Cardero CDY
August 20, 2010 - 4:06am EST by
surf1680
2010 2011
Price: 1.05 EPS $0.84 -$0.10
Shares Out. (in M): 58 P/E 0.0x 0.0x
Market Cap (in $M): 61 P/FCF 0.0x 0.0x
Net Debt (in $M): 0 EBIT 0 0
TEV ($): -6 TEV/EBIT 0.0x 0.0x

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Description

Cardero Resources is a Canadian mineral exploration company that popped up on a screen because it recently came into a lot of cash.  It got the cash because it sold some mineral resources in Peru to a Chinese company.  

 

Positive Attributes:

 

A.  Management Track record.  They are developing big assets that take long periods of time to determine the success.  I have no idea how to measure the progress of their projects in development but 2 completed deals have been profitable for them and are easily verifiable without knowledge of geology:  (1) They bought a mine in Peru for $10 million and sold it to a Chinese company for $100 million.  (2) They bought shares in a gold mining company for around $.10 that now trade at $6ish.   To further put your mind at rest about their credibility, they have partnered with big name resource companies like Rio Tinto; and have explorations in exotic, resource-rich places like Peru, Mexico and Argentina. 

 

B.  They recently started using some of their cash to buy their own shares.   Canadian Insider website shows the promised buybacks are actually happening.  When a company with $1.71 book value buys its own stock back at $1.05 per share, the remaining shareholders benefit.

 

C.  Management thinks share price is low right now as indicated by the intense options activity.  At any given time, options for 10% of the shares outstanding can be granted & outstanding.  If management thought share price would keep going down, they would postpone issuing options (or at least spread it out), instead they put through the maximum amount recently.   

Amount

Strike

issue

expiration

% of maximum allowed

            575,000

1.16

12/9/08

12/9/10

10%

            225,000

1.39

4/9/09

4/9/11

4%

         1,000,000

1.3

9/11/09

9/11/11

17%

            360,000

1.31

12/11/09

12/11/11

6%

            500,000

1.41

2/2/10

2/2/12

9%

         *2,000,000

1.16

7/28/10

7/27/12

35%

         *1,125,000

1.16

8/12/10

8/11/12

19%

 

*The last 2 awards make up over 50% of the maximum amount of options allowed.  If management was bearish, they would not have concentrated the awards at such a time.  It would be better to wait until the share price was lower so they could lock-in a lower strike price.   At this point, they can't award any more options.  They just gave out all they can give.

 

D.  Valuation.  Over the last 10 years, their book value per share has marched upwards an average of 80% per year despite all the options and commodity volatility.  Relative to that book value the share price is cheaper than it has ever been.  Best of all, the current composition of that book value is "harder" than it has ever been because it's mostly cash.

 

year end

Cash

total assets

equity

shares

cash/share

book value

price/book

2000

        121,619

        224,128

        133,694

        9,026,474

 $             0.01

 $           0.01

41.1

2001

            6,752

        461,148

        335,121

      11,026,474

 $             0.00

 $           0.03

11.1

2002

      1,063,479

      1,769,933

      1,723,379

      17,189,974

 $             0.06

 $           0.10

9.3

2003

      3,752,305

      8,877,885

      8,457,824

      26,611,796

 $             0.14

 $           0.32

5.5

2004

    16,920,909

    24,231,580

    23,427,468

      38,247,958

 $             0.44

 $           0.61

5.1

2005

    15,206,219

    28,480,066

    27,670,834

      41,685,239

 $             0.36

 $           0.66

5.4

2006

      4,506,165

    27,172,271

    26,693,650

      43,122,439

 $             0.10

 $           0.62

4.1

2007

        824,484

    34,064,716

    33,470,660

      47,321,439

 $             0.02

 $           0.71

3.0

2008

      1,288,840

    34,004,365

    33,134,157

      57,782,847

 $             0.02

 $           0.57

3.0

2009

      5,823,196

    48,071,671

    44,937,820

      58,543,477

 $             0.10

 $           0.77

1.7

2010-mrq

    73,677,911

  131,130,190

  103,264,372

      58,666,747

 $             1.26

 $           1.76

0.6

 

 

E. Investor Exhaustion.  The company has built legitimate value for shareholders but shareholder returns have been negative for 5 years.  This stock has "negative" market momentum. 

