Wednesday, May 18, 2016

LSB Industries - Agricultural & Industrial Chemicals

This is a special situation / turnaround story that appears to have resolved itself.

Management's guidance for 2017 is as follows:

but depends on 95% on-stream rates across its four facilities. I prefer to assume a 90%  figure for the Cherokee and Pryor facilities, a $475 medium term average selling price for Ammonia, and $3 cost of gas. 

Note that facility turnarounds are scheduled for even years so that the 2017 figures slightly overstate earnings power.
The end game appears to be to transform LXU into an MLP.  In the interim, however, using 5.5x EBITDA which is both the average historical multiple and the forward multiple at which CF Industries is trading would imply LXU is worth  ~$40/share as a C Corp (on 29.7 million shares) and ~$54/unit as an MLP.

Disclosure: I own some shares in LXU 


  1. You might be too aggressive with your ammonia price assumptions, Q1 realized prices were $300/ton

    Also given where European gas prices are headed - with significant LNG oversupply, it doesn't look like cash costs for ammonia will get it anywhere close to $400/ton in the medium term
    At $6/mmbtu gas, cash costs are well below $300/ton

    1. NOLA UAN swaps are trading as follows

      Lets use $150 as a 2017 price
      Plus $46 for transpport to Southern Plains
      = $196/T

      x 2 for the average Ammonia/UAN differential = implied price of $392

      This $392 is in the context of inventory drawdown as a result of poor application in fall 2015 on the demand side, and chinese producers -- i.r. the world's swing producers -- selling at below their marginal cash costs on the supply side. It could be that these conditions/behaviours persist indefinitely -- in which case LXU goes to $25 (or its comps derate by a couple of EBITDA turns).

      On the other hand, Chinese moves to cut thermal coal production and inability of high cost producers at the margin to sustain heavy cash losses as feedstock rises could mean a reversion of the price to let's say $25/t below the average price over the last 5 years ($575 in the Southern Plains).

      Split the difference and one gets to ~$475/t. It's possible that's aggressive. The market for US fertilizer equities thinks so, certainly.

  2. Hey Red, given your experience with F&B in HK, China and Macau area. You might be interested in Tsui Wah. Company recently announced profit warning and looks like what might be an interesting opportunity to get in to a quality F&B brand. Stronger one than future bright IMO given the better brand recognition.

  3. Thank you for the idea. I'm familiar with Tsui Wah and the problem that I can't yet quantify is: just how much of its revenue growth in HK was due to mainland tourism? The mainland expansion may or may not work out well but I'd like it better if I had a sense of the minimum earnings power attributable to HK.

  4. agree on that one. I am too waiting for the annual results to be out to get a better sense. On mainland expansion, I went through reviews on foodblogs, etc. feedback from the shanghai outlets are pretty positive.

  5. Some food companies that seem interesting as well are Thai Wah, Dali foods, Tenwow and Tao Heung. What I cannot figure out is, how significant is having your own distribution network vs brand power? I remember reading that part of KO's advantage is their large distribution network? Both Tenwow and Thai Wah seem to have their own extensive distribution network.

  6. Thai wah, before its merger used to be more attractive IMO. The starch business is more of a commodity vs. the vermicelli business and current price is no longer as attractive (will depend on margin expansion, capacity expansion in vietnam etc. Distribution network is a strong competitive advantage, not just in the food business but across many businesses. KO is able to use it distribution network to push through new product lines while also advertise for its brand (not sure how much of these is owned by bottlers), it is almost impossible to replicate the international network they have today and has become a huge competitive advantage for them. I can't say the same for Tenwow though.. the brand is not well recognised and the financials are spotty to say the least.. cash conversion has deteriorated for the past 3 years if i recall right.. Thai wah has much stronger branding (#1 vermicilli brand in thailand) than tenwow. Not familiar with dali or Tao heung

    Perhaps just to add another point on distribution network being a big adv, take Tencent for example, different industry but it has high penetration in China mobile and PC user base and through its penetration has been able to successfully distribute gaming titles that failed to take off in Japan and Korea. You can think of it as a parallel to food retail, by having your distribution capillaries extend to many more cities, villages, and even smaller towns, the impact on success of a product is huge..

  7. Red, holding on to Flybe is going to negate all your positive returns elsewhere at some point of time if you keep holding.. Airline costs are denominated in USD.. so that's an immediate >10% hit on the cost side given recent depreciation..and unless the view is that Sterling is going to reverse its course vs. USD anytime soon.. the pressure on Flybe or any aviation stock in europe is going to stay.. Would love to hear your updated views..

  8. Hi and thanks for your concern. Costs go up by 10% so profit per seat is only 9 pounds. Is that the sum of it or have you not articulated the main elements of your worry?

  9. Red,

    You have Brammer´s share price halving....

  10. Hi red great post

    When you say " Lets use $150 as a 2017 price
    Plus $46 for transpport to Southern Plains
    = $196/T

    x 2 for the average Ammonia/UAN differential = implied price of $392 "

    I think that you should exclude transport cost, because LXU uses the Tampa price index,. Currently the tampa price index is at 260$ for ammonia. (cornbelt is at 460-500)

    using your 2x Urea price, fair value for Ammonia in Tampa is 270$ right now...

    Am i right?

    thank you for your insights

    1. This is what I'd use for spot fair value estimates

      So if NOLA = $260 for Ammonia then Southern Plains FV is $355 and Corn Belt FV is 400
      If Corn Belt = $460 then Southern Plains FV = $400

      Split the difference and spot FV = $375

      Placed into context:
      -- world prices are currently below China anthracite-fed cash production costs
      -- Corn prices are well below $4
      -- the nat gas differential is narrow

      In any case, $375 ==> 175 EBITDA
      7x 175 EBITDA ===> $40/share equity value
      6x EBITDA to account for residual stigma from past problems ==> $28/share equity value


      "because LXU uses the Tampa price index"

      It uses the Tampa index for (1) its agreement to purchase ammonia from Koch; and (2) for its sales to industrial segments.

