV operation formally approved.  Now that that has happened (and their exists now a Saudi Arabian entity to bring this mine to production – as opposed to an American entity), I would expect to see efforts made to expand the existing 44 sq. kilometer lease.  That would be some unexpected upside, though I’m not counting on it. 
 
 
 
 

Catalyst

Expansion comes on line in Q2.
Mine announcements.
    sort by    

    Description

    If this idea wasn’t so compelling I’d just post an update on the thread of my previous idea. However, ARSD deserves a stand-alone write-up at this point due to the number of changes that have gone on over the past 6 months that have materially increased the value of the Company. 
     
    What was once perceived as primarily a story stock is now a bona fide value investor’s special situation.  An existing business reasonably priced.  An expansion plan that apparently is completely un-noticed.  And a base metal mine that Mr. Market seems to think is a zero. 
     
    I will give you a brief update on the story side, but I refer you to my previous write-up for historical background. 
     
    Then I will run through the numbers of the existing business. 
     
    Lastly – I will point out that there remains one last hidden asset in ARSD that provides a further upside. 
     
    In regard to the above I know many will look at the stock chart and get a bit antsy, however, I think I will demonstrate that the while the story has been playing out the stock price has not changed enough to reflect everything that is going on. 
     
     
     
    Quick Refresher
    ARSD’s operating subsidiary - South Hampton Refining Company - owns and operates a 97 acre petrochemical facility located in Texas.   40 acres are currently in use allowing the Company ample expansion opportunities.  The Company produces high purity petrochemical solvents and other petroleum based products – it produces a very nominal amount of motor fuel products and other commodity type products commonly sold directly to retail consumers or outlets.  85% of revenue relates to products sold as intermediate components to manufacturers in various markets such as expandable polystyrene (Styrofoam), polyethylene, adhesives, foams, synthetic rubber and food processing.  10% of revenue is oil related and consists of gasoline blends sold to the majors or other miscellaneous products such as degreasers / flow enhancers, etc.  5% of revenue is for toll processing to customer specific needs.
     
    ARSD also owns a 50% interest Al Masane Al Kobra Mining (ALAK), a joint venture that is developing a poly-metallic (copper, zinc, gold, silver) mine in Saudi Arabia. 
     
     
     
     
    Update on Story
     
    The “story” before was:
     
    a)      existing chemical business getting fixed and results should dramatically improve reported numbers
    b)      chemical business capable of growing materially with expansion
    c)      Company story about base metal mine opportunity in Saudi Arabia needs to “get out”
    d)      Company needs to get off the bulletin board and onto national exchange
     
    So let’s see what happened:
     
    a)      chemical business operating efficiently and growing organically and for 2007 producing on a normalized basis around $17 - $18 million in ebitda.
    b)      Board approved expansion to double capacity.  Company currently turning away new business that would use up 25% of that capacity immediately.  Permitting process in progress and development work has been completed looking for Q2 start of operations for new capacity.
    c)      Well, well.  Bunch of stuff here.  I’ll give the snippets and then if you want you can dig the stories out. 
     
    First there’s this:
     
    DALLAS, Oct. 24 /PRNewswire-FirstCall/ -- Arabian American Development Co. (OTC Bulletin Board: ARSD - News) today announced that it has received official notification that the Ministry of Commerce and Industry for the Kingdom of Saudi Arabia has approved the formation of the Al-Masane Al-Kobra Mining Company (ALAK).
     
    Then this:
     
    DALLAS, Jan. 18 /PRNewswire-FirstCall/ -- Arabian American Development Co. today announced that the Company's joint venture, Al-Masane Al-Kobra Mining Company (ALAK), has received its official Commercial License dated January 15, 2008 from the Saudi Arabian Ministry of Commerce. The license formalizes the establishment of the joint stock company and allows it to conduct business in the Kingdom. ALAK has scheduled a meeting of the Board of Directors for January 26, 2008 in Jeddah, Saudi Arabia.  (Enables the JV to Contract with Construction Companies, Finalize Financing, Transfer Mining Assets and Appoint Independent Auditors )
     
    And actually the Company had been busy before that as this article explains:
     
    December 21, 2007 (Lexis/Nexis article)
    CGM to tap polymetallic mine in Saudi Arabia
    The China National Geological & Mining Corp. (CGM) has entered into an agreement with Al-Masane Al-Kobra Mining Co. to jointly develop the Al- Masane polymetallic mine in Saudi Arabia, a CGM official told Interfax Wednesday.

