MFC Bancorp Ltd. (MFCB) increased 47% from $9.50 to $13.98 in the three days since releasing very positive financials and a business update on April 30th. The thinly traded nature of the stock plus imminent news of a corporate restructuring leads us to believe that MFCB is a very good candidate to go on a crazy run, much like we have seen on stocks like Hunter Maritime Acquisition Corp. (HUNT), Reebonz Holding Limited (RBZ), Phunware Inc. (PHUN) and Integrated Media Technology Limited (IMTE). All of these listings have been thinly traded, thin float stocks that went on crazy runs after some sort of corporate restructuring or new business. We are up to 860 followers despite not giving out a lot of alerts, a fact that we think is indicative of a successful, diligent and prudent stock picking history. If you like our picks you can follow our blog by clicking the follow button on the top of the left hand panel. You can also follow us on Twitter @StockTradePicks. We have nearly 4,000 followers on Twitter as well.
While HUNT, RBZ, PHUN and IMTE have or one time had ridiculously small floats, sometimes under one million shares, MFCB allegedly has a 6.1 million float on 12.3 million total shares outstanding. We don't think that is accurate based on the price history:
On May 1, the day after financials were released, MFCB moved 37% on only 250,000 shares traded. On Friday it moved 6% on only 27,000 shares traded. Compare that to RBZ which trades over a million shares most days, and multi-millions on any day that it moves more than 10%. If MFCB truly had a float of 6 million shares waiting to hit the market, there would have been a lot more sellers on the way to $13. Perhaps these investors see the value of the company because of the excellent financials and aren't willing to sell so low. On the evening of April 30th, MFCB released this news along with its annual report:
Management welcomes any questions you may have and looks forward to discussing our operations, results and plans with stakeholders. Further:
There is a lot of interesting stuff to take away from this report and news release:
"We also hold an interest under a mining sub-lease related to the Scully iron ore mine located in Newfoundland and Labrador, Canada, which commenced in 1956 and expires in 2055. The mine site is located approximately three kilometers west of the town of Wabush and is connected by rail access to the Port of Sept-Iles, Quebec.
The mine lies within the Labrador Trough in Western Labrador. The Sokoman Formation is an iron formation that consists of three iron bearing formations, named the Upper, Middle and Lower Iron Formations. The Sokoman Formation is more than 300 m thick near the mine and has been subjected to two episodes of folding and metamorphism during the Hudsonian and Greenville orogenies, resulting in a complex structural pattern in the Wabush Area. The younger Menihek and Shabagamo Formations and the older Denault, Attikamagen, and Wishart Formations all outcrop in the vicinity of the mine site. The mineral deposit consists of folded and faulted stratigraphic beds of iron-bearing units within the regional Sokoman Iron Formation. The ore minerals are hematite (specularite), magnetite, and martite. The waste minerals are quartz and hydrated iron oxides such as limonite and goethite. Manganese oxides also occur in banks or are disseminated throughout the iron-bearing units.
Iron ore was first reported in the area of the mine in 1933. In 1956, Picklands Mathers & Company, referred to as “Picklands”, began work on the project and started the first intensive geological, metallurgical and economic investigations thereon. The mine was operated by Picklands from 1965 to 1986, when Picklands was acquired by Cleveland-Cliffs Inc., referred to as “Cliffs”, who operated it from 1986 until being put on care and maintenance in February 2014. For most of its life until 2010, the mine was operated as a joint venture owned by Stelco, Dofasco, Inland Steel, Acme Steel and Cliffs. Cliffs exercised a right of first refusal in February 2010 to acquire 100% ownership of the property. Cliffs placed the mine and concentrator on care and maintenance in February 2014 and, in 2015, commenced proceedings under the Companies’ Creditors Arrangement Act, referred to as the “CCAA”. The mine was acquired by Tacora Resources Inc. in July 2017 and, in November 2018, Tacora announced that it had completed financing that, together with existing commitments it had received, would be sufficient to fund a proposed re-start of the mine and announced that it plans to re-start the mine in the summer of 2019, with ramp-up of operations to continue to 2021.