      Now that it has built its own ammonia capacity the Koch purchase agreement is no longer relevant. (That was the point).
      And most of its ammonia (and ammonia-derivative) sales will be into the wholesale agricultural space rather than to industrial clients

  11. Unrelated to LSB, but, are you participating in the Bracell merger arb? Seems like a no brianer.

    1. Thanks for mentioning this.

      I suppose the quality of the idea turns on why Sateri has made the offer. If it is to temporarily inflate the price of the Bracell asset so that it/he can get a secured loan to buy some other asset then this could turn out to be risky. Tanoto achieves his private objective, minorities fail to approve the resolution, and the stock sinks back to the $1 range. (Bracell's conpetitive position and economics are not a secret but neither is Tanoto's reputation). So, all in all, it doesn't seem at first glance to be my cup of tea but I'll think on it some more.


  12. Not sure if you're still following this one, but BFCF just announced a merger with BBX.


  13. Hey Red,

    I see you've finally got some cash! If you're needing a long oil idea(I think you mentioned elsewhere that you are too short energy), I think Gear Energy is pretty compelling here. With recent deal closure the balance sheet issues are all gone, so we have a low cost heavy oil producer at half of peer multiples that can grow production at $45 WTI and equity at 20% or so at that oil price. Something like an incremental 10% equity IRR per $5 WTI, so if ones base case WTI price is $60, this can deliver 50% IRR's through the 2020's. Perhaps not compelling enough standalone for you given your return hurdle, but it may be of use as a hedge?

    Congrats on such a great start to the year.


    1. Hi Rubycap -- I appreciate you mentioning GXE to me. I've been meaning to have a look at it and this is a good prompt to finally get to it.

  14. Hi Red,
    have you ever had a look at XTC?

    diversified revenue base: over products, geographies, clients and industries. High quality & low cost.
    good capital allocators, conservative and honest, sound dividend policy, great acquisitions (afx &alc).
    sales and net income have compounded at ~30% yearly (but cycle is peaking).
    production of die-cast moulds for light-weight parts is becoming favourable because of the new fuel-efficiency regulations kicking in.
    directors and officers own approximately 38% of the common.

    1. where we are in the automotive cycle - although a downturn might situate the company better compared to comps since it has zero debt
    2. structural trends: a steadily aging population, low economic growth, and historically high levels of consumer debt could all hurt vehicle sales.
    3. Exco’s U.S. operations earn profits in U.S. dollars - so some of the growth came from USD to CAD conversion, which might reverse
    4. they have also gained from a weak raw material cost environment which might reverse.

    If 2/3 growth of the last 5y is sustainable, the current price is 50% cheap over a 2-3y time horizon. But then again, that might not be able to match your investment hurdle...

    BTW, you mentioned over a year ago that if you started from scratch, you would basically invest all funds in Texhong (20%), 0184 (25%), FB (20%), FlyB and Rain. Now that prices have changed plus LXU and RTK are in the picture, I'd love to hear where you stand in a clean slate scenario.

    Thanks for writing, sharing and teaching.

    1. Hmm it looks like the market value of that folio is down 7% since then. I invest in 2 & 3 year cycles so I do like it at least as well today as I did then although, given the relative price moves within the folio, I'd re-weight it as follows:
      FB 30%
      Flyb 25%
      Keck 20%
      Texhong 10%
      Rain 0%
      Cash 15%
      and I'd use the cash to buy more of whichever of these the market decided to sell off by >30%

      If I were to start yet again from scratch for next 2 or 3 year cycle, I'd do this
      Future Bright 25%
      Flybe 20%
      Rentech 15%
      LSB 15%
      Keck Seng 10%
      Cash 20%

      If one or more of these falls by >35% I'd use the cash to buy more of it. If they pay off at different times I'd recycle the gains from the winners into the laggards and allocate the reserve cash to Keck Seng

      re; XTC
      Thx for the outline of the idea. If I'm understanding correctly, 17% annual total return is the upside potential and against that we are taking on currency risk, raw material risk, auto cycle "risk". I think that's too close a call for me, honestly.

  15. This is a LSB thesis 50 min video from robotti in 2014... when the stock was at 34$ ( 7% shareholder now)

    Very funny how markets can change in less than 2 years...


  16. BXC continues to deleverage

    1. Hey Red,

      Mind sharing if anything has changed your view of BXC and Paradise? I'm assuming you are simply pruning to raise cash and work your way towards the portfolio structure outlined above, but curious to know if I've missed anything to change the stories there.

      Also, Gear energy reported some excellent drilling results, and is now the only operator in the Paradise Hill play. I hope to see them make some land acquisitions(or even some of their recently bankrupt peers), and with some scale the EV/DACF discount could disappear very quickly. I think this is the best board/management team in small cap energy. Guys from Peyto, Raging river sure seem to know what they are doing.



    2. Jus tlike Texong or Brammer etc I have not changed my view re: BXC and Paradise .. Just raising cash.

      Gear Energy: I've spent some time poking around & doing the math on this name. Looks like it could be a real rocket. I think I'll have to spend a few hours lining up the energy ideas I like and try to figure out the lowest risk way of getting involved.

  17. Navigator gas looks interesting at these prices. Since I saw you were involved with GSL

  18. Hi Red,
    What do you make of PBF? seems like its escaping everyone's screens due to negative p/e, which is likely to change next quarter.

  19. Hi

    I think one has to get one's head around, at least, (1) the RINS math, and (2) the question of whether gasoline imports to the East Coast are here to stay. I haven't done the work so I can't really say.

