MARRET RESOURCE CORP MAR.
June 12, 2015 - 3:09pm EST by
JetsFan
2015 2016
Price: 3.94 EPS 0 0
Shares Out. (in M): 18 P/E 0 0
Market Cap (in $M): 70 P/FCF 0 0
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 70 TEV/EBIT 0 0

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  • Liquidation
  • Discount to Liquidation Value
  • Discount to NAV
  • Canada
  • Mining
  • Holding Company
  • Energy
  • Oil and Gas
  • Oil Price Exposure

Description

 

Low-Risk Double-Digit IRR Liquidation:  Marret Resource Corp stock represents a compelling investment opportunity with low downside risk and an attractive IRR as it liquidates and distributes cash.  At the current price, one can expect an IRR of 14% - 33%.

 

Summary

 

Marret Resource Corp (“Marret” or “MAR”) is an investment holding company that invests in public and private bonds and stocks of mostly resources companies.  The stock trades on the TSX under ticker MAR with a market cap of $70mm and ADV of 44,420 ($175k / day).

 

Due to poor investment performance and a consistent discount to NAV, along with some prodding from an activist investor, MAR proposed to liquidate and distribute the proceeds to shareholders by way of special redemption.  The management information circular (proxy) was filed May 27th 2015 and shareholders will vote on the liquidation proposal on June 29th 2015.  23.17% of the shareholders, consisting of insiders and a major shareholder, have agreed to vote their shares in favor of the resolution.  The vote is highly likely to go through.

 

Company Overview

 

Marret holds a diversified portfolio of relatively liquid resource issuer bonds and stocks.  Their largest holding, the bonds of bankrupt coal mine developer Cline Mining, is valued at face value.  We believe it is worthless.  At current coal prices we believe their New Elk Coal Mine Project in Colorado is uneconomic.  More information can be found here: http://www.clinemining.com/

 

Marret Asset Management also has another publicly-traded vehicle that liquidated, called Marret High Yield Strategies (TSX: MHY-U).  MHY-U sold all of its investments, except for its Cline Mining bonds and small portion of Mobilicity bonds, and distributed the cash.  The MHY-U “stub” currently implies Cline Mining bonds at approximately 10 cents on the dollar.

 

As of May 31st 2015, 51% of the MAR portfolio was cash.  The remaining investments are as follows:

 

 

Security Name  Coupon Maturity Weight (%NAV) Estimated Value ($mm) % of Outstanding
           
Cline Mining  10% 15-Jun-14 0.0% $0.0 n/a
HudBay Minerals 9.50% 1-Oct-20 4.0% $3.4 0.3%
Eldorado Gold 6.13% 15-Dec-20 3.9% $3.3 0.4%
Northern Blizzard 7.25% 1-Feb-22 3.2% $2.7 0.8%
Silver Wheaton     2.8% $2.4 0.0%
Legacy Reserves 8% 1-Dec-20 2.7% $2.3 0.6%
MEG Energy 7% 31-Mar-24 2.6% $2.2 0.2%
Turquoise Hill     2.3% $2.0 0.0%
New Gold 6.25% 15-Nov-22 2.3% $2.0 0.3%
Athabasca Oil 7.50% 19-Nov-17 2.2% $1.9 0.3%
PolyOne Corp 7.38% 15-Sep-20 2.0% $1.7 0.4%
Jupiter Resources 8.50% 1-Oct-22 2.0% $1.7 0.1%
AG Growth     1.9% $1.6 0.2%
EV Energy 8% 15-Apr-19 1.8% $1.5 0.2%
Chemtrade Logistics     1.7% $1.4 0.1%
IAMGOLD 6.75% 1-Oct-20 1.6% $1.3 0.2%
Resolute Forest Products 5.88% 15-May-23 1.5% $1.3 0.2%
AuRico Gold 7.75% 1-Apr-20 1.5% $1.3 0.3%
Imperial Metals 7% 15-Mar-19 1.4% $1.2 0.3%
Canadian Natural Resources     1.4% $1.2 0.0%
Baytex Energy 5.63% 1-Jun-24 1.2% $1.0 0.2%
Crescent Point     1.2% $1.0 0.0%
Tahoe Resources     1.0% $0.9 0.0%
Twin Butte 6.25% 31-Dec-18 0.9% $0.8 0.9%
Agnico Eagle     0.8% $0.7 0.0%
Enerplus     0.8% $0.7 0.0%
Cline Mining 10% 15-Jun-14 0.0% $0.0 n/a
Lundin Mining 7.50% 1-Nov-20 0.8% $0.7 0.1%
Foresight Energy 7.88% 15-Aug-21 0.7% $0.6 0.1%
Linn Energy 8.63% 15-Apr-20 0.7% $0.6 0.0%
PrairieSky Royalty     0.6% $0.5 0.0%
iShares S&P/TSX Global Gold     0.6% $0.5 0.1%
SPDR Gold Trust     0.5% $0.4 0.0%
Baytex Energy     0.5% $0.4 0.0%
Seven Generations 8.25% 15-May-20 0.5% $0.4 0.0%
Tuckamore Capital 8% 23-Mar-16 0.4% $0.3 0.2%
Parex Resources     0.3% $0.3 0.0%
Northern Blizzard     0.3% $0.2 0.0%
Alpha Natural 7.50% 1-Aug-20 0.3% $0.2 0.0%
Wolfden Resources     0.2% $0.2 2.0%
Hexion 6.63% 15-Apr-20 0.2% $0.1 0.0%
WG     0.1% $0.1 0.1%
Charlotte Resources     0.1% $0.0 n/a
Tanzania Minerals     0.0% $0.0 3.1%
Uranium Resources     0.0% $0.0 0.0%
Charlotte Resources     0.0% $0.0 n/a
Xinergy   13-Aug-17 0.0% $0.0 n/a
Silver Standard Resources     -0.3% ($0.3) 0.0%
SPDR S&P Oil & Gas E&P ETF     -2.6% ($2.2) -0.1%
iShares S&P/TSX Capped Energy ETF     -3.8% ($3.2) -0.3%
           