 

year

market price per share

2000

 $    0.61

2001

 $    0.34

2002

 $    0.94

2003

 $    1.76

2004

 $    3.10

2005

 $    3.62

2006

 $    2.52

2007

 $    2.09

2008

 $    1.72

2009

 $    1.30

current

 $    1.05

 

 

The Top-10 List Attempting To Explain Cardero's Cheapness:

 

#10:  Cardero is a small exploration company and doesn't have any recurring sources of cashflow.   

 

#9:  Some of their assets are in 3rd world countries, along with most of that cash from the Chinese deal. 

 

#8:  Management issues press releases when they grant stock options.  To make a good initial impression, maybe they shouldn't issue press releases just slip it in a footnote.

 

#7:  There are lots of related-party transactions between Cardero and other companies in the "Cardero Group." 

 

#6:  News flow is slow right now.  They don't have a handy "investor presentation PDF" prominently displayed on their website like every other company in Canada. 

 

#5:  Of course, there is commodity price volatility and general market uncertainty for iron ore.

 

#4:  When you look at a graph of the share price, it looks like it is trending down.

 

#3:  Everyone knows that Cardero is shopping for a big fish acquisition.  Why not wait to see what they invest the money in? 

 

#2:  Dashed Expectations.  Before they struck a deal for their Peruvian mining resource they sold to the Chinese, it was hyped as having a multi-billion dollar NPV.  They sold it for a mere $200 million.  A year later the Chinese threatened to walk away so they lowered the price to $100 million.   Then, the icing on the cake... it took them nearly 2 full years to collect the cash!  

 

(drumroll)


Reason #1 why Cardero is cheap:  Contrarian investor Vitaliy Katsenelson and Enron-buster Jim Chanos say China is a bubble.  They are short companies that sell to China. 

 

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


Response to #10:  No recurring cashflow is "by design."  Kenneth Peak says that value is created when you turn the drill bit to the right.  Before they got their big Chinese cashpile, they would sell off shares "as-needed" in their mature gold company investment in order to have extra cashflow.  

 

Response to #9 and #3:  The IR guy at Cardero says they kept the cash in Peru to avoid taxes.  He says they are shopping for a big fish (around $10 million investment is a big fish, he hinted) in Peru.  He says they have considerable expertise in Peru.  He says further investment in Peru will shield some tax liability.  Regardless, the tax liability they booked in the most recent quarter of $27 million is the worst case scenario if they bring the cash back, with no further investment.

 

Response to #7:  The "Cardero Group" is an affiliation of mining companies that share the same office.  They share the same administrative and technical teams.  They share some of the same board members.  They have different executive management.  They say it's an efficiency thing.  I see inter-dealings between them that worry me but note that some deals have clearly been profitable for Cardero Resources. 

 

I don't have anything to respond to the other problems on the top 10 list.

 

Conclusion

 

If you take the value of the publicly traded securities that Cardero owns (THM, TV.TO, WML.V and DRI.V), give them a 40% haircut for taxes and liquidity, then add the after-tax cash from the balance sheet, you get $1.08 per share (the current share price).  You are getting the "resource properties" that are being developed in Mexico, Argentina, Peru and even Minnesota for free.   They are carrying those properties on the balance sheet at $.21 cents per share.  You may think that $.21 is not enough free stuff for your $1.08 investment but don't forget the "resource property" they just sold to a Chinese company for $100 million ($1.70 per share) was on the books at just $.18 per share.  Regardless of what you think about book value, management has been increasing it by 80% per year for the last decade.  You're buying this stock at .6x book value.