  20. Thanks. Management did emphasise the focus on growing exports (assuming that's what you meant?). I'll do the RINS numbers on the weekend and share if anything interesting comes out of it. Not sure which RINs price would count as a safety margin.

  21. i guess I meant imports to the US. If PBF's refineries are mostly coastal that's likely a worry. If PBF is also more exposed to RINS that could explain the gap, if there is one, between how it is behaving relative to other refiners. Did a quick search and found this for example

  22. Seems like some Japanese net nets are getting more interesting with the increased amount of activism and regulations (guidelines) pushed through? Since probably the major reason these things are discounted so much is because of a lack of catalyst.

  23. do you like POT at current price or other fertilizer companies?

  24. Have you reconsidered your position in LXU?

    Tampa price index is down at 218$ which equates to 315$ selling price for LXU. The table doesn't show what happens at 315$... EBITDA comes down to 130M . If we consider 90% on-rate, 20m overhead, 45m capex, 25-30m interest and 39% tax rate. Earnings are almost zero...

    plus there is some new capacity coming in 2016 and H1 2017...

    What do you think? am i correct ?

    Thank you

    1. To the extent that I understand your numbers they don't look right to me.

      - "The table doesn't show what happens at 315$." What, for example, does this mean?
      - what is the actual tax figure that you have?
      - Are these 2017 #s or "mid cycle" #s?
      -- etc

      Rathet than address every possible permutation of what it is that you could be asking me I'll instead ask you instead to lay out your model in full so that I can better share my perspective.

  25. Obviously ammonia/fertilizer prices are low. I think it's very difficult (impossible?) to predict when they'll turn. Do you think UAN, LXU or somebody else is best positioned to weather continued low prices and then thrive on the next upswing?

    1. UAN probably has the best quality assets, ton for ton. But I think thay if one agrees that NA nitrogen enjoys a roughly $200/t to $300/t structural advantage in delivered cost then one capitalize that spread at 8% and apply that to gross ammonia production capacities of each listed entity toarrive at an enterprise valuation.

      From an investment perspective there are pros and cons to each name: CF may respond fastest because, inter alia, it it the most widely covered; Uncle Carl controls UAN; LXU trades at a discount that may prove less justified over time; OCIP may be the most underanalyzed; etc.

  26. IF we input 315$ ammonia price and 2,90$ nat gas in the model you posted for LXU it returns 110M EBITDA and 36m net income . In that model you assumed 8m interest expense, but if we look at UAN refi at 9,5% that input seems difficult. Using 20M interest expense net cinome after tax comes down to 25m... less than 1$EPS. we can argue if this is the bottom of the cycle or not...

    1. I see. Your inputs + my model --> less than $1 EPS. So rather than a question it was a friendly warning. I'm glad I followed up. Thanks.

  27. 8m interest assumes a 2% rate on 388m debt currently. Seems 6-7% is more reasonable? How likely is the mlp, and what would stop them from doing this? With 15m in overhead (they mention 5m in savings in sg&a), I get 120 - 40 - 20 - 15 = 45m Fcf. Seems pretty cheap still.

    1. Actually I think the MLP idea is dead. Not that it matters at prices below, say, $35

  28. Hmm it seems that LSB at 13$ vs CF at 24$, CF would be the more interesting one. Lower leverage, and similar FCF yields at current prices. Especially with the MLP out of the picture.

    As for ammonia pricing, it appears Tampa pricing is 240$ (per latest presentation 13 sept). But you need to add back ~90$ transport costs to the midwest, correct? So that would mean 330$, and that would imply about 150m$ in ebitda.

    So if we take 15m$ in overhead, 20m$ (assuming roughly 5-6% interest rates, curious how you get 8m$?) interest, and 40m$ capex and then 35% tax rate, that is 50m$ of free cash flow. at 13$ that would mean a 13.5% yield. But with higher debt vs CF's 12% yield (assuming 650m$ FCF for CF).

    I wonder why overhead is so high, and why is it not included in ebitda? Would be more accurate to call it eboitda then.


    Sigh. All we need now is a fracking induced earthquake.


    1. Sometimes lightning does strike twice in the same place...

  31. Hi Red,

    It´s a bad new because it´s not the best moment for the fertilizer industry to sell assets. But maybe if they start selling at the end of 2017 having good results, they could sell some assets atfair price for the shareholders.

    Could you please explain your point or view?


    1. If you look at CF Industries' Q3 2016 presentation, slides 11 & 14:
      $2,750 per nutrient short ton of capacity has an expected IRR of ~10%
      So ~$1,800 per nutrient short ton of capacity has an expected IRR of 15%

      LXU's agricultural segment has a nameplate capacity of ~510,000 nutrient short tons so the implied valuation, roughly speaking, of LXU's agricultural segment = 510,000 x $1,800 = $920 million.

      Industrial is probably worth 50M EBITDA x 8 = $500 million

      So implied EV of $1,420 less $475 in net debt, preferreds, fees, etc == > $950M to equity ==> $32/share

      Discount at will from there according to your view of how mechanically reliable LXU's plants actually are.

      ...Or maybe they will just sell the Baytown facility which is a fixed margin, industrial business captive to Covestra.

    2. How long can they survive in this environment? Looks like they have over 100m$ in liquidity after sale of assets and treasury shares. According to LXU presentation ebitda is expected to be about -4m$ in Q4. So looks like cash burn will be significant into 2017.

      Wondering why they don't just slash their overhead quicker. Is it because of employment contracts that have to run off first?

    3. Im struggling to see why results came out so bad. I get a $70-80 million cash burn at this rate going into 2017. Ammonia prices have been around 220-240$ last quarter, so ebitda minus overhead is supposed to be $60-70 million. But it is slightly negative instead going into Q4. What is going on here? Would be nice if they provided a bit more info on this.