    "CGM recently concluded negotiations with Al-Masane Al-Kobra Mining to develop the copper, zinc and gold exploration project, which is the first mining project a Chinese company has undertaken in Saudi Arabia," a CGM official, who asked to remain anonymous, said.

    The Saudi company will inject $95 million into the project, while CGM will be responsible for project implementation. CGM first approached the Al-Masane project in early 2006, China's Ministry of Commerce announced recently.

    The Al-Masane mine was discovered in south Saudi Arabia in 1967 and contains 7.2 million tons of proven resource reserves, including grade 1.42 percent copper, grade 5.31 percent zinc, grade 1.19 grams-per-ton gold and grade 40.2 grams-per-ton sliver.  State-owned CGM is affiliated with the China Geo-engineering Corporation under the State-owned Assets Supervision and Administration Commission, and engages in geological exploration and
    resource development.


    And lastly regarding d)  Company is listed on Nasdaq effective 1/23. 
     
    So essentially everything has played out.
     
     
     
    Next - lets run through the numbers side which I think will show you there is significant upside left in ARSD. 
     
    Existing Business
    Current Stats:
    23 mil shares @ $6.90 = $158 market cap which is also EV as there is no debt (debt on balance sheet is transferred to ALAK). 
     
    Normalized ebitda for existing chemical business is $18 million.  The Company is on track for that for 2007 (making adjustments for expansion expenses, expenses with the mine, etc.) and is supported by the fact that over the long term the company expects operating margins to be in the 15% to 16% range. 
     
    The implied ebitda multiple is 8.8x.  This multiple is in the range of acquisition multiples in the industry. 
     
    So, lets call the current stock price roughly right, reflecting the existing chemical business with normal organic growth.  What else is of value at ARSD? 
     
    Expansion Plan
    The Company’s expansion plan is in full swing and should be completed in Q2 per Company plans.  Based on discussions with management and from prior press releases the goal of the expansion plan is to double capacity.  Management expects 25% of this capacity to be filled almost immediately and full utilization over the next year to 18 months.  The expansion plan should be marginally more profitable than the existing business, but I’m not factoring that in as the business has been run very lean in the past.  I’m just assuming they can maintain a target operating income of 15%.  This implies that incremental ebitda will be at a $6 million run rate by Q4 of 2008 and by 2009/2010 the business could be producing $15 million in incremental ebitda.  Apply an 8x multiple to these numbers adds $2/share in value this year and over $5 per share in 2009. 
     
    Putting this in terms of return percentages that is 25% to 70% upside for the growth opportunity. 
     
     
    Base Metal Mine – 50% interest in ALAK
    Simple math first.  Based on the formation of the JV with the Saudi partners and using ARSD’s cost to establish the mine this asset is worth $30 million.  But that is not a reasonable indicator of the value given all that has transpired over the past three months which puts the mine on a firm development track.  Thus we need to look at a cash flow based analysis. 
     
    Based on the historical studies the operating plan for the mine is as follows:
    10 year life. 700,000 tons per year mined.  Yield = 17.5 million pounds copper, 62.6 million pounds of zinc, 22,000 ounces of gold and 800,000 ounces of silver per year.  Operating costs were projected to be approximately $60 per ton. 
     
    For purposes of my calculation I am using current metal prices, cash costs plus an inflation factor of 10%, estimating G&A at 8%, and 20% for Saudi taxes.  Using a discount rate of 15% I arrive at a value in excess of $5/share.  Haircutting all metal prices by 20% results in a value in excess of $3/share. 
     
    Incremental value to the current stock price for this piece is 40% to 70%. 
     
     
    Conclusion for Existing business
     
    Current Chemical business value = $150 million.
    Expansion plan value = $48 million (2008) - $120 million (‘09/’10)
    Base metal mine value = $75 million - $120 million
    Total Value = $273 million - $390 million
    Per Share =  $12 - $17
     
    Incremental value to the current stock price for the expansion plan AND the mine is 70% to 140%. 
     
