Back in the dark days for commodities, in March of 2016, we purchased the Sherritt 8% 2021 senior bonds at $47 per $100 of face value for a running yield of 17% and a yield to maturity of 26.6%. This past week we tendered our bonds to a buyback initiated by the Company at $95 per $100 face value for a total return of 135%. Thanks bond market for remaining inefficient!  Thanks Sherritt for misallocating capital to an unnecessary debt reduction (my view). Why did we tender with the bonds still providing a new owner with a running yield of 8.4% and a yield to maturity of approximately 9.6%? 1. I’m generally happy to achieve liquidity in my distressed debt holdings at 95 cents on the $1.00. 2. More importantly, when Sherritt successfully extended the maturity of these bonds… Read More »

Date Added: February 23, 2018 | | Filed under: Blog

Takota Asset Management had an issue with Sherritt International’s [TSX:S] efforts to raise capital to firm up its balance sheet, co-founder W. Scott Leckie told Activistmonitor. “It was poor judgement,” he said. “Their recent decision to raise equity at current share prices was an example of poor capital allocation where they diluted shareholders of 20% of their interests in exchange for a modest reduction in debt of about 10%.” In May 2017, Sherritt entered into aggreement with Sumitomo and Korea Resources to eliminate USD 1.4bn in debt, in exchange for part of its stake in the Ambatvy nickel mine in Madagascar. Sherritt retains a 12% stake and operates the mine until at least 2024. Leckie is pushing for “management to make good capital allocation decisions” so shareholders can “fully… Read More »

Date Added: February 9, 2018 | | Filed under: Blog

What should one do when the market is falling like it was on Friday, and like it is as I write this blog on Monday? Well, what I did Friday morning was to do what I always do: Check to see if there was any news of relevance concerning items in which we are invested. Then I considered whether the market turmoil had offered up any opportunities that would cause me to want to invest some of the large cash reserve we have sitting in our Income Value Strategy Accounts, or cause me to want to trade out of any of our current holdings in exchange for something else in our capital accumulation oriented Classic Value and Premium Value Strategy Accounts and Partnership. Finally, I… Read More »

Date Added: February 5, 2018 | | Filed under: Blog

While Takota portfolios have returned a solid gain in 2017, far above the Canadian market return, the gap between the current market value and the intrinsic value we calculate for these portfolios hold remains at historically wide levels. To give you a sense of the current undervaluation, my expectation for our portfolios is that they should be worth at maturity at least three times their current market value (without reference to new opportunities). The financial crisis, and the subsequent period of previously uncharted monetary policy, designed to stem the crisis, restart demand and stimulate global growth has, in my opinion, reinforced and rewarded the kind of investor behaviour which had always previously been unsuccessful during the course of my 30+ years in financial markets. Meanwhile,… Read More »

Date Added: January 31, 2018 | | Filed under: Blog

With great frustration we learned last week that Sherritt International has entered into a dilutive equity financing by selling Units of common shares + a warrants to the public at a share price that is greatly depressed relative to Sherritt’s intrinsic business value potential. The financing will ultimately dilute current owner’s interests by as much as 20% upon the exercise of the accompanying warrants. The purpose of the financing is primarily to reduce debt. How the Board ever approved of such a transaction, and such a misallocation of capital is beyond me. The Board and management group are clearly still shell shocked by the desperate conditions that the nickel pricing trough of the commodity cycle produced in conjunction with their unending obligation to a project in Madagascar (Ambatovy/… Read More »

Date Added: January 22, 2018 | | Filed under: Blog

The numbers are in and the Takota Premium Value Partnership returned +24% in 2017 (+40% return 2016). While the 2017 return was solid, and far above the Canadian market return, the gap between Unit price and intrinsic value remains at historically wide levels, and the expectation is that the Unit price will be 3-5X higher on maturity of the current portfolio (without reference to new opportunities). In general terms 2017 saw positive returns in pharmaceuticals and materials stocks held in the portfolio. Modest short selling activity contributed positive return with the exception of short selling meant to hedge long exposures which was modestly negative (as insurance premiums are). The financial crisis, and the subsequent period of previously uncharted monetary policy, designed to stem the crisis,… Read More »

Date Added: January 11, 2018 | | Filed under: Blog

The numbers are still being compiled and won’t be available for a week or so but after a +40% return in 2016 it looks like the flagship Takota Premium Value Partnership will have appreciated by approximately +24% in 2017. Decent return numbers to be sure but given the late state of the business cycle and the orientation of the portfolio toward certain economically sensitive situations (in addition to the usual special situations), and the nature of the return distributions for such economically sensitive situations (i.e. big tails – meaning the weight of the return is skewed toward the latter part of the business cycle and holding period) more significant positive return numbers are immediately possible. I’m not a successful stock market forecaster (nor do I believe is anyone else) but I… Read More »