  32. You may be interested in Cambium Learning Group (ABCD), a U.S. focused EdTech company. On the surface (and under GAAP), top-line results have looked poor for years as the company has transitioned from primarily print to ~70% digital and cash bookings have exceeded reported revenue. I think it's trading at about 10x FCF now (after taking into account NOLs), likely will report strong growth over the next two years and then be sold once the NOLs are largely used up. There's also room for accretive M&A if they can find products to plug in to their distribution apparatus.

    1. Thanks for mentioning it. I've spent some time on it and it's on my wish list

  33. Any true justification to the skyrocketing of dry bulk carriers?

    1. Dunno but anyone who entrusts his/her family's savings to Economou is being foolish.


  35. Is AEY on your radar? It looks really cheap. Trading at a discount to NCAV, and including amortization operating income is about 2.4 million with stabilizing revenue. They just acquired a company doing 2.3 million ebitda as well. All on a 17m market cap.

    1. Blogger favorite from 2011(?). Heard for it but never really put any effort into it

  36. E.g.

  37. why did you sell bluelinx? Seems like a nice play on house market recovery. They are coming through nicely on operational efficiencies and selling real estate.

  38. In case you haven't seen this:

  39. Canadians, eh? Disappointing.

  40. That is one ugly drop in RMB. Curious why they made it fall. Response to Trump's Taiwan phone call? Seems like macro factors are not giving you much of a break. Although anthracite prices did rally to 2014 levels. So at least there is that.

    1. Is it your intention to write up every US-based idea you see here on Seeking Alpha Pro?

    2. Someone's doing that? Though there's no problem profiting from another person's idea, doing so without putting any personal capital at risk seems deeply unsavory.

      I have been looking into FP Newspapers recently, and buying some as it transferred from the TSX to TSX-V--have you ever taken a look? It's priced as a likely zero (entire co worth well under $1 million!). It's a passive quasi-pass-through entity designed to distribute cash, with contractual right to (repeatedly adjusted and hence turned-off) cash flow from a struggling enterprise whose value is mostly intangible and repeatedly impaired, with pension woes, cost woes, and declining revenue. I think the most probable scenario is continuing losses and writedowns, with cash never flowing again from newspaper LP. It's possible/likely that in a wind-down holders would get nothing, although net cash at the public co level does approximate current market cap (it's such a small sum that administrative costs could eat it all up). But there are a number of scenarios where cash might flow again:

      Orderly decline with no/only minor further writedowns allowing some cash to flow back to FP (a "dream scenario," and even if the possibility of a relatively-good 4Q dangled in front of holders at the last quarterly does materialize, I can't imagine that any cash would be forthcoming until there were a year of "normal" quarters with distributable cash)

      Pay down and refinancing of debt at the LP (quite possibly not until 2020 or beyond, and would have to be in conjunction with an orderly decline/stabilization to show the enterprise could support debt payments)

      Consolidation of the Winnipeg newspaper market (just based on what's happened elsewhere)

      Manitoba pension funding relief reupped, combined with higher discount rates requiring less funding draw for pensions

      Distributable cash has been declining precipitously, but over the last 12 months it was 13.9 cents for a stock that trades at the moment under 10 cents. I recognize that this is very likely a sucker's bet on an ice cube that has nearly melted, but I'm tempted to add.

    3. Sounds like quite a mess. Thanks for this, I'll have a look at it

    4. You're welcome, and thanks for taking a look--would love to hear your thoughts, esp. if after 5 minutes they're an emphatic "Run away!"

  41. Hi Red,
    Did you happen to read the Longleaf 3q16 webcast transcript?
    They hold OCI, and make an interesting assumption regarding Nitrogen prices.
    In short, they say that demand grows by 1.5% a year, whereas supply at these prices is stagnant.
    Their conclusion: prices should start rising latest by 3q17.
    Enjoy your weekend,

    1. They're just relaying the consensus industry view on the trajectory of nitrogen prices. The consensus industry (producers & consultants) story =
      1) Demand growth outstrips capacity growth in Q3 2017.
      2) Ag demand growth is approx 2% to 2.5% per year. Industrial demand growth is approx 1% per year.
      3) Q3 is low demand so that prices start to rise in Q4 etc.

      As far as LXU is concerned that's relevant at a share price of $15-18. For CVR Partners it's relevant at share prices above $8.50 to $10. OCI is more heavily weighted toward industrial (rather than ag) markets.

      To be honest I generally only read analyses that I think stand a good chance of being original (even if not idiosyncratic).

  42. This comment has been removed by the author.

  43. Hi Red,

    Hope your winter holidays are going well! I'm wondering if you've spent any time on MX, Magnachip? Several VIC writeups highlight the opportunity fairly well, and I have little to add to them. Seems like an interesting setup given the strategic alternatives announcement combined with moving of AMOLED drivers to third party fabs. The multiples and growth expectations for AMOLED slightly concern me, given a few new players have made recent announcements about entering the market. Otherwise the core fab business probably has some GP improvement ahead of it, and if sold for numbers in line with private transactions is worth more than the current EV.



    1. I spent some time last week mulling this one over. I am handicapped in (at least) two ways:

      a) I know so very little about the industry that I would be wholly reliant on some third party's view on what the growth trajectory looks like for the good segment;

      b) I can't for the life of me figure out why it isn't listed where all other such companies are listed -- in Korea, where the operators are, where the analysts are, etc.

      So I'm sure this one will rocket up while I'm still thumbsucking.

      Happy holidays

    2. It's a bit of a stretch but I think perhaps Avenue Capital had some preference for an exit in USD or saw higher valuation/liquidity potential in the IPO overseas

  44. Have you ever taken a look at SPAC rights as a trading idea? Much simpler than FP.V, since there's almost nothing to analyze.

