Value Investors Club / Winmill & Co. Inc. (WNMLA)

Description

Winmill may trade at an even bigger discount to intrinsic value than when Charlie479 wrote it up six years ago (even though stock has tripled). Winmill trades below net cash and investments, yet it has a nice little operating business running the Midas gold mutual fund (rated five stars by Morningstar for three-year performance). At the current absurd valuation, Winmill has minimal downside coupled with large upside.

Biggest drawback of this idea: It’s tiny (sorry).

Background

The 2001 write-up by Charlie479 and the associated message board provide a good overview of the Winmill thesis and the concerns that have kept investors away. I highly recommend the write-up and the message board discussion.

There have been three major developments since Charlie479’s write-up: (1) Winmill’s share price has increased from $1.70 to $5.00; (2) Winmill’s net cash and investments have increased from $3.91 to $5.06 per share, thanks primarily to the successful sale of a major investment by Bexil Corp. (AMEX: BXL), a Winmill affiliate; and, most importantly, (3) Winmill is no longer just a “cigar butt,” but has a rapidly growing, well performing gold investment business that could serve as the catalyst for a major revaluation of the shares.

Note that the current net cash of $5.06 per share is a conservative figure, as it is based, among other items, on the tax-effected market value of Winmill’s 222,644 shares of cash shell Bexil on September 30, 3006. Bexil shares have appreciated from $26.12 per share on September 29, 2006 to $32.00 per share on May 17, 2007. In addition, Bexil trades at a discount to net cash, i.e., Winmill has meaningfully more “look-through” net cash and investments than the $5.06 per-share figure suggests.

Midas Fund: Gem Hidden Inside a “Cigar Butt”

While buying a non-depreciating asset for less than net cash is nice, getting an attractive operating business thrown in for free is what makes WNMLA so attractive.

Highlights of the Midas gold mutual fund business:

· Strong AUM growth: Assets under management have tripled since the end of 2004 and more than doubled since the end of 2005.

AUM	Dec-01	Dec-02	Dec-03	Dec-04	Dec-05	Dec-06	Apr-07
Midas Fund	$39mn	$55mn	$67mn	$57mn	$75mn	$139mn	$171mn

· Strong performance: Investment results compare favorably to those of the Category for rolling one-, three- and five-year periods.

Performance *	YTD	1 Year	3 Years	5 Years
Midas Fund	8.62%	7.78%	39.85%	28.60%
Category	2.10%	-0.41%	28.34%	24.37%
Outperformance	6.52%	8.19%	11.51%	4.23%

* Annualized (except YTD)

· Improving Morningstar rating: Strong rating improvement reflects positive trend of investment performance versus the Category.

Morningstar Rating	3-Year	5-Year	10-Year	Overall
Midas Fund	«««««	««««	«	«««

Value of Ancillary Assets Exceeds Market Cap: “Getting Paid” to Own Midas Fund

The following analysis shows that, at $5.00 per Winmill share, investors are being “paid” to own the Midas gold mutual fund business.

Winmill & Co. Intrinsic Value ex. Midas Fund	Conservative Value	Fair Value	Assumption Underlying Conservative Value	Assumption Underlying Fair Value
Cash, ST investments	$1.8mn	$1.8mn	Balance sheet on 9/30/06	Balance sheet on 9/30/06
222,644 shares of Bexil Corp. (AMEX: BXL)	$7.1mn	$9.3mn	BXL market price on 5/17/07 ($32.00/share)	BXL net cash minus total liabilities on 12/31/06
234,666 shares of Tuxis Corp. (Pink Sheets: TUXS)	$1.3mn	$1.3mn	TUXS market price on 5/17/07 ($5.55/share)	TUXS market price on 5/17/07 ($5.55/share)
634,200 shares of Foxby Corp. (AMEX: FXX)	$1.6mn	$2.0mn	FXX market price on 5/17/07 ($2.60/share)	FXX net asset value on 5/16/07 ($3.22/share)
Management of mutual and closed-end funds ex. Midas Fund ($72mn AUM on 12/31/06)	$0.0mn	$1.4mn	No value	Worth 2% of assets under management
Income tax liability	($1.9mn)	($2.2mn)	Balance sheet on 9/30/2006 plus estimate	Balance sheet on 9/30/2006 plus estimate
Winmill & Co. Value ex. Midas Fund	$10.0mn	$13.7mn
Winmill & Co. market value ($5.00/share)	$8.3mn	$8.3mn
Implied value of Midas Fund	($1.7mn)	($5.3mn)

What is Midas Fund Worth?

