The Last of ARD Shares Liquidated Today
ARD Shareholder July 29, 2005 -March 8, 2007
I remember the day July 29, 2005 with clarity and excitement. It was on this day that I decided to sell my GEOI in the $14-$15 range and move it into ARD in the $13-$14 range. My decision was based on logic and simple 8th grade math. ARD was superior to GEOI in terms of fundamentals, had far more oil assets per share, better future growth prospects, better management, and was significantly undervalued. The fact that ARD shares closed today at $44.67 and GEOI closed at $5.82 proves that the average person can do very well in the market by using simple logic and 8th grade math to take advantage of short-term inefficiencies in valuation. Long-term the market tends to get valuations right.
Today I sold the last of my ARD holdings and moved them into nickel producer Lionore Mining (LIM.to.) Lionore is traded on the Toronto Stock Exchange. Lionore Mining exhibits the same characteristics that ARD did back on July 29, 2005 except that Lionore has even better fundamentals, future growth prospects and an even higher degree of undervaluation. The company is so undervalued it is absolutely ridiculous.
The driving forces that led me to begin a quest to search for another company was the reality of slowing future production growth, revenues, net income and EPS. This concern was underscored when ARD appointed Phil Terry as Chief Operating Officer with a salary of $160,000. The creation of this new management position was in my mind the beginning of increased bureaucracy and higher costs and the end of the darling lean mean low cost company that I had grown to love. On top of that my analysis has indicated Q4'06 earnings of $0.36. The Wallstreet consensus is for $0.46. I expect up to a 21% miss in earnings. Certainly my number is conservative. In any case there is no way ARD will meet or exceed the consensus of $0.46 based on production of 325,000 BOE.
I don't believe the 2006 reserve report will surprise anybody. It is expected that they should increase by at least 40.2%. A miss would cause investor disappointment. Investors are left wondering why such a delay in the 2006 reserve report. Are there problems?
I believe investors have their heart set on commercial oil production in Kansas. Everyone is holding their breath on the results of the joint venture exploratory well that has been drilled on the Syracuse property in Kansas. If there is no oil then that will only cause disappointment.
One issue that has flagged my attention on the cashflow statement is the fact that even with all the capex spending the last 2 years cashflow from operating activities are still nowhere close to funding 100% of the capex program for 2007. The latest 10Q reveals $2 going out the door for every $1 that comes in the door. Compare the cashflow from operations of $30 million vs. Cashflow used in investing activites of $62 million. (See page 6 of 10Q.) This is not a good cashflow model.
Lionore Mining is the opposite. It has over $2.50 of cashflow from operations for every $1 of cashflow used in investing activities. (See page 5 of financial statement.)
My analysis indicates that LIM will earn $3.20 U.S. in FY2007. ARD is forecast to earn $2.58 by Wallstreet analysts. I feel the $2.50 range is reasonable. Based on ARD share price of $44.67 you could by 3.21 shares of LIM. If you decided to buy the 3.21 shares of LIM instead of the 1 share of ARD you would have earnings power of:
3.21 (shares) X $3.20 (2007 EPS projection) = $10.28.
In other words a $44.67 investment in LIM would yield $10.28 in EPS for 2007. The same investment in ARD would only yield 2007 EPS of $2.58. To put it bluntly, you are getting nearly 4X the earnings in LIM than by owning ARD. This is based on $15 a pound nickel. Currently nickel is worth over $20 a pound.
LIM has a stronger balance sheet, better cashflow and current assets exceed total liabilities. (Ben Graham would be proud!) The company has a demonstrated record of increasing production year after year. Given the fact that LIM takes in over 2.5 times as much as it spends (cashflow from operations vs. cashflow invested in capex and keeping the company running) there are no concerns about secondary offerings, issuance of preferred stock or going deep into debt. The same can not be said about ARD given the fact that its most recent cashflow statement shows over $2 spent for every $1 coming in from operations.
To top it all off LIM has a forward P/E of 4.4 in comparison to that of 17 for ARD. What we have in LIM is a company with better fundamentals, better future prospects, capable management, and extreme undervaluation. LIM should have a forward P/E at least double the current 4.4. This would yield 8.8 and yet nearly half of what the forward P/E is for ARD. (LIM really deserves a forward P/E at least as high as ARD. So you can see the high degree of undervaluation.)
In conclusion, there were events at ARD that got me looking for other investment opportunities. It was LIM's combination of superior fundamentals and incredible undervaluation that forced me to sell 100% of my ARD holdings and put them into LIM. I have been adding LIM (LMGGF) for a number of weeks. My low buy point was in the $9 range on LMGGF. Today LMGGF closed at $13.82.
I will continue to follow ARD. Since the last of my ARD shares were sold today I felt compelled to explain the reasons for doing so.
Sincerely,
Dok
Note: U.S. citizens can purchase the shares of Lionore Mining via the exchange symbol LMGFF. This is essentially LIM.to except that it is traded in U.S. dollars instead of Canadian dollars. Here is a link to the Lionore Mining website. There is also a wealth of information online about nickel.