    A few recent SPACs have offered as part of the blank check units rights which convert into 1/10 share if a purchase is executed. Management is obviously incentivized to do a deal, since they only get paid that way. Unfortunately, this means they're incentivized to do a bad deal. While in general SPAC deal quality seems to have gone up in the last year or two, these are still a very good way to destroy value. But the rights trade at a huge discount to the stock value, in large part, I imagine, because they're illiquid and expire worthless if no deal is made. I mentioned on the Alpha Vulture blog OACQR and HBACR as the highest-quality SPAC rights expiring in the near term; OACQ/R just made a deal for a sketchy Hawaiian property investment co and the rights doubled in value today; BHAC/R is to my mind the highest-quality SPAC out there, based on management, which may explain why they've taken so long to do a deal (they've extended their expiration once or twice).

    My general math is that a deal will destroy half the SPAC's value off the bat, so a right should be worth the SPAC trust cash (a bit more than $10)*.1*.5*~50 cents* deal probability, which I generically peg at, say, 80%, so ~40 cents for a generic SPAC right. BHACR trades around .20, and will almost certainly be realized (one way or another) in the next 6 months. Of course, for BHAC/R deal prob may actually go down, as they seem unwillingly to do something crappy just to get it done.

    1. Thanks ADL. I've now spent some time on FP which I think is a particularly attractive idea. I'm just at the arithmetic stage right now, and a first read through of the documents. I'll have to read and think a little more about what's happening at the segment level and why.

      Thanks also for BHACR. I'll keep an eye on it

    2. You're very welcome, and thanks for the blog...

      There are a few other SPAC rights trading similarly (JSYNR, PAACR...) but I am more dubious about their stated targets and managements, though the main reason to buy these is for the change in how the rights trade pre- and post-deal announcement.

      Usually these SPACs are structured so that a deal can go through even with significant redemption of units for cash, but sometimes a deal is so bad--set up just so that sponsors get paid on deal completion--that holders vote it down or it's otherwise dropped (as happened with the formerly-trading GGAC). Rightly or wrongly I get the sense that BHAC sponsors care somewhat about deal quality, as did the sponsors of what is now Limbach Holdings. But it's basically a weighted coin flip, with the most money likely to be made before any deal is announced (as opposed to FP, which is more like pinball).

  45. I've long suspected there's an inverse relationship between the number of CoBF posts about a company and its likely future returns, so I've never looked carefully at Fortress Paper. Now that the CoBF posts about it have slowed to a trickle, the "Outsider" sheen of the CEO has worn off, and you've invested in it, I'll have to talk a look.

    Have a Happy New Year and thanks for sharing your thoughts with all of us.

  46. Happy New Year and many thanks for prompting me to think more carefully about some of my investments.

  47. This comment has been removed by the author.

  48. I've been looking at Fortress Paper, focusing on Thurso. It looks like they've solved the near-term liquidity issues and can payoff the 2016 and 2017 debs if necessary (I assume the 2016s have already been paid). Assuming 1.34 CAD to 1 USD, a $950 USD/ton average selling price for DP, sales of 160,000 - 170,000 tons of DP and a delivered cost for Fortress of CAD 950/ton (so manufacturing and production cost of around CAD 800/ton), it looks like Thurso would generate 2017 EBITDA of around CAD 50 - 55 million. If "normalized" DP prices are $1100 USD/ton, then I get "normalized" annual EBITDA of around CAD 90 million. Following the completion of the "Birch Project," "normalized" EBITDA could get to CAD 115 - 120 million if volume gets up to 200,000 tons, delivered cost decreases by CAD $50/ton. (No credit in this scenario for any benefit from the hemicellulose project.)

    Is that roughly what you're seeing for Thurso?

  49. Right, that's it to the dollar.

    Healthy NCIB activity in the common is interesting also

    I should note that I am involved in this in particular because (a) I am otherwise net short the US dollar via LSB & Flybe, and (b) I'm not otherwise participating in the cotton rally

  50. Thanks for looking over my numbers. I eat USD and I'm long Flybe and long CAD versus USD in another investment, so Fortress also makes sense for me from that perspective.

    Does annual companywide CapEx at $10 million and $8 million for corporate SG&A sound about right?

    Regarding Landquart, if I assume a capacity increase to 11,000 tons from the 2017 project and an increase in EBITDA margin to 9% due to greater capacity and potentially more Durasafe, I get around $15 million annual EBITDA, and this might be conservative. So, adding it all up, a reasonable, "normalized" 2018 could look something like this:

    Thurso: 50 - 100 million EBITDA
    Landquart: 15 million EBITDA
    CapEx: (10 million)
    Corporate: (9 million)
    Free Cash Flow to the Enterprise: CAD 45-95 million

  51. For Lanquart I have:
    Shipments = 11,000

    in swiss francs

    ASP = 11,680
    Cash costs per tonne = 10,650
    EBITDA per tonne = 1,030
    EBITDA = 11.33 million

    in CAD at $1.30 exchange rate = $14.75m

    For corporate I have $12m
    For CapEx I have $10m

    So my FCF to Enterprise range = CAD $40 to $90

    It looks to me that the "incentive price" for new DP capacity ought to be in the US $1,100/t range so I would expect 2018/9 uFCF to come in at the high end of that range.

    1. Hi red,

      How does the cancellation of 30% of the order book at Landqart Mill for 2018 impact valuation from your perspective?

      I have them generate FCF somewhere between CAD $20 - $60.

      Also, given that I'm new to the idea:
      What's the reason for the current share price weakness? Am I overseeing something obvious? Any guesses?

