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Khing Oei:
Hello and welcome everyone I'm Khing Oei and this is the AlphaSwap podcast. Every week, we'll be discussing a top investment idea from the platform and have an in-depth conversation with a user who posted the idea. You can learn more and join our community at alphaswap.io. This week, we're talking to Tariq Hamoodi.
Hey Tariq, thanks for being with us today. Can you give us some quick introduction of yourself?
Tariq Hamoodi:
Of course, Khing. Thanks for having me on. So, I'm an informer emerging markets credit and distress trader/analyst now focused on illiquid credit, litigation, finance, insolvency claims and special situations investments more generally.
Khing Oei:
Cool. So can you share your investment style and philosophy with us?
Tariq Hamoodi:
Of course. Well, I think it's best described by looking for quirky stories that have lots of hair and generic run by the principal. There's nothing better than finding a diamond in the rough small cap stock.
Khing Oei:
Okay. So, which stock are we going to talk about today? What's a trade what's the upside, downside, any instant context. We'd love to learn everything about it.
Tariq Hamoodi:
So, today we're going to focus on Kingsgate Consolidated Limited, which is Australian enlisted minor with assets in Thailand and Chile. It's a unique story. Kingsgate has, I guess, a long storied history, was formally a multi-billion Aussie dollar market cap company and profitable gold miner that was caught wrong-footed with a high amount of balance sheet leverage during the downturn in precious metals prices post 2011, 2012 and the company's family jewels are a high grade, 120 to 140,000 ounce, low cost gold mine in Thailand, which was actually expropriated from the company in 2016 via an executive order from the military dictator who came into power in 2014. So, Kingsgate is I suppose, some would look at it and say it's a binary story, but there are very, very strong legal merits underpinning the value of the claim that they have brought against Thailand, which is also at a very, very short fuse.
The arbitration process has progressed over a number of years and is drawing to a close and what's interesting is, although arbitration award is almost a surefire result to the tune of hundreds of millions of dollars, whether it's U.S. dollars or Aussie dollars, it appears that Kingsgate is actually involved or deep involved in settlement discussions with the Thai government who are seeking to avoid a payout, which would have very negative political implications and so, the company is basically defacto solvent and liquidation because it has three assets, the timeline and arbitration claim, which we can chat more about, a Chilean silver development assets, which recently received environmental approvals, although it's unlikely the company will develop that asset themselves and cash and there's no debt. So it's a very, very easy to understand or easy to analyze story if you understand, of course, the intrinsic value of the arbitration claim or the timeline.
So today it's trading at a share price of around 80 Aussie cents per share, which translates to a market cap of around 180 million Aussie dollar. I think that the company trades at a 50 to 75% discount to a worst case outcome for the claim, my best case outcome is around a three extra mirror or a range of two 25 to two 75 Aussie dollars per share and my bull case is around three $75,000 and I think the catalyst for the company to trade at these levels is a resolution of the legal dispute, which they have with the Thai government and that should happen at the very earliest in one month and I expect that the very latest in three months.
Khing Oei:
Okay, well, very instinct trait. So, if you think about, they have the three assets, so you can almost look at it as a sum of parts basis, right? So, why do you think the market is even value in a company at a big discount to your, to a worst case
Tariq Hamoodi:
That's a good question and I think this is a stock that's burned investors a number of times in the past, the bad acquisitions, high leverage at wrong point of the cycle, the Thai issues, et cetera and it's predominantly a stock which is held by retail investors and with some passive real money shareholders, who wrongfully do not trust management today and so I think when you also bake in the fact that, value is really being driven by a legal outcome, which is tough for most market participants to really understand or analyze, I think is where you get that dislocation in what I perceive to be the intrinsic value of the stock versus the current trading price today. And again, I think, given that many would perceive the value of the claim as being binary and literally a zero or an unknown amount with no real understanding of how to value that asset, which I think there is, when in fact there is a lucrative settlement or handing it down an arbitration award, which look like a surety, which should be a multiple of the current market cap.
And I think the other thing to point out is that, the arbitration hearings took place in February 2020 and generally these things take a four year period to resolve, so you can imagine the fatigue involved in all the headlines about settlement and there's been many conflicts with the Thai government in between there, et cetera, so I think it's starting to pick up, I guess, traction again, given that then an outcome is nearby and I think what's also interesting is that if anyone's been following the press, they've seen that the Thai government and monarchy is under pressure at the moment and it was the current Thai prime minister, who actually through executive order, expropriated the asset from Kingsgate and given his role in the saga, he's trying to settle with the company to avoid any political blow back. So I think, again, understanding what a settlement could look like is also very difficult for the market. I think it could end up being a broad suite of measures and benefits, ultimately leading to a sale of the asset to a buyer shortly thereafter.