In the third quarter of 2017, we entered into a settlement agreement with the new operator in respect of an underpayment of royalties under the lease by the past operator, whereby we received $5.6 million in settlement of such claims. Pursuant to such agreement, we also amended and restated the sub-lease underlying our interest. As a result, our royalty interest is now a 7.0% net revenue royalty interest on iron ore produced from the mine and 4.2% net revenue royalty interest on iron ore produced from tailings and other disposed materials. Under the terms of the sub-lease, we are entitled to minimum payments of $3.25 million per year.
The mine site includes electrical infrastructure, a maintenance facility with five bays and cranes, warehouses, a wash bay, explosive storage, a machine shop, dewatering equipment, fuel storage, administration buildings, a concentrator plant and rail load-out and track infrastructure."
Now we understand why MFCB states its financials in Canadian Dollars despite being domiciled in Hong Kong and listed in the United States. We also understand why it plans to rename itself Scully. MFCB's interest in the restarted Scully Mine located in the heart of the Sokoman Formation in Newfoundland and Labrador, Canada is going to be its primary business (while still owning several other assets around the world). The Sokoman Formation was hot last year, made popular by a gold discovery from Sokoman Minerals Corp. (SICNF) (SIC.V). We spoke about Sokoman last August along with the area plays beside it in Newfoundland. While the hype around this region didn't last and the stock price has dropped, MFCB has its own connection to Scully that could put this area back in focus again.
Tacora Resources managed to secure the financing needed to get this mine up and running again. This was a significant deal with $212 million US in private equity and senior secured debt on top of $64 million US previously committed for mining equipment. Tacora doesn't get this deal done without the economics clearly making sense to the private investors.
This news made national media in Canada. The CBC, Canada's government broadcaster, reported on the mine being restarted in the summer of 2019:
"New life is about to be breathed into an old pit, as Tacora Resources Inc. announced today the Scully mine will restart operations next summer.
The company is expecting to create 260 jobs, and will start looking for those workers right away. A hiring information session is expected to take place Tuesday night, 6:30 p.m. at the Arts and Cultures Centre in Labrador City.
"It's the life breathed back into our community again," said Wabush Mayor Ron Barron. "Let's get the show going and get people working."
Premier Dwight Ball was in Labrador West on Tuesday to make the announcement alongside Tacora CEO Larry Lehtinen.
Lehtinen said the Scully mine has a future "decades and decades" long, with an expected annual production between 6 and 6.5 million tonnes of iron ore, which will be 65.9 per cent iron content.
He said he's hoping to have "the first concentrate product hitting the railcar" in June 2019, and that the mine will be operating at full tilt in 2020.
Tacora says the mine will operate for at least 25 years, with all of its product sold to metal supplier Cargill for the first 15 years.
Tacora secured a private investment of $212 million US, along with $64 million US in mining equipment debt financing to restart the mine.
"It's not easy raising that kind of sum of money," Lehtinen said.
Lehtinen said despite claims the mine was at the end of its life, there's still a lot left in the pit.
In particular, the new operation will employ equipment that can separate and process manganese, which he said was otherwise a problem.
"The manganese content was a hurdle and an impediment before. We're turning that into an advantage. A lot of material that couldn't be processed, now it can.""
This is obviously very good news for the local people and speaks to the fact that all levels of government and native people want this mine restarted.
Tacora Resources tried going public last year, but obviously that was scrapped in favor of this private deal to raise the necessary cash:
Since Tacora managed to find the financing through private means, it didn't need the IPO. This is actually a good sign since the best businesses always go through private equity first before going public. However, given MFCB's connection to the mine and name change, could Tacora and MFCB be working on a reverse takeover transaction so that the entire interest in Scully is listed? The economics are very favorable according to Tacora's investor presentation, including an after-tax NPV of $1.1 billion CAD based on after tax cash flows of $100 million CAD annually:
A reverse takeover would be very positive for MFCB shareholders, depending on how much they would be left with after the combination. Even if there is not a reverse takeover, MFCB would be receiving the cash flow of 7.0% net revenue royalty interest on iron ore produced from the mine and 4.2% net revenue royalty interest on iron ore produced from tailings and other disposed materials on a mine projected to have $100 million in annual after tax cash flow. The net revenue figure used to calculate MFCB's entitlement will be much higher than that.