    2. I had forecasted roughly CAD18m in Landqart EBITDA for FY 2018. As it stands today I think it will generate approx CAD 7 million. I'm using EUR/CHF of 1.15 and CHF/CAD of 1.28

    3. re: the other items

      My estimates for Thurso are approx 35 in 2018 and 70 in 2018, plus or minus 10 million in each case & assuming that the antidumping duties are liftedat the end of 2018

      So, let's say Corporate and Landqart net out to zero and nterest on the convertibles = (4)
      So consolidated FCF = ~35 in '18 and ~70 '19

      I think it works its way up to >100M over time

      The owner operator of this business is an unreliable narrator; the business is accident prone; dissolving pulp prices are (still) underperforming VSF prices; environmental enforcement actions in PRC leading to temporary plant shutdowns; low liquidity; maybe tax loss selling; etc. I don't understand what makes other people buy and sell stocks honestly

    4. My view is that this is a Canadian nano-cap in which people lack confidence in management because of past results. So, any bad news hammers the stock price.

      It seems to me the other big variable is CAD/USD exchange rate. Does your FCF estimate assume the current exchange rate?

      Also, are your "35" and "70" numbers EBITDA? If so, I think you need to account for at least some maintenance capex to get to free cash flow. Thankfully, nearly all of the growth spend appears to be covered by government grants.

    5. "It seems to me the other big variable is CAD/USD exchange rate"
      No. It's the CAD/RMB exchange rate that matters.

      "Does your FCF estimate assume the current exchange rate?"


      "Also, are your "35" and "70" numbers EBITDA?"
      No: "So consolidated FCF = ~35 in '18 and ~70 '19"

      "I think you need to account for at least some maintenance capex to get to free cash flow"
      Thanks for the tip

    6. Thanks for the prompt response.

    7. Landqart sold for CAD$ 28 million:

  52. If CF Industries is worth $1,689/ton then LXU is worth $25/share at max dilution. Slide 27 of CF's Q3 2016 presentation

  53. Hi Red,

    Did you find any news about the recent raise in the shares of LXU? I didn´t find any, maybe there isn´t and is just because some fund is buying the shares.

    1. It was this, as it happens

  54. Hi David

    As far as LXU is concerned no news is the best news. I haven't seen anything new.

    But (a) it announced its earnings date, (b) nitrogen prices are up, 9c) its equipment doesn't seem to have blown up, and (d)there is a lot of money shorting these shares. That's usually a recipe for short sellers to ease up on their gamble and to buy back some shares. That may be what's happening. I haven't spent any time thinking about it, to be honest.

    Wish me luck for today's game :)

  55. The press release looks ok to me

    1. Yup. No flood, fire or famine is good news.

  56. Let's see how the markets react. 2017 have to be the year LSB.

  57. I'm newbie into UK, HK and Canada investing. I subscribe to EDGAR filing through RSS. How do you automate subscripting to UK/Canada/HK listed company news? seems ok for UK. Haven't found my way in SEDAR yet. Thanks.

    1. For regulatory filings, I find this site useful:

      The site will automatically send you filings for companies listed in the following jurisdictions:
      Hong Kong

    2. Greatly appreciated.

  58. I haven't read Fortress Paper's filings yet, but the release and presentation look good to me. Thurso cost/ton should come down without a maintenance shutdown and commentary on Q1 DP prices was very encouraging.


  59. I've read through the various filings & it looks okay to me. There were start-up costs at Landqart and turnaround costs in Canada in Q4. Ex the start up costs and normalizing the turnaround costs the business & valuation looks quite healthy at the current strip.

  60. Hi Red- taking a look at the LXU idea, in the most recent presentation they updated the EBITDA-Ammonia chart you've attached, and appear to be using the Tampa price instead of the local price you are using. With tampa ammonia in the ~$300 region, are you expecting ~$100m EBITDA for 2017? Thanks for the blog!

    1. Hi - I don't think they're going to be operating at 95% of capacity in 2017. I think it more likely that the operating rate will be in the mid 80s. o I think it more likely that that'll generate 67 million or so including the proceeds from the disposal of non-core assets. And it goes up by 20 million next year and another 20 million the year after that and so on.

      I would look at the pure play notrogen producers -- CF, LXU, UAN, TNH, etc -- on a replacement cost per ton basis. Replacement cost per short ton of ammonia is in the $2,750 range. CF and UAN are trading, on an enterprise basis, at about $1,300 per ton. LXU is trading at ~$725. By the end of the decade they'll likely all trade (again, as measured by enterprise value) at, or close to, par.

      With LXU one's explicitly taking on the risk of equipment failure and therefore the risk of bankruptcy. CVR Partners offers distributions and more valuable assets. CF offers liquidity, diversification across multiple plants and markets.

      So, if one is looking to emphasize safety and certainty I think it makes sense to buy a piece of each of these nitrogen businesses rather than settling for LXU -- despite its higher upside potential.

    2. Hi red, thanks for the post. Would you happen to have a report or other reading material you would recommend to get a better understanding of this industry?

    3. Yara has an annual Yearbook at its investor relations site and Agrium has a Handbook at its site. These provide general and statistical overviews.

      In my view, however, the most useful quick overviews are the annual "cost curve" estimates and other presentational materials provided by CF Industries.

      En bref, this is a commodity industry and prices will be set by the marginal producer's cash cost of urea production. Who the marginal producer is will be determined by the level of demand. What the marginal producer's cost is will be determined by its feedstock costs (either narural gas or coal, depending on the technology employed).

      The profitability of North American producers will therefore be a function of:
      -- the difference between North American feedstock prices -- Henry Hub natural gas $/mmbtu + hedging costs -- and the marginal producer's feedstock cost;
      -- plus the cost to transport the product (ammonia, urea) to the US Gulf Coast ($40/MT and $20/MT respectively);
      -- plus freight/logistics/handling costs from the US Gulf Coast to the farm belt as appropriate

      and, in the case of UAN or HDAN, add a 10% premium.

