Resource plays at deep discount?
Let me start with a confession: I am extremely partial to small caps. Particularly small caps that are not yet on a major exchange. I expect that alone is reason enough to scare away many readers. Yet that is exactly what makes bulletin board stocks so interesting to me: high risk, high reward. Two Canadian investment and merchant banks that invest in junior resource companies are currently trading at significant discount to their NAV: Aberdeen International (AABVF, market cap $76M), and Pinetree Capital (PNPFF, market cap $314M).
In many ways, the two companies are mirror images of one another. Both have primary exposure to precious metals – about 45% of the total portfolio for each (AABVF here, PNPFF here) – and each also has exposure to energy, agriculture, base metals, and more emergent resources. Both have a history of successful venture capital allocation, as evidenced by the following chart of NAV returns.
If one accepts the notion that both companies have a strong history of asset allocation, the next question is whether they are valued in a manner that reflects the performance of the underlying assets, and reflects management’s track record of outperformance. In short: no. Below is a chart documenting the historical premium/discount to NAV for PNPFF and AABVF. (Since their quarterly reports don’t line up, I’ve paired the December PNPFF report with the January AABVF report (and left is as December), and the June PNPFF report with the July AABVF report (leaving it as June) to streamline the information).
It looks to me like there’s a pretty decent case to be made that both companies are compelling buys based simply on discount to assets. That’s not taking into account their outperformance as asset allocators. The market is certainly discounting them heavily for their own status as small/micro-caps and their dependance on the volatile junior resource market. Certainly if the markets sell off heavily, they are part of a sector that is likely to take heavy losses. It’s also worth noting that when the resource markets heats up, these companies can fly, as evidenced by the extreme premiums in 2006-2007.