Thursday, August 18, 2011

Terra Nova Royalty Corporation (TTT)

A good article/write-up on Seeking Alpha of a company and manager with a great track record. The conference calls can be accessed HERE. (Neither I nor the fund I co-manage have a position in TTT at the time of this post)

Before the end of the year, Terra Nova plans to distribute to shareholders about $100m in assets that the management thinks should not be part of the “new” MFC. My guess is this will mainly be the real estate situated in Dessau and Stendal (which has no synergies with the supply chain management operations) along with some other assets or excess cash which still have to be announced. This will reduce the net worth of the company to about $450m, an amount that the company is comfortable with to achieve further growth.

From the financial standpoint, shareholders really have nothing to complain about. Based on the management’s valuation (which we have to trust since there is little transparency about the assets), the book value of the company is $8.91 per share, and the company earned $0.38 per share in the first half (if the share-based compensation expensed in Q1 is backed out). The royalty rate on the Wabush Mine increased compared to last year, but shipments or iron ore pellets from the mine are still below the historical average (see my previous article for details about the royalty asset). If production ramps up again after maintenance and repairs, and iron ore prices stay favourable, the royalty could earn the company an extra $0.20 per share as Mr. Smith indicated in the telephone conference yesterday. If this materializes, and the rest of the business performs in-line with the first half, the new MFC Industrial could earn $1 per share this year. So at about eight times earnings, a discount to book value, lots of cash on the balance sheet ($413.8m, or $6.62 per share) and a $1.63 special dividend or spin-off distribution coming later in the year, the valuation is not demanding.