Khing Oei:
Got you. And what do you think is sort of most of your downside case on this one? Is it like another very long drawn out process? Is it possible for the ruling to be extended?
Tariq Hamoodi:
That's a good question. So again, back to the sum of the parts basis or some of the parts valuation analysis, so you've got around 25 million Aussie dollar of cash, you've got the Chilean asset which was written down significantly last year to I think a 25 million Aussie dollar book value, there's been interest in that asset, so I think we can ascertain that given the run-up and silver price, et cetera and without going into too much detail, that seems to be quite a fair or realistic liquidation value of the asset and that discards the fact that it's received environmental approvals and it's shovel ready. So there is around, let's just call it 50 million Aussie dollars of value there.
With the arbitration case itself and this idea of downside, one has to realize that an arbitration award is a near certainty and it is a certainty because, this claim was brought under the Thailand Australia, free trade agreement and under the terms of that agreement, one can expropriate an asset, but it requires fair compensation and actually following due process. Here, without going through the Thai legal process, you had a dictator, they close down the mine and cause Kingsgate great damage. At the time of closure, that mine was producing 80 million Aussie dollars of EBITDA/free cashflow with a mine life of around seven to eight years left on the mine. Again, gold was also at, I think, $1,200 at the time and obviously there's been a big run-up in precious metals prices.
So if we just look at what an arbitration award could look like and assume that there's many ways to value that asset or for a tribunal to value that, it could be on a DCF basis, it could be on a book value or replacement cost basis and in this case, the book value of that asset at the time was 600, 700 million Aussie, but I think if we go back to the discounted cash flow basis, I mean, assume if this is even at a worst case, if this is valued at the time of taking or expropriation at three times free cash flow, at 250 million Aussie dollars, that it's still a significant chunk of value and more than covers the current valuation.
People may also point out that yes, you receive an arbitration award, but then you actually have to enforce that against Thailand through international courts, et cetera, I do agree with that and that's even why, if you assume that you haircut that in half and that you have a marketable credit asset, which you could sell to a sophisticated hedge fund buyer, you take your 25 million or 20 million of cash, 30 million value of the Chilean asset and let's say a 125 million Aussie dollar valuation of the claim on an absolute worst case basis and you're more than covered from where we trade today. So I think if we take a base or optimistic case of what an arbitration award could look like, well, it's been reported that the company is actually made a claim for over 750 million U.S. dollars, so around 1 billion Aussie dollars, so I'm not saying they're going to get there, but if you even end up landing somewhere in the middle, then this looks like a great investment.
Khing Oei:
Awesome. Sounds very instinct, Tariq. Thanks very much. So, I'd love to usually end with a couple of general investment insights, three questions, which resources do you use for your research? What's your favorite investment book and thirdly, what's the most important investment lesson you want to share with our audience?
Tariq Hamoodi:
Sure, of course. So, on the investment lessons, the last thing I'd say is to just be patient and disciplined. In a politically charged situation like this, there's lots of different headlines floating around and it's obviously from sources which should not be believed and I think it's important to really diligence follow up on every headline that comes out, making sure you're looking at the right sources and not panicking.
I think if I go back to what I just mentioned about my burned down value of the asset, I think I've been very conservative in just focusing and aside from settlement negotiation, et cetera, what is my worst case outcome, assuming an award here and sticking to that and of course, I think, leading into the second point, which you've asked, which sources do I use, well, clearly this is a really unique situation and I follow the tide press regularly and that involves using things like Google alerts and speaking to local journalists, local contacts and I think what's becoming more important these days is actually forums and message boards, so I've formed some great relationships with some other like-minded I'd say retail or high net worth type investors who should be on AlphaSwap, but we need lots of ideas and bounce ideas and things around off each other, because you'll find some people who know the politics well and then you'll find a guy like me who knows the legal arbitration angle well and then we've pulled in people who know the geology of the Chilean asset and the Thai assets.
So, I think it's a range of different sources and really just depends on the occasion really. I think other sources to use is to read through, I mean, the arbitration itself is actually confidential, but you can read the tea leaves in a sense of looking at the other cases, which some of the arbitration tribunal or judges that have actually handed down decisions often in the past and these types of things, they won't answer or give you any discrete outcomes, but they're a good way to get a better feel for particularly your observe of case.
Khing Oei:
Makes total sense. And last one is, any investment books you recommend?
Tariq Hamoodi:
Any investment books, oh, I'd have to think that the last time I actually read a book. Well, look, I'd have to point to Seth Klarman's book in Margin of Safety, which I think is clearly highly relevant in here. Because I think there's a wide margin of safety in this investment and where it's currently trading
Khing Oei:
A hundred percent agree there. Thanks very much fantastic trade and great insights for anyone who would like to read more details, obviously available on alpha swab that IO along with a number of other investment ideas. Thank you all for listening and look forward to the next episode.