Disclosure: We are long MFCB
While HUNT, RBZ, PHUN and IMTE have or one time had ridiculously small floats, sometimes under one million shares, MFCB allegedly has a 6.1 million float on 12.3 million total shares outstanding. We don't think that is accurate based on the price history:
On May 1, the day after financials were released, MFCB moved 37% on only 250,000 shares traded. On Friday it moved 6% on only 27,000 shares traded. Compare that to RBZ which trades over a million shares most days, and multi-millions on any day that it moves more than 10%. If MFCB truly had a float of 6 million shares waiting to hit the market, there would have been a lot more sellers on the way to $13. Perhaps these investors see the value of the company because of the excellent financials and aren't willing to sell so low. On the evening of April 30th, MFCB released this news along with its annual report:
HONG KONG (April 30, 2019) . . . MFC Bancorp Ltd. (the “Company” or “MFC”) (NYSE: MFCB) announces it has filed its financial results for the year ended December 31, 2018. The Company also announced that it has scheduled a shareholder meeting to seek approval for: (i) the change of its name to "Scully Limited"; and (ii) the completion of a consolidation and subsequent forward split of its shares to further reduce administrative expenses.
2018 Annual Report
In late 2018, the operator of the mine underlying our iron ore interest in Canada announced that it had completed financing to re-start mining operations and that it plans to re-start the Scully mine in the summer of 2019. This development triggered a review of the carrying value of this asset, which resulted in the recognition of an after-tax non-cash gain of $137.4 million.
As a result, we returned to profitability for the first time since 2013 and reported net income of $112.3 million, or $8.96 per share, which increased our shareholders’ equity to $386.4 million, or $30.82 per share.
The Company's financial results for 2018 are set forth in its Annual Report on Form 20-F for the year ended December 31, 2018, a copy of which is available on its website at www.mfcbancorp.com and under the Company's profile at www.sec.gov.
All amounts are in Canadian dollars and the Company's financial statements are prepared in accordance with International Financial Reporting Standards.
Name Change / Consolidation and Split
Going forward, to reduce our costs and to better reflect our balance sheet and business we have called a meeting of our shareholders that is scheduled to be held on May 31, 2019. At the meeting, shareholders will be asked to approve the change of our name to "Scully Limited", which we believe better reflects our business strategy and profile going forward.
In addition, At the meeting, shareholders will also consider the approval of a consolidation of our common shares on a 25 for 1 basis, referred to as the "Consolidation", and subsequent forward split of such shares on a 1 for 25 basis, referred to collectively as the "Consolidation / Split". No fractional shares will be issued as a result of the Consolidation to registered shareholders (i.e. shareholders who hold their shares in registered form and not beneficially through a broker or other intermediary), with such fractional shares to be combined and sold by our transfer agent and the proceeds thereof to be paid to registered holders of fractional shares on a pro rata basis.
Subject to receipt of requisite shareholder approval, we currently expect the name change and Consolidation/Split to be completed on or about June 3, 2019. Additional information regarding the name change and Consolidation / Split will be included in the proxy materials relating to the meeting.
President’s Comments
Michael Smith, President and CEO of the Company, commented: “It is our goal and initiative to structure the group in a way that assists in substantially eliminating the discount between the market price of our common shares and our stated net book value per share as of December 31, 2018. We are in the process of defining and finalizing our plans and expect to announce details of such strategy in the near future.”