     
    The Last Kicker

    From the 10K -
    "On June 22, 1999, the Company submitted a formal application for a five-year exclusive mineral exploration license for the Greater Al Masane area of approximately 2,850 square kilometers, which surrounds the Al Masane mining lease area and includes the Wadi Qatan and Jebel Harr areas. The Company previously worked in the Greater Al Masane area after obtaining written authorization from the Saudi Ministry of Petroleum and Mineral Resources, and has expended over $3 million on exploration work. Geophysical, geochemical and geological work and diamond core drilling on the Greater Al Masane area reveals mineralization similar to that discovered at Al Masane."  (my emphasis added)

    In talking with management, the additional work was specifically done on two areas inside Greater Al Masane... from the K,

    "The Wadi Qatan area is located in southwestern Saudi Arabia. Jebel Harr is north of Wadi Qatan. Both areas are approximately 30 kilometers east of the Al Masane area. These areas consist of 40 square kilometers, plus a northern extension of an additional 13 square kilometers. The Company's geological, geophysical and limited core drilling disclosed the existence of massive sulfides containing an average of 1.2% nickel."


    That is a potential WOW.  The current mine at Al Masane is 44 sq kilometers....there’s an opportunity for 2,850 sq kilometers in Greater Al Masane??   And ARSD may have an "in" on this??   Now, before this gets all crazy there are limitations in place in SA that limit the amount of land one entity can control to 100 sq. kilometers.  But that still more than doubles the existing opportunity.  And the company is exploring ways to be part of developing significantly more. 
     
    Needless to say that would be stunning.  From discussions with management and IR the Wadi Qatan and Jebel Harr areas would be serviceable from the infrastructure used to set up the existing mine.
     
    I’m not even going to attempt to put a value on this right now.  But this is NOT a pipe dream.  My discussions with IR suggest that management intends to try to fully exploit the whole area given their position as one of the “discoverers” of the region.  It hasn’t been discussed much because the Company wanted to get the JV operation formally approved.  Now that that has happened (and their exists now a Saudi Arabian entity to bring this mine to production – as opposed to an American entity), I would expect to see efforts made to expand the existing 44 sq. kilometer lease.  That would be some unexpected upside, though I’m not counting on it. 
     
     
     
     

    Catalyst

    Expansion comes on line in Q2.
    Mine announcements.

    Messages


    SubjectUpdate
    Entry03/06/2008 09:52 AM
    Membergrant387
    Permit approval received / Mine Construction contract in place.

    Expansion in Texas is now on fast track.

    Mine development costs lower than Company estimated by $10 million.

    PR below

    - - - - - - - - - - - - - - - - - -

    Arabian American Development Company Receives Permit for Facilities Expansion
    Thursday March 6, 8:30 am ET




    Company Also Announces Update on Transfer of Mining Assets to Joint Venture

    DALLAS, March 6 /PRNewswire-FirstCall/ -- Arabian American Development Co. (Nasdaq: ARSD - News) today announces that the permit from the Texas Commission on Environmental Quality for its South Hampton Resources, Inc. facilities expansion to double C5 & C6 capacity has been approved. These products generate approximately 85% of the Company's revenue. Full utilization of the expansion is expected to double revenue and EBITDA opportunity for the Company.

    Nick Carter, President of South Hampton, commented, "We have been eagerly awaiting receipt of this permit so that we could determine the timing of the start up for our expanded facilities. The permitting process has taken approximately two months longer than what we initially anticipated, moving the projected start-up date to late May or early June rather than early second quarter. When complete, management expects at least 20% of the expansion to be immediately utilized with the remainder filled over the next three to four years. This additional capacity is expected to increase our North American market share and open opportunities in South America, Europe and Asia."

