DCHAF Jumps 40% on Share Buyback Catalyst


Written by

Jae Jun

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Dacha Strategic Metals (DCHAF)

DCHAF is a rare earth holding company and is either very misunderstood by the market or the market just does not believe the business model will work.

To bring you up to speed, the majority of Rare Earth Elements (REE) is controlled by China.

When I talk about majority, I mean monopoly.

China accounts for 97% of the world’s REE supply and because there is a lot of political power and games involved, REE prices skyrocketed last year but has come down since.

REE’s are required in basically every new technological gadget nowadays. From your TV to iPhones, hybrid cars and fluorescent light bulbs, it is a necessary part of the product and it is not replaceable by some other metal.

Other countries are trying to find alternative supplies outside of China but no one has been successful to date.

That’s why Dacha is interesting.

The company acquired a small company in China which holds a license to purchase and import REE legally into their own warehouses. This means that Dacha is not a miner. There is no mining risk involved. A reader has mentioned in previous comments and in the forum that it sounds more like an ETF which I agree to a certain extent. You can read the forum thread in the link at the bottom of this article.

Dacha headquarter is located in Toronto but the business operates in Barbados which lets the company evade many tax implications and effectively has a tax rate of less than 3%.

The Good

  • Selling at a 40% discount to value
  • Management believes the stock price does not reflect the value.

The Board of Directors of Dacha believes that the underlying value of Dacha, particularly based on the liquid assets on hand per share, is not reflected in the current market price of its common shares, and may not be so reflected at certain times during the course of the NCIB, and has thus concluded that the repurchase of common shares pursuant to the proposed NCIB presently constitutes an appropriate use of financial resources and would be in the best interest of Dacha shareholders.

  • Has initiated buyback of 10% of the common shares
  • Best way to get exposure to the rare earth industry without any mining risk

The Bad

  • Management is overcompensated for the business
  • Expenses are too high
  • My view of the board is not favorable. Not independent enough
  • The REE space is full of political games which will affect REE pricing and hence the value of inventory
  • No insider buying even though the stock is so cheap

Asset Valuation

The only way to value Dacha is by its assets. No point for a full blow stock valuation as DCF or EPV is useless.

That means buy and sell criteria is easier to decide. Sell when it reaches its asset value, hold while it is below.

Unlike most companies, looking at ratios, returns on equity or book value growth is not required as it doesn’t tell you much about the business or the investment.

It really depends on the what the market for REE is like at the moment and is primarily one of the reasons why many people, including value investors and contrarians are staying away.

These numbers were taken from the latest filing which is the March 2012 annual report. I adjusted some numbers to reflect the latest inventory value and current asset value.

Based on assets, Dacha is still 40% below its Net Net Working Capital (NNWC) and Net Current Asset Value (NCAV).

Why the Jump from the Bottom?

Whether the stock buy back announcement is gathering interest, increasing awareness and value recognition, I have no idea.

I was just trying to come up with a catchy title.

My position is still swimming in deep red at -40% but Bruce Berkowitz recently published a presentation titled “Stay the Course” where he included a quote from his 2006 letter that says

“Fairholme’s history includes many instances of short‐term ‘embarrassment’ leading to long‐term victory”

At the moment, Dacha is definitely an “embarrassment”, but with no mining risk where everything could and will go wrong, I have less to worry about and I’ll continue to patiently wait for inventory to be liquidated and value returned to shareholders.

Now that summer is here in the United States, this is the time when REE prices tend to climb so I will monitor how the company handles their inventory.

Additional Resources

1. Youtube Video on Dacha

“Alastair Neill, Executive Vice President at Dacha Strategic Metals Inc. talks about their strategic business model and focus on purchasing physical rare earth element assets to form non-Chinese inventories.”

2. Background, industry discussion and stock analysis of DCHAF

3. Forum discussion on risk and business model of DCHAF

Disclosure

Long DCHAF at time of writing

  • Sungsta

    Hi Jae, speaking of rare earth materials, I think I’m having a change of heart regarding the value of gold and here’s why. I feel as humans we seem to be hard wired to it as gold has been lusted after for greater part of human history. IE: All those ancient civilizations in different parts of the world treasured gold. Gold as jewelery I still believe is not utilizing gold to its real potential but is still pretty. In the mean time, it serves a purpose as currency as the desire for gold drive it’s price. But gold as a rare element I believe have a even greater usage scientifically and in technology. I don’t think we realize its full potential.. It doesn’t corrode, high reflective capabilities, conduction and other properties. So to conclude I don’t think gold as currency or jewelry it’s properly being utilized. As technology progresses i believe the value of gold would then be realized for its elemental property and not for jewelry.

    Keep up the good work in your site! Thanks.

    Sungsta

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