Date Added: January 2, 2018 | | Filed under: Blog

When I came home from my regular weekly hockey game the other evening, I was struck by how warm and Christmassy our house felt as I came in the front door. This got me to thinking about how grateful I am for all that I have. I have my health which allows me to enjoy all of the other blessings in my life. I have a partner who loves me, who believes in me more than I sometimes believe in myself, who sees me the way I have always wanted to be seen, and with whom every day is an absolute pleasure. I have the treasure of my boys, with whom I enjoy strong and close relationships. Why I even get invited to play shinny with my… Read More »

Date Added: December 22, 2017 | | Filed under: Blog

From the Takota Monthly “Reflections” Partner Letter “Therefore, while the small size of the cobalt market may have allowed speculative interest to prosper until now, it might well be the nickel market that will offer the best rewards from the development of the EV market.” To read “Reflections” please click here!

Date Added: December 20, 2017 | | Filed under: Blog

At Takota we like to uncover unloved disregarded and cheap securities that have enough going for them in terms of assets that they have a good chance of surviving whatever it was that made them cheap in the first place, and hold them while they revert to a higher price. In fact studies have shown that a focus on very cheap and mean reverting securities is the best way to earn superior investment returns. We followed the saga of Acerus Pharmaceuticals and its destructive and ego driven major shareholder Eugene Melynk and blogged about this on several occasions, finally writing a positive blog on Acerus in June of this year which you can read here. We followed that up with a blog a few weeks ago when the… Read More »

Date Added: December 18, 2017 | | Filed under: Blog

In June I blogged about Acerus Pharmaceuticals, and talked about why we found it an “compelling option on a developing pharmaceuticals business”. You can read that blog here! At the time I was intrigued by the immense size of the U.S. market for the condition that Acerus’s lead product Natesto treats (hypogonadism in men). That is, men who require testosterone replacement therapy to maintain an age appropriate level of testosterone. The testosterone replacement market in the US is estimated to be a $2b USD market. Natesto has a unique delivery system (a convenient nasal applicator) which delivers testosterone without the significant transference problems that exist for the various gels with which it completes, gels that must be rubbed on the shoulders and can often be transferred to other family members… Read More »

Date Added: November 27, 2017 | | Filed under: Blog

Someone asked why we have been reporting our Income Value Strategy returns on a gross basis when all of our other reporting (legacy capital accumulation business) is done on a net basis. The explanation is simple. The Income Value Strategy, offered through segregated managed accounts(SMAs), was started with my own capital in March of 2016 when I invested $1 million in the strategy.  While other investors have subsequently opened Income Value Accounts the fact that the management fee is on a sliding scale depending upon the amount of money invested (see below), and given the fact that this strategy is only 18 months old it is difficult to present a meaningful composite of like account returns as we have varying amounts of capital on deposit from… Read More »

Date Added: November 23, 2017 | | Filed under: Blog

I was asked to participate on a panel at a Shareholder Activism conference last week. The topic of discussion for our panel was what happens after you as an activist have successfully won a seat or seats on a corporate board. A bit different than the other participants on the panel, I tried to make the following points: 1. I am a reluctant and occasional activist just as I find myself from time to time being a reluctant and occasional investment banker i.e. when the situation calls for me to be. My full time occupation is as a value investor, but these are tools that a value investor needs to have at his disposal to maximize his opportunity in the event that they are required. 2. I only get involved in… Read More »

Date Added: November 9, 2017 | | Filed under: Blog

So you say you’re a value investor do you? Well, good for you if you are because we know that value investing, over the long haul, beats out every other way of thinking about investing. There are of course different styles of value investing, which range from the purchase of really cheap stocks, to the purchase of really good companies at reasonable prices. (Interestingly – the purchase of really cheap stocks beats out every other investment approach including the really good companies approach). See my blog here As I engage with other “value investors” I find that often they actually – aren’t! They think of themselves as deploying a value investing approach with all that entails which is generally taking a contrarian stance and digging into a pile of garbage to find… Read More »

Date Added: November 7, 2017 | | Filed under: Blog

Over the weekend I read “The Acquirer’s Multiple – How the Billionaire Contrarians of Deep Value Beat the Market”, a quick read written for the everyday investor. The book reinforced what I already know. Cheap stocks win over time! They beat the market, they beat the “evolved” Warren Buffett approach of buying wonderful companies (those with economic moats) at reasonable prices, they beat Joel Greenblatt’s “Magic Formula” approach which ranks stocks according to price and quality. Over time, cheap stocks provide the best investment returns, period. Contrarian thinking, value focused value investors earn the best stock market returns. Cheap stocks win out because of the phenomenon of reversion to the mean. This simply means that great businesses tend to get less great over time as competition is attracted to the high… Read More »

Date Added: October 30, 2017 | | Filed under: Blog

Income Value Portfolios: Name change As you may have noticed, after careful consideration we have decided to update the name of this portfolio from Income and Arbitrage to Income Value. The reason is simple. The old name was drawing too much attention to the word “arbitrage”. Arbitrage is not a term that is well understood by investors. When well practiced: arbitrage is the marriage of two related transactions where the one side of the transaction serves to reduce the risk in the other, like an insurance policy. {To Read the Full Report Please Click Below.} Income Value Portfolio 3rd Q Report