    Regarding the Company's mining lease in the Al-Masane area of western Saudi Arabia, Hatem El-Khalidi, the President and CEO of the Company stated, "The formal application for the transfer of the mining lease to the Al-Masane Al-Kobra Mining Company (ALAK) was filed with the Ministry of Petroleum and Mineral Resources on February 23, 2008." ALAK is the Saudi joint stock company of which the Company owns 50%. The Company believes that the Ministry will approve the transfer promptly since ALAK has agreed to fulfill all the provisions of the mining lease and has demonstrated its financial and technical competence to do so. The construction contract for the project was signed on November 26, 2007 with Nesma & Partners Contracting Company Limited, a major Saudi construction company, as the prime contractor, and the China National Geological & Mining Corporation (CNGM) as the primary sub-contractor. Together, they will build the copper/zinc mine's concentrator and surface works at the Al-Masane lease site. The total contract for the project was awarded to Nesma and CNGM for $110.8 million US dollars. The Al-Masane mine underground works, which had been flooded, was very recently de-watered, and is being prepared for development. CNGM has also completed the detailed survey of the area where the facilities are to be built. El-Khalidi added, "The Company is confident that the project will proceed in a timely manner and will be good for the growth and diversification of the Saudi economy and good for the shareholders of Arabian American Development Company."


    SubjectRan, Part 3
    Entry05/14/2008 10:29 AM
    Memberdavid101
    (continued from ARSD write-up #2)

    ..."my points, in my thread" and basically banning someone from posting on a particular thread is rather disappointing from someone of your stature.

    There is a lot of value in the ideas posted on VIC, but the dialogue helps to really flesh out an idea. In my opinion, Balkanizing the discussion is of less value, especially with the new expanded messages feature.

    Just my thoughts.

    David

    SubjectRAN response
    Entry05/14/2008 11:26 AM
    Membergrant387
    OK, no problem using the thread on my post, sorry to clutter up your idea just thought it would be easier to hit reply.

    And, sorry if somehow I got the “tone” wrong. Perhaps if we were sitting in a room instead of trying to do something electronically we’d agree to disagree on some points but on others I think we’d agree….well, I’m assuming we’d agree based on what you posted in your writeup.

    If I could summarize - your thesis essentially was:

    1) Chemical operations generating $16 million in TTM EBITDA and could peak out at $20 million. Transaction multiples are 12x and the mean of publicly traded multiples approx. 9.5X. Your implied value range is accordingly $152 million to $240 million. (Current EV = $160 million or so)

    2) Mining operations – speculative but could be huge.


    I added on to the story when the expansion plans firmed up and ALAK became more definitive.

    OK, so on the chemical side:

    If you thought EBITDA could be between $16 and $20 and they are doubling capacity from your writeup what is your estimate of normal cycle EBITDA? The Company believes they could double EBITDA effectively through operating leverage on the SGA side. I used in my writeup $17 - $18 in base business plus $15 upside – slightly under management’s guidance.

    In my recent response to your post I’m using only $25 in EBITDA - which based on your writeup would look very conservative given the expansion. Using $24 in EBITDA (12% EBITDA margins on $200 million in revenue and accounts for your complete loss of $1 million for tolling) and applying your multiples gets me a range of $225 million to $285 million in EV – which is significantly above where the stock is now. This is NOT a today number, but what the business could grow into when the capacity is filled. At those EV numbers the implied stock price is $9 - $11 (ignoring cash flow during the period) compared to $6 and change right now.


    Now the mine.

    You thought peak EBITDA could be just over $100 million. Obviously metal prices have been moving around and at this date the REVENUE degradation to your peak number appears to be about $15 million.

    My number is not a peak – using my assumptions I’m getting an implied $60 million in 10 year average EBITDA – a 40% reduction from your peak. You may not think that is enough – and I guess we’ll just have to see how it plays out. But on a cost basis they have about $1.70 per share into this. With a reasonable return going forward I don’t think its out of school to say it may be worth $3. Again – this is not a value NOW, but a couple years out.

    As it relates to these two pieces…I guess I’m just thinking in terms of what Wayne Gretzky used to say “skate where the puck is going to be.”


    On the last piece – the speculative upside. I have always phrased that as such. And I truly believe it is not a throw away – but it is speculative and would be gravy. But I’m wondering who you think would be better to take advantage? ARSD has data on the areas from their prior work and they are in a position to be able to use infrastructure they are building to handle multiple locations. A different miner would have to build the infrastructure putting them at a cost disadvantage to ARSD. ARSD will have it in place, how will they not be at some minimal competitive advantage? And further – the local investors (who are tied to the project closely) involved there I’m sure will be self-incentivized to make this as big an opportunity as possible. I’m not counting on it…but it’s there which is a better position than it not being there.


    Where does that leave this discussion?

