|Shares Out. (in M):||1||P/E||17||14.5|
|Market Cap (in $M):||132||P/FCF||17||14|
|Net Debt (in $M):||-14||EBIT||11||15|
As we watch Florence bare down on the Carolinas, first we pray that everyone leaves the area safely and there is no loss of human life, then we start to consider the impact on our portfolio and the possible opportunities it may bring. Home Depot and Lowe's immediately come to mind, but so do they come to the cerebrums of millions of other investors. But Pardee Resources (PDER) certainly does not!
Pardee, pure and simple, is a commodity/natural resource investment company. It was reviewed on VIC five and one half years ago. So we believe it merits another analysis. It makes it's money through royalties and the purchase and sale of its commodity assets.The Company's operational guidelines are very well defined: 1) Invest in real, long lived assets requiring minimal operational involvement; 2) Maintain a strong flexible balance sheet; and 3) Seek out niche investment opportunities where competition is limited. The Company is the definition of a long term investment requiring patience. It's not looking for quarterly results but seeking to take advantage of the limited supply of natural resources on the planet. It defines these natural resources as: 1) Minerals, including fossil fuels; 2) Natural vegetation, including timber; 3) Animals, including fish; 4) Solar Radiation; 5) Wind; 6) Water; and 7) Land. We direct you to the April, 2013 write up for a good summary of some of the Company's historical investments.
Florence was the driver for us to look more closely at Pardee, but as we dug further we found some interesting data. Not surprisingly, PDER is highly correlated to commodity prices, specifically the GSCI, the Goldman Sachs Commodity Index. If we graph the GSCI versus the S&P 500 from 1971 to 2017, we find that the GSCI is now at its lowest point versus the S&P in almost 50 years, suggesting that this might be a good time to have some PDER in your portfolio. The prior low point was reached in 1998. From 1998 to now the S&P is up 180% but PDER is up over 500%!
That's certainly outstanding performance by any measure. What explains this out performance?
1) Employee Continuity: The entire employee base has an average of 17 years with the Company.
2) Invest for the Long Term: take only measured risk, be patient and focus on IRR.
3) Be Conservative: Preserve the quality of the balance sheet and diversify.
4) Expense Control: The Company has the same number of employees it had 20 years ago, 27, despite the fact that assets have grown from $27 million to $190 million.
5) Shareholder Focused: The Board owns 16% of Company shares and employees own 9%.
6) Don't deviate from the Focus on Natural Resources.
Okay, so where does Florence come in? PDER owns more than 170,000 acres of timberland, including 154,000 acres of hardwood most of which is in West Virginia and 17,000 acres of softwood pine plantation property located in central Virginia. The pricing of this timber will hopefully be positively impacted by Florence. This may be a short term effect, but it highlights the opportunity in Pardee.
What other natural resources does Pardee own?:
1) The Company has extensive coal holdings, including 250,000 acres throughout the Central Appalachian Basin. The properties contain an estimated 325 million tons of miserable coal reserves, including 133 million tons of the highest quality coal reserves in North America.
2) PDER owns over 730,000 acres, mostly in the Appalachian Basin, of oil and gas reserves. The properties contain over 32 billion cubic feet of proved reserves.There is no shale development, yet. There are 3,580 conventional operating wells.
3) Since 2010 PDER has invested in several solar projects.To date the Company has invested a total of $46.8 million in 28 separate solar projects that it owns and manages.
4) To date, the Company has invested almost $6 million into two premium grape farms in Southern California.
We strongly encourage you to get a copy of the 2017 annual report for an excellent review of the company's assets and sales and purchases. There is no need for us to rehash this excellent presentation.
The Pardee balance sheet, as intended and managed, is pristine. The Company has almost $27 in cash per share. The Company has no net debt. It's tangible book value is almost $252 per share which means it sells for 75% of tangible book value! (We don't count deferred taxes as a liability.) This is much more impressive than it appears. Remember the assets are on the balance sheet at cost with some of the costs dating back to the 1800's! So, certainly book value is understated, to put it mildly! Oh, by the way, the Company also pays a 3.8% dividend!
Let's take a look at second quarter 2018 results. The Company earned 25% more than last year at $2.96 per share. The coal and timber markets were strong. Low natural gas prices and a weaker alternative energy division hampered performance. The company benefited from the new lower tax rates. Some Highlights:
- Central Appalachian coal exports increased 112%
- Gas spot prices averaged 12% lower than last year
- Hard wood prices increased 10% but poor weather reduced production by almost 9%
- Rural real estate sales were strong
- An outage reduced electricity production
The company continues to cautiously look for acquisition opportunities. I can't overemphasize that this is one quarter's results which are not very meaningful. I would look at the old presentation to look at the long term results to better gauge what the opportunity is here.
So what are the negatives here? The shares are illiquid. These shares will not make you rich overnight. The shares are delisted and don't provide the full SEC reporting, but they do a good job of keeping shareholders apprised, including notes and the presentation from the Annual Meeting. I completely recognize these shares are not "everyone's cup of tea".
What are the positives here:
1) A proven and outstanding track record of success.
2) Highly experienced and very conservative management.
3) Shares can be purchased at 75% of an understated book value.
4) They provide a 3.8% dividend yield while you wait.
5) An excellent way to participate in the commodity markets and possibly have a non-correlated asset.
6) Management and employees own 25%
Well, the main catalyst is time. We don't expect a takeover or instant gratification. We expect that over time an investment in limited resources, managed by an experienced conservative team will appreciate.