Humboldt HMB.V
April 02, 2008 - 3:52pm EST by
surf1680
2008 2009
Price: 2.77 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 37 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

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Description

Many microcap stocks in the Canadian resource sector have had capital cut off by the market and are trading at historically cheap levels. Iradesso did a quarterly report on junior E&Ps showing that the cashflow multiples and enterprise values per flowing barrel are at a 5 year low. The annual report of another Canadian company that I follow that’s model is making bridge loans to small cap resource stocks said business is exceptionally good for them because these small cap companies cannot raise capital any other way. Commodity prices have been strong yet the shares of resource stocks in Canada haven’t tracked them.

I found an investment vehicle to participate in the inevitable recovery (both of liquidity and valuation) but the trading volume is miniscule right now. Stop here if that’s a problem or if you’re impatient.

Company description: “Humboldt is an investment company with its holdings concentrated in the resource sector. Humboldt provides early stage risk capital, business experience and guidance to small oil and gas enterprises with attractive prospects and motivated high quality management. Humboldt makes investments in businesses that have potential for growth, with the objective of realizing capital gains through the increase in the value of its share positions. The Company’s principal business philosophy is to purchase securities for the long term. This is based on Humboldt’s experience that both business cycles and company growth trends provide optimum returns with a longer term investment strategy. As such, Humboldt tends to avoid short term trading positions believing that investment in companies, with well thought out growth plans, will benefit the Company’s shareholders over a three to five-year period. Humboldt appoints representatives to the Boards of companies in which more significant investments are made, and is proactive in ensuring management maintains well considered, long term business plans. Humboldt also has investments in the mining sector, with a particular emphasis on companies exploring or producing commodities which Humboldt anticipates have further growth potential in this stage of the economic cycle.”

Market Valuation:
Yesterday they released their fully diluted NAV of $4.42 as of their year end, 12/31/2007. This is the most recent release from them. Their assets are listed. They mainly consist of market priced equities and cash. Shares of Humboldt currently trade at 62% of these assets as marked at year end. Of that $4.42 per share in assets, 16% of it is in cash.

Intrinsic Value:
The deeper you dig, the cheaper it looks. Mr. Market is pricing the 4 largest holdings in HMB’s portfolio at a discount to the net present value of their audited reserves (the $ value of the reserves available to equity owners as audited by a third party, not including any land or other property).

Four Largest Holdings of HMB (16.5% of NAV) of which HMB has taken substantial control:
In thousands except per share amounts…
name
shares outstanding (mrq)
npv-10%
date of
reserve report
net debt (mrq)
HMB shares owned
Value of reserves attributed to HMB
diaz
67,239
$83,200
12/31/2007
$8,542
18,546
$20,592
sharon
75,403
$34,900
6/30/2007
$(2,082)
17,787
$8,724
tuscany
26,550
$9,995
12/31/2006
$2,970
10,328
$2,733
paris
9,552
$3,258
11/30/2007
$(1,559)
1,417
$715












Total
$32,763






Fully Diluted HMB Shares
13,484












Per share
$2.43

When you buy a share for $2.77, you are paying little more than for the reserves of HMB’s largest holdings. You get the 70 cents in cash and everything else HMB holds for just 34 additional cents ($2.77, current market asking price - $2.43, npv of reserves = 34 cents). This remaining stuff includes gold mining stocks, diamond miners, uranium miners, international oil & gas companies, various warrants, and convertibles. The market price for the remaining assets comes out to $2.03 per share at today’s bid. I didn’t include prices for 17% of the items listed in their financial statement for one or more of the following reasons: they were trading under a dime, I was unclear on the ticker, they were trading on foreign (non-N. American) exchanges and/or they were not listed at all. If the cell is blank then it didn’t make it into the calculation. The $2.03 in free stuff, on top of the cash, is conservative.

$2.03 at today’s market prices in Free Stuff (not including the cash):
Canadian Oil & Gas
% NAV
shares owned by HMB
Current market bid

Painted Pony Petroleum –a
2.00%
190
4.47
849.3
Buffalo Oil Corporation
1.50%
816


Storm Explorations

1.30%
82
12.06
988.92
E4 Energy

1.00%
732
0.78
570.96
Wave Energy Inc

0.90%
175


Vero Energy Inc

0.80%
79
7.83
618.57
Endev Energy Inc

0.80%
588
0.83
488.04
Celtic Exploration Ltd
0.70%
37
15.3
566.1
Rock Energy Inc

0.60%
145
2.76
400.2
NuVista Energy Ltd

0.60%
27
16.21
437.67
Burmis Energy Inc

0.50%
168
3.15
529.2
Result Energy Inc

0.50%
751
0.47
352.97
Cyries Energy Inc

0.40%
35
9.65
337.75
Canext Energy Ltd

0.40%
543
0.71
385.53
Painted Pony Petroleum –b
0.30%
32
5.35
171.2
West Energy Ltd

0.30%
65
3.4
221
Sure Energy Inc

0.30%
160
0.85
136
Trafina Energy Ltd

0.20%
303
0.55
166.65
Crocotta Energy Ltd

0.20%
45
3.05
137.25
Nexstar Energy Ltd

0.20%
310
0.135
41.85
Nuloch Resources Inc
0.20%
200
1.25
250
Renegade Oil & Gas

0.20%
100


Other Canadian Oil

0.30%



Total Canadian Oil & Gas
16.20%


$7,649.16







International Oil & Gas
% NAV



Bow Valley Energy

4.20%
381
5.14
1958.34
Pan Orient Energy

4.50%
168
11.15
1873.2
Cirrus Energy Inc.