The value of the Midas Fund business is in the eye of the beholder, and many VIC members know a lot better than I do how to value a fast-growing, strong-performing fund management business. Here is what I believe should be taken into account when valuing the business:

Negative: Management has to date not fully capitalized on the growth potential of Midas, and this may continue. While management and directors own approximately one-third of WNMLA and have a strong incentive to “maximize the value” of the business, there is a real risk this may not happen.
Positive: Owning the Midas Fund business provides exposure to gold without paying for the commodity itself. With the dollar at risk of further depreciation, it’s nice to own a hedge without really paying for it.
Positive: Impressive AUM growth, driven by strong performance versus the Category.
Positive: Improving Morningstar rating, including highly marketable three-year rating of five stars.
Positive: Room for improvement of Morningstar’s overall rating (currently three stars): If Winmill simply lowered the Midas Fund’s total expense ratio of 1.96% to the Category average of 1.56%, the Morningstar rating might improve.
Positive: Room for improvement on marketing front: As far as I can tell, Midas Fund’s asset growth has been driven primarily by the strong performance versus the Category rather than by good marketing. Winmill could become much better at growing the Midas Fund’s asset base.

What Winmill Could Do To Maximize Value

In order to turn WNMLA into a GROW-like story, management should pursue one of the following three courses of action:

1) Divest ancillary assets, move WNMLA back to the Nasdaq, lower the expense ratio of the Midas Fund, and become more aggressive on the marketing front; or

2) Spin off the Midas fund management business in a way that highlights the value of the business; or

3) Sell the Midas fund management business to an entity that can better capitalize on the substantial growth opportunity.

Key Risks

Insider control. While the Class A shares (WNMLA) account for virtually all of the economics of Winmill & Co., the Class A shares are non-voting, with all voting power vested in insiders.
Form 15 company. While Winmill appears committed to providing quarterly financial statements and audited annual financials along with detailed footnotes, the company has not been a filer of periodic reports with the SEC since 2004.

Catalysts

Value
Continued growth of Midas gold mutual fund
Translation of Midas Fund growth into EBIT growth for WNMLA
Potential divestiture of non-core assets
Strong Q4 results (2006 annual report should become available in next 60 days)
Ongoing share repurchase program (authorization in place to buy 500,000 shares, or 33% of total shares outstanding)

Disclaimer

This is not a solicitation to buy or sell stocks. Please do your own independent analysis before buying or selling WNMLA (or any other stock). We have a long position in WNMLA at the time of this write-up that can change at any time without notice. There are no plans to provide future updates on our WNMLA buying or selling activities.

Additional Information

Winmill & Co. website: http://www.winmillco.com/
Midas Fund website: http://www.midasfunds.com/

Appendix

Winmill & Co.: Net Cash and Investments *

(as of September 30, 2006)

($ millions, except per share data)

Cash and cash equivalents	$1.6
Investments in securities	0.2
Investments in securities, affiliates	8.7
Cash and securities	10.5
Total liabilities	(2.1)
Net cash and securities	$8.4	($5.06 per share)

* Calculation uses balance sheet data, which reflects market value of stakes in investee companies as of September 30, 2006. As pointed out above, Bexil trades at a discount to net cash.

Winmill & Co.: Shares Outstanding

(as of September 30, 2006)

Class A shares	1,519,667
Class B shares	20,000
Stock options	305,000
Less: Shares using treasury stock method *	(180,560)
Diluted shares outstanding	1,664,107

* Based on $2.96 weighted average options exercise price; assumes $5.00 per share WNMLA stock price

Catalyst

(1) Value; (2) Continued growth of Midas gold mutual fund; (3) Translation of Midas Fund growth into EBIT growth for WNMLA; (4) Potential divestiture of non-core assets; (5) Strong Q4 results (2006 annual report should become available in next 60 days); (6) Ongoing share repurchase program (authorization in place to buy 500,000 shares, or 33% of total shares outstanding)

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			2007	2008
Price:	5.00	EPS
Shares Out. (in M):	0	P/E
Market Cap (in $M):	8	P/FCF
Net Debt (in $M):	0	EBIT	0	0
TEV (in $M):	0	TEV/EBIT