      So, for example, in the case of agricultural ammonia in 2017, you might flip to the CF industries cost curve for 2017 and see $190/st for urea + $20 for ocean transport + $45 for inland freight and arrive at an estimated average price for urea of $255

      UAN at a 10% premium on a nitrogen-to-nitrogen basis (UAN is 32% nitrogen,; urea is 46% nitrogen) comes out to $195/st
      Ammonia at a $0.70 discount to urea comes out to $397/st.

      North American producers at $3 Henry Hub gas can produce their marginal ton of urea at $128/st, UAN at $75/st, and ammonia at $137/st. The difference between the selling prices and the marginal cash costs constitute the cash gross profit. Cash gross profit less Less $20/st in annual maintenance capital expenditures gets you to actual gross profitability.

      The thesis is that after the recent substantial global capacity increases have been absorbed by demand growth -- 2 to 4 years from now depending on who's counting -- the marginal producer will once gain be Chinese anthracite and we'll therefore see the fertilizer prices prevalent in 2015.

    4. Excellent answer on US Fertilizers, vintage Red material! Whilst we are focusing on financially and operationally leveraged cyclicals, Shipping also offer tempting entry points at moment, was thinking of oil and product tankers like STNG-explosive upside- Surprised to see you do not own any (Singapore Shipping is a long term bond/a a balance sheet play-more sedate!).

    5. Thanks for the pointers. I will dig deeper.
      A quick follow up,
      where is the incrental supply coming from? Mainly US? If not, do you have an eatimate of their replacement cost per ton? I.e. at what point will they not add capacity?

      Are the Chinese suppliers state owned I.e. do they care about providing employment than make money?

    6. North American replacement cost for integrated fertilizer plants is -- in practice -- between $3,000 and $,3100 per short ton of NITROGEN*. The expectation is that that generates, at current expert estimates of full cycle product prices, a 13% to 14% rate of return. In other words, midcycle cash gross profits per short ton of nitrogen are expected to approximate $400.

      The latest wave of capacity additions are in the the low feedstock-cost regions: North Americaand the Middle East (including post-sanctions Iran). The prior wave was 55 million or so tons of high cost Chinese capacity in the 2009-2012 period. The Chinese capacity growth was spurred by (a) a policy directed at food self sufficiency; (b) 1% and 2% interest rates; and (c) substantial electricity and freight subsidies. Those policies and conditions are no longer in effect and 30 or so millions of that capacity has now been shuttered. The remaining capacity was operating at 50% of capacity in the back half of 2016. Etc. CF's presentations and fireside chats do a good job in discussing these and other trends.

      It takes 5 years to go from start to construct an integrated nitrogen plant so it would be hard to conceive of circumstances under which a third wave of capacity additions could come on stream before 2024 or so.

      Ammonia is 82% nitrogegen and therefore counts at 0.82 tons
      Urea is 40% N and therefore counts as 0.46 tons
      UAN is 32% N and therefore counts as 0.32 tons, etc

    7. Chevalier -- Thanks you for the reminder; I'll refresh my memory of the shipping sector

  61. You asked me about EBITDA and I wrote about FCF. My apologies. I expect average Tampa price of $320 and EBITDA of roughly 120

    1. Thank you for the detailed response! I guess you expect Tampa pricing to move fairly significantly into the mid $400's over time? I'll have to dig into those other names for better perspective on replacement values that you've pointed out.

  62. Q2 2017 for LSB doesn't seem so bad at those market prices for ammonia and UAN.

    Ammonia prices has to go up or LSB and peers are going to suffer.

    Have you any update about LSB & nitrogen fertilizer industry?

    Waiting for cycle turnaround?


    1. Right -- waiting for the cycle to turn. Based on new capacities and adjustment times the bottom was going to be in either 2016 or 2017 depending on what oil prices did in those years.

      If North American producers have a $160/st delivered cost advantage over imports than the earning power of North American producers => ($160/r) x capacity x on-stream rate.

      Another way of saying that NA producers have a $160/t cash cost advantage is to say that at importers are at a $160 cash cost disadvantage. It is worth multiplying that by import volume and wondering how long importers can sustain those losses. As I think I've mentioned a few times before it is worth going through CF Industries' materials and webcasts to get both a broader and more detailed perspective on the dynamics of nitrogen world/import prices.

      LSB's story has an extra twist in that if prices don't turn around before 2019 then the preferred debt will convert into equity and dilute the coomon stock. I think many investors had LXU in their special situations basket and were expecting/hoping for a sale of the company this year. I think also that those folks are moving on to other ideas that they hope will give them returns uncorrelated with the market. Hence the price action today.

  63. hi red,
    somewhere above you mentioned that "North American replacement cost for integrated fertilizer plants is -- in practice -- between $3,000 and $,3100 per short ton of NITROGEN"
    do you know what the replacement costs are in other regions china/africa/middle-east?

    also, seems like brownfield expansions are much cheaper. usd ~1k/ton ammonia. would you know why is this such an outlier?

    1. Thanks for the Q

      China XLX and China Bluechemical are publicly traded N companies so you can look at their materials and see what their capital costs were and will be. Middle East is googleable.

      Re: Waggaman Have a look at slide 13 of CF's Q3 2016 presentation. Also, Ammonia-only + brownfield is lower capital cost and lower margin than intergrated (i.e. NH3 + urea or UAN or AN or DEF)

    2. thank you!

      at the start of the year you had about roughly 35% allocated to N (or related). if you were starting out now, what would your portfolio look like?

      also, is there any other areas/cos you find interesting?

      thanks again for your blog. i have been following it for a while now. i find the clarity of thought inspiring.

    3. Well I'll answer a Q different to the one you asked: which to own for 3 or 4 years with no possibility selling?
      Texhong 20%
      Future Bright 20%
      Nitrogen variety pack 20%
      Fortress Paper 5%
      Cash 35%

      Thanks for reading

    4. I listened to the most recent CF conference call and it reminded me about this thread at a certain stage of the call. Towards the end they talk about the logic of a potential buyer and a seller in the current environment. To quote from memory, a buyer isn't going to pay replacement cost, since the buyer themselves trades below that and the deal needs to be accretive. Equity deals would make logical sense - both ride the market up - but then there is a chance the seller needs to agree to a book loss.