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Stakeholder Communications
- stakeholders are encouraged to read our entire audited financial statements and management's discussion and analysis for the year ended December 31, 2018 as set forth in our Annual Report on Form 20-F for a greater understanding of our business and operations;
- direct any questions regarding the information in this report to our North American toll free line: 1 (844) 331 3343 or email info@mfcbancorp.com to book a conference call with our senior management; and
- shareholders may request a hard copy of the Annual Report, free of charge, by contacting the Company as set forth above.
There is a lot of interesting stuff to take away from this report and news release:
- This company organizes itself out of Hong Kong. Three of the four companies named above - RBZ, IMTE and HUNT - are domiciled in Asia. These are the companies most likely to go on crazy runs.
- MFCB recorded net income of $8.96 per share and book value of $30.82 per share. MFCB uses Canadian Dollars (more on why later), so book value per share is about $23 US Dollars. But this is still a substantial discount to market price. EPS was based on a one time gain on a revaluation so this is not expected to be a repeated number, but there is reason to believe that MFCB will be making good money going forward.
- The CEO stated that it is his goal to restructure MFCB in a way to eliminate the discount of the stock price compared to book value per share. If he is successful, there is over 60% upside from Friday's close.
- Part of the restructuring involves reverse splitting the stock 1-for-25 then forward splitting the stock 25-for-1, for a zero net effect. Investors and traders reading this should be quite familiar with how small float stocks can run after a reverse split. So this scheme must be part of the CEO's plan to help make the stock run.
- The company will rename itself to Scully Limited, indicating that there could be a reverse takeover in order, again more on that below.
- The company is openly encouraging investors to call or email management to get updates. This thinly traded, unknown stock wants to be open and transparent to the market to try to raise its profile.
"We also hold an interest under a mining sub-lease related to the Scully iron ore mine located in Newfoundland and Labrador, Canada, which commenced in 1956 and expires in 2055. The mine site is located approximately three kilometers west of the town of Wabush and is connected by rail access to the Port of Sept-Iles, Quebec.
The mine lies within the Labrador Trough in Western Labrador. The Sokoman Formation is an iron formation that consists of three iron bearing formations, named the Upper, Middle and Lower Iron Formations. The Sokoman Formation is more than 300 m thick near the mine and has been subjected to two episodes of folding and metamorphism during the Hudsonian and Greenville orogenies, resulting in a complex structural pattern in the Wabush Area. The younger Menihek and Shabagamo Formations and the older Denault, Attikamagen, and Wishart Formations all outcrop in the vicinity of the mine site. The mineral deposit consists of folded and faulted stratigraphic beds of iron-bearing units within the regional Sokoman Iron Formation. The ore minerals are hematite (specularite), magnetite, and martite. The waste minerals are quartz and hydrated iron oxides such as limonite and goethite. Manganese oxides also occur in banks or are disseminated throughout the iron-bearing units.
Iron ore was first reported in the area of the mine in 1933. In 1956, Picklands Mathers & Company, referred to as “Picklands”, began work on the project and started the first intensive geological, metallurgical and economic investigations thereon. The mine was operated by Picklands from 1965 to 1986, when Picklands was acquired by Cleveland-Cliffs Inc., referred to as “Cliffs”, who operated it from 1986 until being put on care and maintenance in February 2014. For most of its life until 2010, the mine was operated as a joint venture owned by Stelco, Dofasco, Inland Steel, Acme Steel and Cliffs. Cliffs exercised a right of first refusal in February 2010 to acquire 100% ownership of the property. Cliffs placed the mine and concentrator on care and maintenance in February 2014 and, in 2015, commenced proceedings under the Companies’ Creditors Arrangement Act, referred to as the “CCAA”. The mine was acquired by Tacora Resources Inc. in July 2017 and, in November 2018, Tacora announced that it had completed financing that, together with existing commitments it had received, would be sufficient to fund a proposed re-start of the mine and announced that it plans to re-start the mine in the summer of 2019, with ramp-up of operations to continue to 2021.