    I’m not sure. You obviously think results are going to be poor this year. I don’t think they’ll be that bad. (and by the way…try as I might I didn’t receive any feedback in February from mgmt in terms of how the quarter was going. I was just going off what the past 12 – 18 months had been like). I think that when the capacity comes online it will get filled over a two year period and EBITDA will move to at least $25 million.

    Based on that number I’m estimating that the chemical business alone is worth in excess of $9 (using a 9x ebitda multiple). The mine COULD be big, but realistically is worth somewhere between $2 and $3. The additional mines (if any) are worth some very small option value which is who knows at this point.

    But that gets me $11 - $12 share in a couple years and a return above 20% per year (at my last writeup price). I think those numbers are base numbers. If anything moves higher (ebitda or the multiple) it will be well in excess of that.

    And yes, it would be convenient if the stock would only move up after a writeup. But to say I’m making an excuse because its down since February?? My portfolio turnover is very low, my long term gains to short term gains ratio is something like 4:1. I have no control over the performance of any stock over a 3 month period.

    If adverse developments to the business on a normalized basis occur I’ll have to re-evaluate. But as of now I’m not sure much has changed looking out two years from now compared to February.

    I'll post an update after I run your concerns past management.


    SubjectFACTS / Follow up
    Entry05/27/2008 10:12 AM
    Membergrant387
    I have sincerely admired the ideas and Q&A that Ran112 has provided over the years to VIC. Obviously I have a different view than Ran112’s current view on the operations of ARSD. That is what makes markets. We felt very strongly in February – just as we do today that ARSD is undervalued. I have taken time to review certain comments and check on a couple things.

    FACTS:

    First off an apology and correction – share count IS 24 million. I erroneously used 23 in my writeup. However, in follow up posts and in determining my price ranges I have been using 24. So just wanted to correct/clarify that.

    Speaking of corrections I’d also like to correct a few other items and get the facts on the table.

    Ran112 recently wrote the following implying related party transactions are not proper:

    “The question that springs from this should be the following: why doesn`t the firm raise prices more agressively, if they are being squeezed? One answer that comes to mind, is the unique arrangement between Nick Carter`s wholly owned Silsbee Trading, and ARSD. Silsbee trading supplies 100% of ARSD`s feedstock. This can be about 75,000 barrels per month. If Silsbee trading makes $2-$5 per barrel, there might be some that would argue there is no incentive to curtail production under circumstances that would be little more than break even. Alternatively, raising prices to such a level that customers might cancel orders will also result in reduced profit margins at Silsbee. In short, if you understand the relationship between Silsbee and ARSD, one quickly disregard the blithe statements made about Mungeresque attributes of good stewardship.”

    This is an irresponsible comment – quite simply it is factually untrue.

    Silsbee Trading is ACTUALLY Silsbee Trading & Transportation. This entity is controlled by Nick Carter, but it is equipment leasing only (trucks, tractors, trailers, manlift, bulldozer, etc.). It has ZERO trading or selling of feedstock related to ARSD. In the long ago past it was involved in feedstock (looking at the 1995 10K one can see that STT was used to purchase feedstock – and actually it was for pennies per gallon – nothing near the price noted above). However, this has NOTHING to do with current times.

    From the 10K:
    “Pursuant to a lease agreement, South Hampton leases transportation equipment from STTC. Lease payments at the beginning of 2007 were approximately $52,100 per month and were raised to approximately $57,600 per month as new and additional tractors and trailers were added to the fleet throughout the year. With the increase in volume of the products produced with the new expansion of the facility which is currently underway, additional transportation equipment is expected to be required. Under the lease arrangement, STTC provides transportation equipment and all normal maintenance on such equipment and South Hampton provides drivers, fuel, management of transportation operations and insurance on the transportation equipment. Approximately 95% of STTC’s income will be derived from such lease arrangement. The lease agreement operated on a month-to-month basis until January 1, 2004, when a new five year agreement was signed. STTC also entered into a capital lease with South Hampton for acquisition of a motorized man lift. At the end of the five year lease period, title to the manlift will be transferred to South Hampton for a final payment of one dollar.”

    Also, the leases are listed as attachments on the filings.