      Just in case, I looked up to double check: "A deal that will result in higher earnings per share, post-deal, is classified as accretive, whereas one that will cause a drop in earnings per share is viewed as dilutive."

    5. ?

      "reminded me about this thread"

      The replacement cost discussion in this thread is about import substitution and not about M&A at the bottom of the cycle. It isunlikely that there will be further import substitution unless margins are high enough and expected to remain high enough to generate adequate returns on capex. Import substitution is important because (from CF's latest call):

      "But if you think about sort of roughly 25 MMBtu per metric ton of production, it takes more than that in the older plants, but in the current ones, the world-scale ones, you're talking somewhere in the neighborhood of about $100 of delta on cost before you basically load it on a ship and send it and then unload it. So, that could be $120, $125 pretty easily by the time something gets landed over here."

      "To quote from memory"

      Jeffrey J. Zekauskas - JPMorgan Securities LLC

      So, many of the fertilizer companies have been under all kinds of pressure with the nitrogen down cycle. Do you think that these sorts of pressures increase the probability of further consolidation in nitrogen fertilizer? Or do you think that they just create so many price inefficiencies for the valuations of companies that consolidation opportunities are diminished in an environment like this?

      W. Anthony Will - CF Industries Holdings, Inc.

      Now look, I mean, I think, consolidation is likely to occur, it was pretty public that one of the public fertilizer companies was evaluating strategic alternatives and looking for a sale, that they canceled that process. But I think that that's not uncommon. If there's basically $1 of synergy to be had in any given situation, $1 of synergy goes a lot farther in a lower premium environment, lower premium, because the base assets are priced lower to begin with, than it does in a high valuation environment. So, I would expect there to be ongoing consolidation."

    6. Sorry, late at night I interpreted rishi's comment at the start of this thread as attempting to ask the question "Public fertilizer assets are trading below replacement cost. Shouldn't M&A occur to bridge the gap?".

      I think your quotes are from the Q2 earnings call. What I referred to as the "conference call" is "Credit Suisse 30th Annual Basic Materials Conference" here: I didn't see a transcript for that one that I could quote directly.

      Thanks for clarifying. Import substitution is important as well.

  64. Hi Red,

    Do you know XLMedia PLC? A provider of marketing services online. Trading at EV/FCF 10 and EV/EBITDA 5. Growing annually at 20%. Looks very cheap and with good outlook for next years.


    1. I was aware of message board interest in it last year. It's not something that I would understand or trust so not something I would invest in at almost any price.

  65. Hi Red,

    Another company in your neighbourhood: GYM GROUP.

    IPO in 2015, the share price hasn´t gone up since and the results are very good since 2012 (revenue CAGR 30%). EV/FCF 10 for 2017, ROCE 32%. I´m trying to account the operating leases as an asset with depreciation and interest, but I´m not sure if the annual expenses for the operating leases are those:

    Future minimum rentals payable under non-cancellable operating leases as at 31 December, analysed by the period in which they fall
    due are as follows:
    2016 2015
    Within one year 13,222 10,053 £’000

    I suppose the debt for operating leases will be 13,222 x 7, Am I correct?


    1. H1 17
      Adj EBITDA = 14.6
      MCX = (-1.7)
      Lease interest @ 6% = 4.4
      Tax at 19% = -3.3
      NOPAT = 14
      Annualized run rate NOPAT = 28

      Mkt Cap = 263
      Net debt = 4.6
      Leases x 7 = 92
      EV = 360

      EV/NOPAT = 12x

      Let's say that addressable market for low cost gyms = 70% of total = ~1000 sites
      Apply a 5x multiple on NOPAT straight-line-extrapolable to GYM's next 95 sites (the easiest sites have already been snapped up)
      Assume negative working capital pays for growth capex along the way
      ==> implied EV of 475 ==> 1.45x current market cap 5 years from now = 7.5% annualized return

    2. Red,

      5x NOPLAT over next 5 years ==> 140
      NOPLAT in 2022 ==> 60 more or less.
      Leases x7 ==> 185

      EV in 2022 12x NOPLAT ==> 12X60 = 720
      Mkt Cap. in 2022 ==> 720-185+140= 675


      What I´m doing wrong?

    3. I'm confused. David. Reconcile the 5x multiple in first line and the 12x multiple in 4th line for me.

      In my post I used average(12x,5x) = 8.5x 56 = 476

  66. I use the same multiples as you. What I don't know if you consider the cash accumulated during the 5 years.

    1. I see: the 5x NOPLAT in the first line is cash build. That makes sense

  67. Yes, that's it. Not a bad return for a no cyclical business.

    How do you see it?

  68. I've spent less than 10 mins looking at it, honestly speaking, so I don't have an opinion. In your shoes
    I'd look at
    -- what same store sales look like to get a sense of what the earning power of the average store is when fully mature
    -- what % of costs are fixed
    -- how FCF and EBITDA/(rent + interest) varies with a 15% decline in average membership
    If those metrics look good/okay it would be worth thinking about further

  69. Pepe Mel is completely out of order. Hope he goes on vacances with L.Enrique as soon as possible.

    Valverde is a fantastic guy. And thanks for returning Lucas.

    Take a look to Asensio. Next balon de oro.

    1. Sad to see so many empty seats at the Riazor..

  70. 29 abr. - LaLiga
    Deportivo vs Barcelona.

    Fantastic day in a fantastic city, if doesn´t rain, of course.


    $4.75 millions is a minor fire?




    It's seems very interesting idea....

    Let's watch seedorf first day in an hour. Too much offensive in my opinion.