In the third quarter of 2017, we entered into a settlement agreement with the new operator in respect of an underpayment of royalties under the lease by the past operator, whereby we received $5.6 million in settlement of such claims. Pursuant to such agreement, we also amended and restated the sub-lease underlying our interest. As a result, our royalty interest is now a 7.0% net revenue royalty interest on iron ore produced from the mine and 4.2% net revenue royalty interest on iron ore produced from tailings and other disposed materials. Under the terms of the sub-lease, we are entitled to minimum payments of $3.25 million per year.
The mine site includes electrical infrastructure, a maintenance facility with five bays and cranes, warehouses, a wash bay, explosive storage, a machine shop, dewatering equipment, fuel storage, administration buildings, a concentrator plant and rail load-out and track infrastructure."
Now we understand why MFCB states its financials in Canadian Dollars despite being domiciled in Hong Kong and listed in the United States. We also understand why it plans to rename itself Scully. MFCB's interest in the restarted Scully Mine located in the heart of the Sokoman Formation in Newfoundland and Labrador, Canada is going to be its primary business (while still owning several other assets around the world). The Sokoman Formation was hot last year, made popular by a gold discovery from Sokoman Minerals Corp. (SICNF) (SIC.V). We spoke about Sokoman last August along with the area plays beside it in Newfoundland. While the hype around this region didn't last and the stock price has dropped, MFCB has its own connection to Scully that could put this area back in focus again.
Tacora Resources managed to secure the financing needed to get this mine up and running again. This was a significant deal with $212 million US in private equity and senior secured debt on top of $64 million US previously committed for mining equipment. Tacora doesn't get this deal done without the economics clearly making sense to the private investors.
This news made national media in Canada. The CBC, Canada's government broadcaster, reported on the mine being restarted in the summer of 2019:
"New life is about to be breathed into an old pit, as Tacora Resources Inc. announced today the Scully mine will restart operations next summer.
The company is expecting to create 260 jobs, and will start looking for those workers right away. A hiring information session is expected to take place Tuesday night, 6:30 p.m. at the Arts and Cultures Centre in Labrador City.
"It's the life breathed back into our community again," said Wabush Mayor Ron Barron. "Let's get the show going and get people working."
Premier Dwight Ball was in Labrador West on Tuesday to make the announcement alongside Tacora CEO Larry Lehtinen.
He said he's hoping to have "the first concentrate product hitting the railcar" in June 2019, and that the mine will be operating at full tilt in 2020.
Tacora secured a private investment of $212 million US, along with $64 million US in mining equipment debt financing to restart the mine.
"It's not easy raising that kind of sum of money," Lehtinen said.
Lehtinen said despite claims the mine was at the end of its life, there's still a lot left in the pit.
In particular, the new operation will employ equipment that can separate and process manganese, which he said was otherwise a problem.
"The manganese content was a hurdle and an impediment before. We're turning that into an advantage. A lot of material that couldn't be processed, now it can.""
This is obviously very good news for the local people and speaks to the fact that all levels of government and native people want this mine restarted.
Tacora Resources tried going public last year, but obviously that was scrapped in favor of this private deal to raise the necessary cash:
Since Tacora managed to find the financing through private means, it didn't need the IPO. This is actually a good sign since the best businesses always go through private equity first before going public. However, given MFCB's connection to the mine and name change, could Tacora and MFCB be working on a reverse takeover transaction so that the entire interest in Scully is listed? The economics are very favorable according to Tacora's investor presentation, including an after-tax NPV of $1.1 billion CAD based on after tax cash flows of $100 million CAD annually:
A reverse takeover would be very positive for MFCB shareholders, depending on how much they would be left with after the combination. Even if there is not a reverse takeover, MFCB would be receiving the cash flow of 7.0% net revenue royalty interest on iron ore produced from the mine and 4.2% net revenue royalty interest on iron ore produced from tailings and other disposed materials on a mine projected to have $100 million in annual after tax cash flow. The net revenue figure used to calculate MFCB's entitlement will be much higher than that.
Disclosure: We are long MFCB
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