Catalyst

 

Increased news flow now that option awards have been granted

 

Valuation - even companies with verifiably bad track records don't trade below cash & marketable securities for very long

 

    sort by   Expand   New

    Description

    Cardero Resources is a Canadian mineral exploration company that popped up on a screen because it recently came into a lot of cash.  It got the cash because it sold some mineral resources in Peru to a Chinese company.  

     

    Positive Attributes:

     

    A.  Management Track record.  They are developing big assets that take long periods of time to determine the success.  I have no idea how to measure the progress of their projects in development but 2 completed deals have been profitable for them and are easily verifiable without knowledge of geology:  (1) They bought a mine in Peru for $10 million and sold it to a Chinese company for $100 million.  (2) They bought shares in a gold mining company for around $.10 that now trade at $6ish.   To further put your mind at rest about their credibility, they have partnered with big name resource companies like Rio Tinto; and have explorations in exotic, resource-rich places like Peru, Mexico and Argentina. 

     

    B.  They recently started using some of their cash to buy their own shares.   Canadian Insider website shows the promised buybacks are actually happening.  When a company with $1.71 book value buys its own stock back at $1.05 per share, the remaining shareholders benefit.

     

    C.  Management thinks share price is low right now as indicated by the intense options activity.  At any given time, options for 10% of the shares outstanding can be granted & outstanding.  If management thought share price would keep going down, they would postpone issuing options (or at least spread it out), instead they put through the maximum amount recently.   

    Amount

    Strike

    issue

    expiration

    % of maximum allowed

                575,000

    1.16

    12/9/08

    12/9/10

    10%

                225,000

    1.39

    4/9/09

    4/9/11

    4%

             1,000,000

    1.3

    9/11/09

    9/11/11

    17%

                360,000

    1.31

    12/11/09

    12/11/11

    6%

                500,000

    1.41

    2/2/10

    2/2/12

    9%

             *2,000,000

    1.16

    7/28/10

    7/27/12

    35%

             *1,125,000

    1.16

    8/12/10

    8/11/12

    19%

     

    *The last 2 awards make up over 50% of the maximum amount of options allowed.  If management was bearish, they would not have concentrated the awards at such a time.  It would be better to wait until the share price was lower so they could lock-in a lower strike price.   At this point, they can't award any more options.  They just gave out all they can give.

     

    D.  Valuation.  Over the last 10 years, their book value per share has marched upwards an average of 80% per year despite all the options and commodity volatility.  Relative to that book value the share price is cheaper than it has ever been.  Best of all, the current composition of that book value is "harder" than it has ever been because it's mostly cash.

     

    year end

    Cash

    total assets

    equity

    shares

    cash/share

    book value

    price/book

    2000

            121,619

            224,128

            133,694

            9,026,474

     $             0.01

     $           0.01

    41.1

    2001

                6,752

            461,148

            335,121

          11,026,474

     $             0.00

     $           0.03

    11.1

    2002

          1,063,479

          1,769,933

          1,723,379

          17,189,974

     $             0.06

     $           0.10

    9.3

    2003

          3,752,305

          8,877,885

          8,457,824

          26,611,796

     $             0.14

     $           0.32

    5.5

    2004

        16,920,909

        24,231,580

        23,427,468

          38,247,958

     $             0.44

     $           0.61

    5.1

    2005

        15,206,219

        28,480,066

        27,670,834

          41,685,239

     $             0.36

     $           0.66

    5.4

    2006

          4,506,165

        27,172,271

        26,693,650

          43,122,439

     $             0.10

     $           0.62

    4.1

    2007

            824,484

        34,064,716

        33,470,660

          47,321,439

     $             0.02

     $           0.71

    3.0

    2008

          1,288,840

        34,004,365

        33,134,157

          57,782,847

     $             0.02

     $           0.57

    3.0

    2009

          5,823,196

        48,071,671

        44,937,820

          58,543,477

     $             0.10

     $           0.77

    1.7

    2010-mrq

        73,677,911

      131,130,190

      103,264,372

          58,666,747

     $             1.26

     $           1.76

    0.6

     

     

    E. Investor Exhaustion.  The company has built legitimate value for shareholders but shareholder returns have been negative for 5 years.  This stock has "negative" market momentum. 