    Regarding feedstock, ARSD uses a primary supplier for convenience. And to reiterate – it is NOT Silsbee Trading. The feedstock is a commodity product widely available and there is no relation to STTC. The supplier provides feedstock and coordinates supply tankage and a pipeline connection for a fee. Feed prices are average monthly market prices, which are passed through to ARSD. Standard industry practice type deal. They have worked with them for many years.

    There is no smoking gun with Silsbee Trading – period. Lease rates for the equipment are set at local market rates and checked by the auditors. I would encourage members to contact management for any clarification.


    Ran112 made a point regarding a better entry point into the stock based on crack spreads as follows: “The key is to watch guidance on crack spreads from other refiners, such as TSO or Western. When they start informing shareholders that margins are turning up, ARSD should also experience operating profit increases. That would be the time to buy this stock once again.”

    I would caution member about using this information as a way to time entry into ARSD. I have discussed this with management and their response is that crack spreads are just not applicable to ARSD's business. They don't consider it AND their customers never discuss it.

    Accordingly – one could get head faked if they believed that an improving crack spread at the large refiners will lead to improvements at ARSD. Alternatively, just because crack spreads have tightened does not lead to a corresponding decline at ARSD.

    One has to understand that ARSD and their customers don’t compare their position to the oil to energy market at all. ARSD provides a value add in the processing of specialized chemicals into niche markets. That value add is the markup above feedstock cost. They take their pricing to customers and explain feedstock costs and the price increase they want to account for feedstock increases and any special processing changes. Not many customers enjoy dealing with the competitor so, as long as ARSD is reasonable - and doesn't try to get greedy - and preserve the relationship the customers stick with them. Just wanted to clarify how this tiny niche chemical industry views the world – which is quite different than the large integrated oil players of the world. It can be dangerous to assume broad industry conditions always impact small niche players in similar manner.

    Lastly, there was a reference to the tolling business that was "lost". The FACT is that a PART of the tolling business was reduced. A sizable customer (Penreo) was purchased by another company and they reduced their toll processing to the minimum required under the contract. The other company is reviewing the relationship. ARSD is fine with that....the minimum is just that a required minimum. So tolling is not going to be great, but it should not be perceived as a permanently "lost" piece of their business. It was one customer. Further, ARSD said they are being proactive. They have already had inquiries from other companies to use the capacity. Thus, they may sell the capacity (at similar profitable terms) and let Penreo out of the contract. Alternatively, Penreo just runs at the minimum and ARSD sells the amount available over that. This was not a permanently "lost" piece of business.

    OTHER CONSIDERATIONS

    It has been asserted that the fundamentals of the business are in dire straits. Specifically it was written that the Company’s Q2 could be worse than Q1.

    Regarding that one must consider that January and early February were running essentially 100% unhedged accordingly ARSD’s margins paid the price. But during early February when oil prices briefly cracked $90 the Company put hedges on. So, I’m not sure how that translates into Q2 being worse than Q1. The company was completely unhedged for 1/3 of the first quarter and with no price increases. Now they have some hedges on and have raised prices each month since March (June prices increases appear to be sticking). So given that, I don’t see how one can make the leap that Q2 is going to be worse.


    I was a bit dismayed when I saw this recent comment:
    “I am always cautious when management continually gets caught in errors of omission. Nick Carter has a tell (in poker parlance) in that he stammers a bit in conference call while making a statement, which omits a pertinent fact. He stammered a lot regarding margins. He stumbled around when bringing up the potential inability to deconsolidate the Saudi Arabian mining venture. He stammered a couple of time when talking about the loss of a customer at the tolling business.”

    I’m not sure if Ran112 has ever spoken to Nick Carter in the past, but this is the way the man speaks. He may be a bit more nervous on the call (up until a few quarters ago he never conducted calls). I have nothing else to add to this unfortunate comment.

    Additional information has recently been released about the mine. Members can review that and make your own judgments. My point about ARSD being in a good to better than good competitive position regarding other mining opportunities in SA was not responded to so I’ll let that stand as is.

    Last thing:
    For a Company that had no insider activity for a long time interesting how the price drop resulted in a number of Form 4's being filed last week.


    So in conclusion - I respect Ran112’s ideas and contributions to VIC, however, I respectfully disagree about a number of his facts as well as his outlook and interpretations.

    And as is often the case when two parties in the investment arena disagree – the ultimate arbiter here is unlikely to be anything other than the passage of time.

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