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XMFSinchiruna (28.52)

Cardero Resource in Focus

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March 11, 2012 – Comments (13) | RELATED TICKERS: CDY

Last week's $500 million purchase of Talisman Energy's Sukunka deposit provides the perfect opportunity to retrain our focus upon the uncommon value present in shares of Cardero Resource. And because excerpts from my recent interview with Cardero CEO Michael Hunter will be available this week, it also offers the ideal catalyst to renew our ongoing examination of the company and its portfolio of valuable assets. Those unfamiliar with Cardero may wish to begin here: 

http://caps.fool.com/Blogs/why-im-addicted-to-cardero/679269 


http://www.fool.com/investing/general/2012/03/11/move-over-shania-twain-meet-canadas-surprising-new.aspx

  

As you can see, the Peace River Coalfield has grown quite crowded with major operators through this ongoing consolidation event; such that Cardero's Carbon Creek deposit stands out glaringly as the last advanced, major project in the hands of a junior. Cardero's stock trades for nowhere near the clear and onservative market value of its 75% stake in Carbon Creek, LET ALONE the company's potentially world lass iron deposits in Ghana, the non-core ferro-titanium discovery in Minnesota (which BHP Billiton called "the largest ilmenite deposit in North America"), a cozy cash position, and a completely overlooked and valuable portfolio of equity investments.

Keep doing your homework on this one! This has now grown into my second largest equity position in my own portfolio, and I aim to continue acquiring shares. As I prepare to publish my interview with Michael Hunter this week, I want this blog post to serve as a sort of notebook for our collective examination of the stock.

Thank you in advance or taking part, and for keeping this post on-point. 

13 Comments – Post Your Own

#1) On March 11, 2012 at 4:48 PM, XMFSinchiruna (28.52) wrote:

P.S. With great appreciation, credit to Ocean Equities for granting me permission to reprint this map image.

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#2) On March 11, 2012 at 5:07 PM, XMFSinchiruna (28.52) wrote:

Cardero's entire market capitalization stands at around $120 million. The base case NPV for its stake in Carbon Creek is $752 million. Even using weaker coal price assumptions, the asset is worth considerably more than the mcap.

Once you give that some thought, have a close look at the Sheini Hills iron deposits in Ghana. In then take a look at Trevali Mining, in which Cardero holds a major equity position. The strands of deep value keep coming together, until, in my view, you end up with a rope that will not break.

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#3) On March 11, 2012 at 6:26 PM, ziying (< 20) wrote:

Hi Chris,

  If another company comes in and buys Carbon Creek from CDY do you see a quick double or higher in share price? What about a time line if CDY mines Carbon Creek for itself. Are we looking at mining operations starting 2013 or 2014? What price could we be looking at in a few years if they keep Carbon Creek?  

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#4) On March 11, 2012 at 9:32 PM, XMFSinchiruna (28.52) wrote:

Cardero won't sell Carbon Creek. If someone wants Carbon Creek, they'll have to make a fair bid for Cardero to win shareholder approval; and we are a very far cry from anything even remotely resembling the fair price area. One of Cardero's strategic strengths is the fact that the dual focus on iron and met coal makes the company a difficult acquisition target. Cardero doesn't want to get taken out... They want to build this mine, and they seek a fast-track timeline for that development.

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#5) On March 12, 2012 at 9:15 AM, SkepticalOx (99.44) wrote:

Hi Sinch, 

What is the market missing? If Carbon Creek has NPV of $752 alone, why is the stock trading at 1/6th of that?

(I've made a tidy profit so far on this stock since your recommedation) 

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#6) On March 12, 2012 at 9:15 AM, SkepticalOx (99.44) wrote:

$752 million*

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#7) On March 12, 2012 at 9:35 AM, XMFSinchiruna (28.52) wrote:

SkepticalOx,

There is no quick or easy answer to such a question. As I'm sure you know, the entire coal sector is presently engulfed in pronounced weakness. I've also been a buyer of Peabody Energy near $30, because I find the shares remarkably undervalued.

But part of the dynamic with Cardero, I'm convinced, is a failure by the market to recognize the company's recent strategic transformation from a multi-resource entity that looked more like a holding company, to a motivated development push for met coal and iron.

Also, the markets are punishing companies with project capital expenditures on the horizon. See my series on Thompson Creek.

Finally, please note in the PEA the rather wide gap in NPV between the base case and the next lower price scenario.  

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#8) On March 12, 2012 at 9:36 AM, XMFSinchiruna (28.52) wrote:

Here is the PEA:

 http://www.cardero.com/s/news_releases.asp?ReportID=496193

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#9) On March 12, 2012 at 9:53 AM, mcgusto66 (< 20) wrote:

Sinch,

 I'm a fellow shareholder as well and believe in the prosects of Cardero over the long-term. I was wondering, is it common for companies to trade at large discounts to NAV such as Cardero? I was looking at another coal company similar to Cardero called Fortune Minerals and they too trade at a large discount to NAV. Any thoughts would be much appreciated. 

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#10) On March 12, 2012 at 10:39 AM, XMFSinchiruna (28.52) wrote:

Mcgusto66,

It's not at all uncommon in the resource space; particular for smaller development companies for which the market will often hold back a fairer value until it perceives a clear road to project financing. But Cardero stands out for the degree of that valuation disconnect. By the same token, I looked at Fortune recently and liked what I saw there as well. It's further along with a full feasibility study and the POSCO jv, but it's also a fairly capital-intensive project. Carbon Creek conceived as only $300m in pre-production capital, vs. More than $750m for Mt. Klappan. Also, Carbon Creek's IRR is more robust, at least through the PEA stage.

But yes, deep value opportunities abound in met coal in the present environment, and Fortune makes another fine example.  

 

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#11) On March 12, 2012 at 1:57 PM, SkepticalOx (99.44) wrote:

Thank you for the reply. I was just wondering if you could go a bit over the downside risks (for the company and stock)? What are the most probable things that could derail Cardero (or will this be covered in the intereview)?

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#12) On May 15, 2012 at 6:24 PM, Bovinecheese (93.04) wrote:

Thanks for bringing this company to my attention.  Sounds almost too good to be true.  I opened a position, though.

One of my chief concerns in this - and any smallish asset play - is the potential for share dilution, which has already occurred.

 What's your assessment of the impact of dilution now and the potential for more in the future as the company attempts to survive the (possibly lengthy and certainly costly) interim period until coal is actually coming out of the ground at Carbon Creek?

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#13) On February 14, 2013 at 6:50 PM, azinsd (< 20) wrote:

TMFSinchiruna,

 I've followed closely your coverage on Cardero.  Current Coal issues aside, is your thesis still intact?   I find the opportunity to accumulate here compelling.

 Gratefully,

 azinsd

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