Tim McElvaine Annual Meeting Full Transcript
It is great to see everyone and thanks very much for coming today. Most importantly, thanks for your support over the years. I see a number of good friends and I want to thank you very much for your friendship. When I’m on the topic of thanking, I want to thank Shannon, who you met on your way in, and thanks for my extraordinary and beautiful wife Kate, for all that you do. And thank you to Kim and Di. Diann’s not here with us, but Kim’s right here. And I miss you Kim, but life goes on.
Recently, Bruce Greenwald carried out a virtual Fireside Chat with Li Lu, the founder and chairman of Himalaya Capital. Greenwald and Lu covered multiple topics during the discussion, addressing everything from the value investor's approach to appraising businesses and what he had learned from his great friend Charlie Munger. The duo also discussed China's economy Read More
Performance, we’re still tracking a little bit better than the TSX over a long time. More importantly, over the last three years since we instituted some of the changes that I talked about in 2011, we’re doing better than the TSX with much higher cash balance. There are some copies of the annual report out there as well on our website. So I won’t really spend a lot of time on these slides, but that’s how we went from return on investments to the net return. And that’s where the return on investments came from.
The Canadian stuff was really impacted by EGI Financial if you recall. We spoke about it a couple of years ago. They sold their US division and made some changes, and that was the bulk of our Canadian return, which also was helped by Legumex Walker and Village Farms, which I’ll talk to.
Our US holding returns were really generated by Howard Hughes Corp., which we talked about at last year’s conference, has now been sold. H&R Block, which we’ve sold and Voya Financial, which we continue to hold and we spoke about last year as well.
Japan was really Monex Group. We continue to own, but in a much, much smaller position. We hold about a 2 or 2.5% position now, and it’s our only Japanese holding. And Europe was Europe.
Dealing with ideas from last year, as I mentioned, we have now sold our remaining Howard Hughes. We’ll talk a little bit more about RHJ towards the end. Voya Financial trades in the mid 30s. It’s still quite cheap and we haven’t sold any. If you recall, it was a distress sale by ING Group in Europe. We bought it as a dislocation, which I’ll talk to more in a second, and we continue to hold it.
So I thought I’d flip it around a little bit first and talk a little bit about what’s going on and then narrow in to about four or five specific names of stuff that we’re doing. I’ll start with the Mark Twain comment, “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” And watching BNN and CNBC in the morning, which I try not to do, but I was in the hotel this morning, so couldn’t help but watch them, this quote certainly comes to mind.
As you know, from time to time I go on boards, and that’s one of the things I think you can really influence as a board member, is trying to line up the alignment of interest. If you get that right, a lot of other things become less difficult to do.
I’ll talk about this a little bit. If you want rules of thumb – if they have say, five times their salary in stock ownership, that’s somewhat interesting. If it’s a small cap company, ideally you don’t want them to own 25% or more, because that’ll restrict some of the alternatives and pressures in the future. Equity ownership is better than options, and there’s a whole little checklist that I go through.
The final thing we’ve done, which is kind of the fifth leg to the chair, so to speak—I’m a value guy, so my chair has five legs—is I set up an advisory board of three guys. All are quite successful investors and have been members of many, many boards, including chairperson. They don’t act as an investment committee, but rather what they do is look at risk control and ask me questions. “Have you thought about this? Have you thought about that?” This is very similar to how Peter operated in the early days when I was with him. You might recall, Bill and Brian, when he had the board of directors of Cundill Value Fund. The board didn’t have any investment role, but they did act as a little bit of an overseer. They kept Pete’s feet to the fire a little bit. That’s the role of this advisory committee. I meet them about once a quarter, give or take.
At the other end of the spectrum is MBAC Fertilizer. What they produce—and I’m not going to spend a lot of time on this one, it’s the most risky of the three. It trades about $0.55, give or take a little bit. It has a book value of about a buck. They just finished constructing a phosphate facility in the middle of Brazil. The key things are, and this will be like the last idea as well, it was a plant start-up. Quite often when you find plant start – ups, people are very enthusiastic in the beginning. They get very excited about the idea of a plant, and then they actually start constructing the thing and investors go, “Oh, well, that’s not so much fun.” There’s no earnings and there’s a whole bunch of cash going out, and that process lasts about two years.
Then of course, there are problems in getting the plant started and people get a little bit annoyed. About a year and a half or a year after they finish constructing, they finally get a plant up and running and everyone begins to get excited again. With MBAC, we’re right in that middle stage. They finished the plant in December. The key issues are, does the plant work? And the answer is yes. Is there a market for the product? The answer is yes. Do they have the financial capacity to keep the wheels on the bus until they get the production up to say 80 or 90% of capacity? They just completed a rights—or an offering about two weeks ago. So I think they do. It’s a little bit tighter than they originally thought, for sure.
This is an asset that’s capitalized at about maybe $100 million in the marketplace, which has the ability to generate north of $50 million a year in free cash flow, and has a 20 year plus mine life, as well as a number of other facilities. So it’s interesting. It’s a growing area in Brazil, the supply of phosphate fertilizer. It’s a unique asset with some protection because of its location. The board is somewhat shareholder friendly. It is a very cash generative, long life project. But as I said, there is some risk with this one because it’s the most levered of them all.
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