Central Natural Resources (CTNR.OTC)
Price: $27 (2/7/2012)
Market Cap: $13,000,000
Often I will read an investment thesis that hinges on some sort of hidden asset. A hidden asset is something a company might own that is either under monetized or maybe held on the books at an exceptionally low cost. In theory most investors somehow skip over these hidden assets when doing their research leaving them as a pot of gold for enterprising or inquiring investors.
I have my doubts about how many hidden assets are truly actually hidden and missed by investors. I own one company that could possibly qualify, Bowl America. They own 17 bowling alleys in the DC area and Florida, the real estate is held on the books at cost. The key is these centers were purchased in the 1950s, so presumably DC real estate is worth much more now than in 1950. Even though the real estate would qualify as a hidden asset I'm not sure how hidden it is. Most of the investment writeups on Bowl America all discuss the hidden value of the real estate. If all investors are looking at the mis-priced real estate it's not all that hidden.
One example of a asset being truly hidden is the case of EDCI. EDCI was a company that entered liquidation a while back that I owned and followed. At one point in their liquidation process they announced they sold some patents they regarded as worthless for a few million dollars.
Readers might have noticed that recently I'm highlighting a lot of un-followed and mostly unknown companies. For some background I've been working my way through a book the Walkers Manual of Unlisted stocks. I started with the A's and have been steadily moving towards Z. Some of the companies have gone private, for others there is no information available at all. Some like Central Natural Resources don't file with the SEC but do put their financials out on their website. The exercise has been fun, most of these companies are simple to research and it's fun to hunt down hard to find information.
For a quick background Central Natural Resources is a resource company based out of Kansas City. They own some coal properties along with some gas wells. Most of their income comes from mineral leases on the land they own. The company is pretty simple and straight forward, price of gas/coal * amount extracted minus extraction costs and salary equals profit for investors. The company has been pretty good about paying out a good chunk of profits to investors as dividends.
The hidden asset at Central Natural Resources is a bit more hidden than usual, it only appears in the annual reports as a single sentence.
This is curious, the company has a large coal deposit which hasn't been mined yet being carried for $700,000. When I read about this I wondered what 92m tons of coal would go for on the spot market. Using a NYMEX quote of $57.87 per ton that coal has a gross value of $5 billion dollars! Sure there are mining costs, and transport costs and all sorts of other things but remember that Central Natural Resources's market cap is $13,000,000, there is a lot of wiggle room there. The value of the coal alone is 400x the trading price of this company.
The problem I have with hidden assets is that while they're supposedly unknown to investors they are well known to the people running the company. And it's not a far stretch to say insiders probably know the true value of the asset. Sometimes an insider will be buying back stock trying to capitalize on this discrepancy. But mostly insiders don't seem to care much, and are content to let a supposedly valuable asset lie idle or dormant.
As I was thinking about Central Natural I kept thinking that management knew they had a $13 million dollar company with a $5 billion dollar asset, so why didn't they get moving on mining it? I skimmed a few of their annual reports and found some vague references answering my question. It seems those 92m tons of coal aren't exactly easy to extract, the company has looked into mining it but there have been no mine operators who are interested in digging it out.
Maybe after all the $700k carrying value is overstated? If there's a pot of gold in the ground that's impossible to extract does it have a value? Maybe this coal will be like the shale gas, in a few years someone will discover a way to extract hard to reach coal cheaply and Central Natural Resources will make a lot of investors rich.
My conclusion is that relying on a hidden asset to make an investment thesis seems fraught with problems, most where were highlighted above. This doesn't mean an investor should ignore an asset like the 92m tons of coal, but rather they should view it as an option on their investment. If something lucky happens and the coal is dug out everyone wins. On the other hand if the investment thesis is based on the value of the coal there's the potential and likely outcome of disappointment when the coal remains in the ground forever.
At this point I should mention that Central Natural Resources actually looks attractive on a stand alone basis, they're overcapitalized with $4.6m in cash and a small amount of debt. They're trading at a EV/FCF multiple of 6x. If natural gas prices or coal prices rise again they should do very well.
Talk to Nate about Central Natural Resources
Disclosure: No position