ARD Shareholder July 29, 2005 -March 8, 2007
I remember the day July 29, 2005 with clarity and excitement. It was on this day that I decided to sell my GEOI in the $14-$15 range and move it into ARD in the $13-$14 range. My decision was based on logic and simple 8th grade math. ARD was superior to GEOI in terms of fundamentals, had far more oil assets per share, better future growth prospects, better management, and was significantly undervalued. The fact that ARD shares closed today at $44.67 and GEOI closed at $5.82 proves that the average person can do very well in the market by using simple logic and 8th grade math to take advantage of short-term inefficiencies in valuation. Long-term the market tends to get valuations right.
Today I sold the last of my ARD holdings and moved them into nickel producer Lionore Mining (LIM.to.) Lionore is traded on the Toronto Stock Exchange. Lionore Mining exhibits the same characteristics that ARD did back on July 29, 2005 except that Lionore has even better fundamentals, future growth prospects and an even higher degree of undervaluation. The company is so undervalued it is absolutely ridiculous.
The driving forces that led me to begin a quest to search for another company was the reality of slowing future production growth, revenues, net income and EPS. This concern was underscored when ARD appointed Phil Terry as Chief Operating Officer with a salary of $160,000. The creation of this new management position was in my mind the beginning of increased bureaucracy and higher costs and the end of the darling lean mean low cost company that I had grown to love. On top of that my analysis has indicated Q4'06 earnings of $0.36. The Wallstreet consensus is for $0.46. I expect up to a 21% miss in earnings. Certainly my number is conservative. In any case there is no way ARD will meet or exceed the consensus of $0.46 based on production of 325,000 BOE.
I don't believe the 2006 reserve report will surprise anybody. It is expected that they should increase by at least 40.2%. A miss would cause investor disappointment. Investors are left wondering why such a delay in the 2006 reserve report. Are there problems?
I believe investors have their heart set on commercial oil production in Kansas. Everyone is holding their breath on the results of the joint venture exploratory well that has been drilled on the Syracuse property in Kansas. If there is no oil then that will only cause disappointment.
One issue that has flagged my attention on the cashflow statement is the fact that even with all the capex spending the last 2 years cashflow from operating activities are still nowhere close to funding 100% of the capex program for 2007. The latest 10Q reveals $2 going out the door for every $1 that comes in the door. Compare the cashflow from operations of $30 million vs. Cashflow used in investing activites of $62 million. (See page 6 of 10Q.) This is not a good cashflow model.
Lionore Mining is the opposite. It has over $2.50 of cashflow from operations for every $1 of cashflow used in investing activities. (See page 5 of financial statement.)
My analysis indicates that LIM will earn $3.20 U.S. in FY2007. ARD is forecast to earn $2.58 by Wallstreet analysts. I feel the $2.50 range is reasonable. Based on ARD share price of $44.67 you could by 3.21 shares of LIM. If you decided to buy the 3.21 shares of LIM instead of the 1 share of ARD you would have earnings power of:
3.21 (shares) X $3.20 (2007 EPS projection) = $10.28.
In other words a $44.67 investment in LIM would yield $10.28 in EPS for 2007. The same investment in ARD would only yield 2007 EPS of $2.58. To put it bluntly, you are getting nearly 4X the earnings in LIM than by owning ARD. This is based on $15 a pound nickel. Currently nickel is worth over $20 a pound.
LIM has a stronger balance sheet, better cashflow and current assets exceed total liabilities. (Ben Graham would be proud!) The company has a demonstrated record of increasing production year after year. Given the fact that LIM takes in over 2.5 times as much as it spends (cashflow from operations vs. cashflow invested in capex and keeping the company running) there are no concerns about secondary offerings, issuance of preferred stock or going deep into debt. The same can not be said about ARD given the fact that its most recent cashflow statement shows over $2 spent for every $1 coming in from operations.
To top it all off LIM has a forward P/E of 4.4 in comparison to that of 17 for ARD. What we have in LIM is a company with better fundamentals, better future prospects, capable management, and extreme undervaluation. LIM should have a forward P/E at least double the current 4.4. This would yield 8.8 and yet nearly half of what the forward P/E is for ARD. (LIM really deserves a forward P/E at least as high as ARD. So you can see the high degree of undervaluation.)
In conclusion, there were events at ARD that got me looking for other investment opportunities. It was LIM's combination of superior fundamentals and incredible undervaluation that forced me to sell 100% of my ARD holdings and put them into LIM. I have been adding LIM (LMGGF) for a number of weeks. My low buy point was in the $9 range on LMGGF. Today LMGGF closed at $13.82.
I will continue to follow ARD. Since the last of my ARD shares were sold today I felt compelled to explain the reasons for doing so.
Sincerely,
Dok
Note: U.S. citizens can purchase the shares of Lionore Mining via the exchange symbol LMGFF. This is essentially LIM.to except that it is traded in U.S. dollars instead of Canadian dollars. Here is a link to the Lionore Mining website. There is also a wealth of information online about nickel.
posted by -Aztec- at 6:23 PM
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