Investing

I wrote about the AHUG securities here in my post about general Allco securities. I indicated that they were worth about 60c on the dollar in the absence of the Allco guarantee. After Allco confirmed they would not honor the guarantee I estimated a value of closer to 50c on the dollar for AHUG based on an Alleasing sale between 120-180M and an appropriate portion of Allco's Mezzanine money to be kicked back to AHUG holders.

My weighted average purchase price across accounts was $17.88 adjusted for purchases made a few days before the previous interest payment.

AHUG was trading at $10 before it was suspended pending a sale of the Alleasing trust which took Allco about 2 weeks longer than they expected. An announcement was made on Friday outlining the terms of the sale:

• Sale of Alleasing trust for total consideration of $146M
  
• $20M of that is deferred for 18 months and subject to various conditions, warranties etc
  
• Allco gets $49.9M total consideration
  
• Alleasing gets $49.9M total consideration
  
• AHUG holders get $41.97 within 2 months of completion which is estimated to occur on 30th November
  
• AHUG holders get $8.03 after final payment of the deferred amount subject to adjustments
  
• AHUG holders have to agree and no doubt waive all their other rights
  

AHUG is now trading again and traded as high as $38.1 before closing at $33, a reasonable 230% rise from the pre-suspension price!

A quick look at the numbers shows that a purchase today at $30 would provide an annualized 119% return or 40% over 4 months followed by an additional 27% after 20 months from now.

The outstanding risks are:

• The sale does not proceed - Alleasing needs to continue to pay interest and Allco may still be on the hook to redeem AHUG. Allco had other bidders and would almost certainly be able to find another buyer, though at worse terms
  
• The deferred amount is substantially less than forecast - from today's price almost all the value is in the January 09 payment anyway. The deferred payment is just a bonus
  
• AHUG holders vote down the proposal - Allco can try to force the sale, though I'm not sure this would succeed. Allco could put the trust into receivership, in this case it seems likely that AHUG holders would eventually get more than proposed except if the trust was liquidated which doesn't seem to be in anyone's interests. I don't think a receiver could recommend liquidation if the company is so obviously worth more as a going concern. AHUG holders could still pursue the Allco guarantee.
  

The trust is worth book value + additional residual value + interest margin + new business margin. This is roughly -30M + 180M + 60M (over 2 years) + 45M (assuming 5% on assets as new business is written). This comes out at 255M. Therefore CHAMP Private Equity, the purchasers, are getting a good deal and ought to be motivated to see this close. Allco are motivated because they have to desperately raise cash to meet debt level agreements. AHUG holders are motivated because they may see 60% in a runoff but that would be in 2-3 years time. Given this business environment, 41% return now and 9% return in 18 months is about the same thing or slightly better.

Therefore a buy around $30 is still looking good and is much lower risk that a buy at $10 before the announcement (and much lower reward).

I mostly recently wrote about Strahmore Mineral (STM) here. My valuation hasn't changed but the stock price certainly has. It is now trading around 40c, a price last seen in 2003. This chart is worth looking at to see that this has happened before. Mind you the last time STM traded at 40c long term Uranium was trading at a fraction of $80, about $10 in fact during a bear market.

The only real, fundamental risk that could justify such a low price is running out of cash. A quick analysis can put that issue to bed:

Their cash burn rate is between $2m and $4m per year. This is substantially within their control based on how much they spend on exploring, advertising and travel. They have $1M cash on hand (after paying $1m for Chord) and $10m in bonds and bond funds which were unimpaired as of June 30, 2008. They also have about $4m in unlisted investments which could be worth something. They are also due $400,000 from Great Bear upon execution of a deal to buy Chord. If the deal doesn't happen then the cash won't come.

Let's take the most conservative approach and say $11m cash and REAL cash equivalents. That is at least 3 years worth of cash expenses and it could almost certainly be extended out further.

They continue to be able to sell equity in properties that they acquired for cash. Real properties with Real Uranium deposits, even if they can't raise equity or debt financing.

The obvious question is what could have caused such a fall in their share price. I think the obvious answer is that there is not much liquidity in their stock. Only a few hundred thousand shares trade every day and a big player is having to sell. Consider that Sprott had an interest in Strathmore and the press is reporting substantial redemptions. Even if Sprott wanted to increase their Strathmore exposure they would achieve that by selling less than they sell of other things. Buyers are scared to death and probably (like me) spent most of their available cash buying at the terrific prices on the way down to here!

Risk Reward 5 years : 15:1