     

    year

    market price per share

    2000

     $    0.61

    2001

     $    0.34

    2002

     $    0.94

    2003

     $    1.76

    2004

     $    3.10

    2005

     $    3.62

    2006

     $    2.52

    2007

     $    2.09

    2008

     $    1.72

    2009

     $    1.30

    current

     $    1.05

     

     

    The Top-10 List Attempting To Explain Cardero's Cheapness:

     

    #10:  Cardero is a small exploration company and doesn't have any recurring sources of cashflow.   

     

    #9:  Some of their assets are in 3rd world countries, along with most of that cash from the Chinese deal. 

     

    #8:  Management issues press releases when they grant stock options.  To make a good initial impression, maybe they shouldn't issue press releases just slip it in a footnote.

     

    #7:  There are lots of related-party transactions between Cardero and other companies in the "Cardero Group." 

     

    #6:  News flow is slow right now.  They don't have a handy "investor presentation PDF" prominently displayed on their website like every other company in Canada. 

     

    #5:  Of course, there is commodity price volatility and general market uncertainty for iron ore.

     

    #4:  When you look at a graph of the share price, it looks like it is trending down.

     

    #3:  Everyone knows that Cardero is shopping for a big fish acquisition.  Why not wait to see what they invest the money in? 

     

    #2:  Dashed Expectations.  Before they struck a deal for their Peruvian mining resource they sold to the Chinese, it was hyped as having a multi-billion dollar NPV.  They sold it for a mere $200 million.  A year later the Chinese threatened to walk away so they lowered the price to $100 million.   Then, the icing on the cake... it took them nearly 2 full years to collect the cash!  

     

    (drumroll)


    Reason #1 why Cardero is cheap:  Contrarian investor Vitaliy Katsenelson and Enron-buster Jim Chanos say China is a bubble.  They are short companies that sell to China. 

     

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


    Response to #10:  No recurring cashflow is "by design."  Kenneth Peak says that value is created when you turn the drill bit to the right.  Before they got their big Chinese cashpile, they would sell off shares "as-needed" in their mature gold company investment in order to have extra cashflow.  

     

    Response to #9 and #3:  The IR guy at Cardero says they kept the cash in Peru to avoid taxes.  He says they are shopping for a big fish (around $10 million investment is a big fish, he hinted) in Peru.  He says they have considerable expertise in Peru.  He says further investment in Peru will shield some tax liability.  Regardless, the tax liability they booked in the most recent quarter of $27 million is the worst case scenario if they bring the cash back, with no further investment.

     

    Response to #7:  The "Cardero Group" is an affiliation of mining companies that share the same office.  They share the same administrative and technical teams.  They share some of the same board members.  They have different executive management.  They say it's an efficiency thing.  I see inter-dealings between them that worry me but note that some deals have clearly been profitable for Cardero Resources. 

     

    I don't have anything to respond to the other problems on the top 10 list.

     

    Conclusion

     

    If you take the value of the publicly traded securities that Cardero owns (THM, TV.TO, WML.V and DRI.V), give them a 40% haircut for taxes and liquidity, then add the after-tax cash from the balance sheet, you get $1.08 per share (the current share price).  You are getting the "resource properties" that are being developed in Mexico, Argentina, Peru and even Minnesota for free.   They are carrying those properties on the balance sheet at $.21 cents per share.  You may think that $.21 is not enough free stuff for your $1.08 investment but don't forget the "resource property" they just sold to a Chinese company for $100 million ($1.70 per share) was on the books at just $.18 per share.  Regardless of what you think about book value, management has been increasing it by 80% per year for the last decade.  You're buying this stock at .6x book value.

    Catalyst

     

    Increased news flow now that option awards have been granted

     

    Valuation - even companies with verifiably bad track records don't trade below cash & marketable securities for very long

     

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