Total Net Exposure     48.7% $41.2  
Cash     51.3% $43.4  
Total Gross Exposure     62.1%    

 

 

Marret has proposed two distributions and will hold back an $8mm reserve along with its Cline bonds.  The initial distribution of 60% of “Adjusted NAV” (net of Cline), or $2.59 per share, is to be distributed no later than July 31 2015.  The second distribution of the remainder of Adjusted NAV (net of $8mm holdback), or $1.24 per share, will be distributed no later than October 31st 2015.  These distributions total $3.83 per share (97% of the current share price).  After of these distributions, MAR will hold an $8mm reserve, which will be invested in debt and equity of resource companies (but no privates or illiquid securities), along with Cline Mining bonds.

 

Valuation

 

We model three scenarios, assuming a 60% of adjusted NAV distribution at the end of July and a second distribution of the remainder (net of the reserve and Cline bonds) at the end of October.  We assume the remaining stub could be liquidated by year end for $0.23 - $0.39 per share, which represents 50 – 75 cents on the dollar for the $8mm investment portfolio and 0 – 10 cents on the dollar for Cline bonds.  This leads to an estimated IRR of 14% - 33% for MAR at the current price:

 

 

  IRR 12-Jun-15 31-Jul-15 30-Oct-15 31-Dec-15   Reserve Mark Cline Mark Total Recovery
High Case 33.0% -$3.94 $2.59 $1.24 $0.39   75% 10% $4.22
Mid Case 25.5% -$3.94 $2.59 $1.24 $0.33   67% 5% $4.16
Low Case 13.8% -$3.94 $2.59 $1.24 $0.23   50% 0% $4.06

 

 

All three scenarios lead to an estimated double-digit IRR below a purchase price of $3.98 per MAR share:

 

High Case                          
  Stock Price # $3.90 $3.91 $3.92 $3.93 $3.94 $3.95 $3.96 $3.97 $3.98 $3.99 $4.00
  IRR   38.7% 37.3% 35.8% 34.4% 33.0% 31.6% 30.2% 28.8% 27.5% 26.2% 24.9%
Mid Case                          
  Stock Price # $3.90 $3.91 $3.92 $3.93 $3.94 $3.95 $3.96 $3.97 $3.98 $3.99 $4.00
  IRR   31.0% 29.6% 28.2% 26.9% 25.5% 24.2% 22.9% 21.6% 20.3% 19.0% 17.8%
Low Case                          
  Stock Price # $3.90 $3.91 $3.92 $3.93 $3.94 $3.95 $3.96 $3.97 $3.98 $3.99 $4.00
  IRR   18.9% 17.6% 16.3% 15.0% 13.8% 12.5% 11.3% 10.1% 8.9% 7.7% 6.6%

 

 

Conclusion

 

Marret Resource Corp is trading at an 8.1% discount to its adjusted NAV.  At the current price of $3.94 per share, one can earn an estimated 14% - 33% IRR under the current management-proposed liquidation proposal, which is to be voted on at the end of the month.  This is a low-risk investment with a sufficient margin of safety supported by liquid assets (over half of which is cash) with a near-term catalyst. 

 

Buy MAR at $3.97 or better.

 

 

Risks

 

  • Liquidation is cancelled or delayed

  • Remaining investments decline in value

  • Stub valuation is lower than expected

 

 

 

 

 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

- Implementation of liquidation

- Distributions

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