If I could buy more than 50% of ADI.V, I would study such option as ADI.V trades
near half of net cash because of corporate burn which may be reduced.
ADI owns 40% of a Canadian iron ore project that would take years and billions to develop if
development started tomorrow.
The other 60% is owned by WISCO International Resources Development & Investment Limited, one of
the major subsidiaries of Wuhan Iron & Steel (Group) Corporation (the "WISCO Group"), one of the "Big
Three" Chinese state-owned integrated iron and steel companies. It bought this stake for C$92MM in
Jan 2012, C$52MM of which went to ADI.V
WISCO is also a 20% owner of ADI.V, having bought 29MM shares for $28MM in March 2011.
That WISCO has not bid for the rest of ADI.V despite ADI.V trading a large discount to net cash for more
than a year suggests that WISCO is an unhappy shareholder and/or the stake is immaterial.
Liquidation value is roughly 2x current share price IF burn is eliminated in 2015:
ADI.V shares out=158MM
Net cash at end of 2014: C$32MM at ADI.V plus $8MM net cash at the JV, of which $3MM is ADI.V’s
Brazilian assets: ADI.V owns land in Brazil on which it considered building a port, having spent C$43MM
in such venture, which ADI.V values at C$5MM
2015 burn: C$2MM (per 4q2014 MD&A)
Expected liquidation value in 2015= $34 to $38MM, or ~C$0.22/share
Another potential source of value: JV tax assets if JV is impaired
If an investor can buy the other 60% of the JV cheaply, accounting rules may allow for a complete
impairment based on today’s iron ore futures curve and ADI.V’s share price vs net cash value. Under
such impairment, the tax assets of such joint venture could be worth 25% of the C$179MM JV 12/31/14
carrying value, or C$45MM, $0.28 per ADI.V share.
Canadian tax law allows tax assets to remain intact upon a change of control as long as the operation is
similar to the acquirer’s and is carried on with a reasonable chance of profit. As the Canadian govt has
set aside C$20MM for rail to the Labrador Trough, as of last December, they saw a reasonable chance of
profitability even at low iron ore prices. Moreover, Champion Iron, cash-poor comparable in the Labrador Trough, trades at a C$14MM
enterprise value, showing that investors believe it has value.
Thus, a mining company with profitable Canadian operations can gain exposure to a large, validated (by WISCO investment) iron
ore project for the next cycle, while being reimbursed for the cost to progress it.
“Similar” is not defined precisely by Canadian tax law, so the tax authority may argue that gold or
copper mining is not similar to iron ore mining. A strong counter, however, is that large mining
companies, like BHP, mine iron-oxide, copper, gold (IOCG) deposits as one mine. BHP’s Olympic Dam
is a large example.