3.80%
768
3.31
2542.08
Sterling Resources Ltd
2.40%
515
2.24
1153.6
EnCore Oil

2.20%
1,235


Ithica Resources Inc

2.20%
392
2.44
956.48
Granby Oil & Gas

2.00%
750


Antrim Energy Ltd

1.80%
212
4.15
879.8
Serica Resources PLC
1.30%
401
1.64
657.64
Gran Tierra Energy

0.90%
189
3.55
670.95
TG World Energy

0.80%
814
0.81
659.34
Loon Energy Inc

0.70%
590
0.62
365.8
Excelsior Energy Ltd

0.60%
609
0.38
231.42
Mart Resources Ltd

0.60%
700
0.48
336
Benchmark Energy Corp
0.50%
535
0.59
315.65
Bridge Resources

0.40%
236
1.16
273.76
BrazAlta Resources Corp
0.40%
341
0.48
163.68
Europa Oil &Gas

0.40%
600


Genesis Petroleum

0.40%
400


Gulf Shores

0.30%
638
0.105
66.99
Argenta Oil &

0.30%
427
0.195
83.265
Coastal Energy Company
0.30%
41
3.55
145.55
Elixer Petroleum Ltd

0.30%
612
0.16
97.92
Big Sky Energy

0.30%
1,950


Tarim Resources

0.20%
500


Cue Energy

0.20%
633
0.78
493.74
Avery Resources Inc

0.20%
346
0.39
134.94
Other International Oil
1.10%



Total International Oil
33.20%


$14,060.15







Mining


% NAV



Goldmark Minerals Ltd
1.20%
5,079


Firestone Ventures

1.40%
1,435
0.41
588.35
Global Copper Corp

0.90%
80
8.57
685.6
WSR Gold Inc

0.60%
1,008
0.48
483.84
Sanatana Diamonds

0.60%
200
0.91
182
Apoquindo Minerals

0.60%
300
1.3
390
Capstone Mining Corp
0.50%
105
3.23
339.15
Vaaldiam Resources Ltd
0.50%
570
0.41
233.7
International PBX Ventures
0.50%
957


Full Metal Minerals

0.50%
110
1.63
179.3
Premium Exploration Inc
0.40%
450
0.36
162
Scorpio Mining Corp

0.40%
166
1.38
229.08
Oromin Explorations

0.40%
62
2.67
165.54
Atlas Minerals Inc

0.40%
500
0.31
155
Alberta Star Development
0.40%
377
0.35
131.95
Herald Resources

0.30%
100
2.2
220
Shear Minerals Ltd

0.30%
366
0.375
137.25
Chapleau Resources Ltd
0.30%
525
0.32
168
Silver Spruce Resources
0.30%
245
0.35
85.75
Alexis Minerals Corporation
0.30%
200
0.59
118
Freewest Resources Canada
0.30%
500
0.34
170
Sanatana (warrants)

0.30%
100


Yukon Zinc

0.30%
1,217
0.14
170.38
Capstone Gold (warrants)
0.30%
105


Midlands Minerals Corp
0.30%
600
0.26
156
Silverstone Resource Corp
0.20%
53
2.53
134.09
Boxxer Gold

0.20%
1,520


Indicator Minerals Inc

0.20%
493
0.2
98.6
Peregrine Metals Inc

0.20%
200


Kilo Goldmines

0.20%
375


Commander Resources Ltd
0.20%
568
0.14
79.52
Strongbow Exploration Inc
0.20%
254
0.35
88.9
Nevada Copper (warrants)
0.20%
100


Fortune Valley Resources
0.20%
400
0.25
100
Bayswater Uranium Corp
0.20%
122
0.41
50.02
Other Mining Companies
4.80%



Total Mining

19.10%


$5,702.02
Other


0.20%














TOTAL

$27,411.33















I look at this investment like a closed end fund run by an activist investor & industry insider with a longer time frame. The CEO, Robert W. Lamond, is also the CEO of the 2 largest companies mentioned above, Diaz and Sharon. His investment performance looks pretty ok. It looks like he is loosely tracking the TSX energy index with a higher beta. I’m just basing this on the chart in the most recent annual report.  The CEO is a geologist by training. He has run several companies before and owns 48% of HMB. He is currently buying HMB shares on the open market, and has bought at higher prices in the past. Here's a picture and some personal information about him. http://www.calgaryhighlandgames.org/History/Chieftain%202000%20Bob%20Lamond.pdf

There is a Normal Course Issuer Bid (buyback) in place. The company bought 39,300 shares in 2007 at an average price of $3.04. From the guidance in their most recent report it appears they are operating in a defensive mode regarding their liquidity, the economy and commodity prices.

In reality, there are quite a few underperforming juniors trading at 50% discounts to their year end reserves but this cascading discount (underlying at a discount, plus the fund itself trading at a discount) is pretty interesting. Plus, you have an experienced manager who is in control of the largest portion of the portfolio. After Katrina & Rita, when natural gas spiked, it was difficult to find anything trading at much of a discount to reserves. The liquidity of this stock is hopeless. I used the market’s ask price in my report and the bid is 10% lower. As investors return to juniors the volume will improve.

It may be possible to short out the largest holdings but I wouldn’t recommend this approach because of the lack of liquidity. To make a trade like this even more difficult both Diaz and Sharon participated in a high impact well in South Texas, for which we are waiting results any day now. Again, I apologize for the liquidity on this one. There may be some opportunities to buy a bigger quantity if we have a selloff in the shoulder season as the winter ends in North America.

RISKS:
-Resource sector concentration
-We are heading into shoulder season when gas & energy prices tend to fall
-Strong gas injections over the summer
-Warm winter next year
-No trading volume, low liquidity
-The CEO is spreading himself too thin
-For the last 5 years HMB has traded at a discount to NAV, this may never change

Catalyst

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