Value Investing Forum

Post edited 12:01 pm – May 15, 2012 by blainehodder

I haven't heard from Scotty yet unfortunately.

Thesis is still sound though, and 10% buybacks should be coming soon.  I see big upside for DSM, with solid downside protection.

 Have you taken a look at URB.A/URB?  It is a virtually identical scenario: discount to NCAV, overpaid management, and 10% stock buybacks. I'm  just waiting for the money to hit my account to pick up some.  Seems safer than DSM due to the fact that most of NAV is comprised of publicly traded exchange shares, but upside is limited in comparison.

I think it will be telling to see if management takes any action to get the stock price up above $0.42 over the next few weeks. You got to think they are heavily incentivized to meet that threshold. 

I fully expect the company to launch another NCIB in June 2012 and buy back shares. I don't know the ins and outs of NCIB's but i would think they can't currently buy back shares as their capacity to do so is extinguished under the NCIB approved in 2011. They bought back 6.7m shares at 0.73 so I would expect them to be very aggressive at current prices. June 2012 is the earliest they can have another NCIB. Wonder if they may opt for a different kind of buy-back since NCIB's are limited to 10% of the outstanding stock. 

Post edited 5:02 am – May 9, 2012 by blainehodder

This is a copy of a letter I wrote to Mr. Moore this morning.  I look forward to the response:

Mr. Moore,

I am writing this letter in order to get some insight into your future plans for Dacha Strategic Metals.

According to the most recent press release, Dacha Reports an estimated asset valuation of $1.06 per share, with inventories at 72.6 Million dollars as of April 30, 2012. With minimal debt, the company is currently trading at roughly a 60% – 65% discount to net current assets. As a shareholder, it concerns me that management has not yet taken meaningful measures to unlock that value on behalf of the shareholders.

The Dacha website states the following:

As a professional in commodities trading, I question why you have yet to take advantage of the potential arbitrage opportunity the market has presented. Therefore, on behalf of the shareholders, I propose the following options to unlock the intrinsic value of the company:

1) The REE bull case:

Does the management team believe that REEs hold the potential for significant capital appreciation? If so, I propose the company immeditately cease purchasing minerals on the open market, as you can acquire them at a significant discount to market prices posted on your website. At a discount to assets of 60%-65% per share, Dacha stock represents an arbitrage oppportunity to increase per share REE holdings signifcantly cheaper than open market purchases.

2.) The REE bear case:

Conversely, If management believes that REEs do not present an opportunity for capital appreciation, the company should seek to be acquired at a premium to a conservatively estimated liquidation value. In the absense of a buyer, management should commense the liquidation of all inventory (as market liquidity allows), and distribute the funds to its shareholders.

It is my opinion that while the REE bull case may be compelling, on a risk adjusted basis, shareholders will be better compensated through an outright sale or liquidation (particularly if the market refuses to recognize inventory valuation in the stock price).

I know receiving a letter like this is not an enjoyable experience and I sympathize with the position this letter puts you in, however I truly believe that the market has presented an opportunity to Dacha management which cannot be ignored. In the absense of an outright buyer of the company, please liquidate the companies assets for the best interest of shareholders.

Thank you so much for your time. I very much look forward to hearing from you.

Sincerely,

Blaine Hodder

Pulled the trigger today at .42 for 1/3 the portfolio.  Its either an arb or a fraud!  Go binary option!

Post edited 7:32 am – April 24, 2012 by blainehodder

Jae,  excellent analysis so far.  Here is my take:

I recently took a look at Dacha and while it is clearly a cheap stock compared to managements inventory estimates, I see a few red flags:

I am quite concerned about the large number of warrants outstanding.  Could it be that the 42 cent strike on the warrants is putting a short term ceiling on this?  After all, if the price were to go above .42 cents prior to June 16, there are 18 million conversions that will take place pounding the price back down.  Looking at the daily volume, I think you will have to wait until June 16 passes before any value can really materialize.  I realize that the warrants provide incentive to realize value, but so many of them look like a hammer on the price if it were to rise.  Then again that is just a short term look.

-On a longer term basis, Mr. Bharti/Moore scare me…  If the inventory is truly worth what they say, as per the recent transaction, why aren't they liquidating some more inventory?   I'm bullish REEs but I have been for years…some stronger inventory to cash conversion would help give me some confidence…like 40%?

-It would be nice to get a straight answer about the loan, but then again, even if there was 100% default, the current price is stll a value.

-And lastly, is the inventory verifiable?  I honestly woudln't mind seeing another auditor brought in to verify.  Seems scarilly similar to BreX/Allied vegetable oil.

What are your thoughts?  Go easy guys, I am very new to this game, but have read every buffett/brk letter, greenwald's book, graham, etc…

Thanks

I'd like to make a suggestion of owners of this stock to request the company for a liquidation and observe the kind of response we receive from the company.  This may give us an indication of future strategy.  The value of this stock is in the inventory, and if they do not liquidate the inventory, the value will not be realized.  

I recently purchased 40,000 shares and would like to keep buying because of the fundamentals.  But we need the catalyst to make this stock work.  

Did they sell that investment? IIRC, the investment was still positive on paper. I don't know if it still is. I'd still be curious what the initial circumstances of the invetment involved were. I wonder how Stan played it.

In either event, I did find this recent bit:

The US, EU and Japan are complaining about China's hoarding of rare earths. See here.

One more thing before I quit talking about it:

Has anyone attempted to verify the inventory at the warehouses, or is there any audited statement which verifies the inventory?  I hope we are not looking at another Allied Crude Vegetable Oil Refining Corp debacle.  

Take a look at the latest report on REE from the department of energy:

http://energy.gov/sites/prod/f…..ummary.pdf

You can view the full report at:

http://energy.gov/sites/prod/f…..L_Full.pdf

With the current REE price and the latest report from DACHA.  The stock is still around 50% NAV.  My concerns are the same as Jae's:

1. Bharti seems unreliabile, especially that the loan in question has no resolution
2. Burn rate for the company at the current REE price

However, at such deep discount, it seems as though if you are patient and stick with the stock for another year or two, you may be rewarded when REE price gets an upward gyration. With the REE price in China near bottom and stablizing and the Chinese government continues to curb export, we may see the light of day if we wait.