Date Added: October 23, 2017 | | Filed under: Blog

As many of you know we started a new strategy to complement our legacy capital accumulation business last year, a strategy meant to provide investors who require income with an alternative to the low yields available in today’s low rate market.  From time to time I have commented on the progress of my own Takota Income Value Account. I am excited to report that the gross* return for my own account is 28.7% over its first 1.5 years of operation (March 1, 2016 – September 30, 2017.  What’s more – this extraordinary return was accomplished with a broadly diversified portfolio (maximum 5% weighting in any security with no averaging up or down) and with fully 50% of the portfolio sitting in cash for the entire period – a… Read More »

Date Added: October 11, 2017 | | Filed under: Blog

From the Globe and Mail.  Couldn’t agree more.  As long as this kind of thing happens the future is bright for value investors and short sellers.  Beware your high expectation stocks! As Freshii stock goes sour, it may be time to detox from analyst advice IAN MCGUGAN 18 HOURS AGO SEPTEMBER 27, 2017 FOR SUBSCRIBERS The problem with gobbling up Freshii Inc. stock is that a few months later you’re hungry for answers. How is it that a tiny fast-food chain specializing in healthy meals can go public at the end of January, raise $125-million from investors based on its projections of warp-speed growth, earn near-universal applause from analysts – and then abruptly scale back its growth projections in September, chopping its share price and… Read More »

Date Added: September 28, 2017 | | Filed under: Blog

Over and over again we see examples in society of what was originally a good idea but which becomes a bad ideas as a result of its unquestioned acceptance, dilution and bastardization over time by all of the players involved. For example, the idea that home ownership should be available to everyone in the U.S. was a grand idea, fully supported by government policy, but the unquestioned acceptance of this idea and the resulting acceleration of the structures that made this idea a reality (aided and abetted by greedy financial institutions) created the housing crisis of 2008. Passive investing strategies are an inexpensive way for investors to participate in the growth of the economy through exchange traded funds and other structures. However, their unprecedented recent popularity… Read More »

Date Added: September 25, 2017 | | Filed under: Blog

Our previous firm, Aquilon Capital’s final office was a beautifully finished 15,000 square foot floor on King Street East, Toronto in the SAS Building. The office housed Aquilon Capital and Aquilon Power and our 50 employees and included a full gym, lounge, etc. Funding was provided by Aquilon’s successful capital investment in my Premium Value Investment Partnership, and a private equity deal completed by my partner. When we sold Aquilon Capital to one of the Canadian banks, in addition to selling them our business we sold to them all of our leasehold improvements and furnishings. In the aftermath of the financial crisis, the bank decided to consolidate their various downtown offices into their head office and to sublet the Aquilon office. By this time, having made the decision to leave… Read More »

Date Added: September 22, 2017 | | Filed under: Blog

The nickel market is of interest due to the forecast increase in electric battery usage for electric cars and grid storage. Nickel is a component of many battery technologies as is cobalt which is a frequent by product of the nickel mining process. nickel market update

Date Added: September 11, 2017 | | Filed under: Blog

There are four components to my personal investment programme. 1. Money in the Bank:  This money sits in a series of one year GICs, high yield savings accounts and money market/tbill funds earning next to nothing but acts as a form of insurance in the event all goes to hell, or if I became sick or disabled. There are sufficient funds here to provide income for several years and/or supplement other income streams for many years. 2. Takota Income & Arbitrage Account: This is my primary source of income unrelated to my employment, income which is provided by a broadly diverse portfolio of bonds and stocks that generate interest, dividends, and capital gains. 3. Takota Classic Value (RRSP) and Takota Premium Value Account/Fund: These concentrated value based portfolios are the source of long term capital… Read More »

Date Added: September 8, 2017 | | Filed under: Blog

In a previous blog I talked about the areas of market inefficiency that we were able to exploit to help us to earn an approximate 20% compound annual rate of return for approximately 20 years at Aquilon Capital and a predecessor employer. Furthermore, I promised to talk about possible areas of opportunity in today’s market in a future blog. This is that blog. Long Positions in Small Capitalization Stocks: It is a well-documented phenomenon that small capitalization stocks have historically provided the greatest rates of return. A partial explanation for this phenomenon is A. that “growth” has a bigger impact on a smaller economic base, and B. that due to restrictions on certain types of investors, more small capitalization stocks fly under the radar of market analysts – and thus… Read More »

Date Added: August 21, 2017 | | Filed under: Blog

Then: While employed by Midland Doherty, and then especially after founding our first firm, Aquilon Capital, we prospered to the tune of 20% per annum for 20+ years (with two down years only of approximately 5% each) in our most flexible strategy, our Premium Value Strategy and its predecessor account strategy primarily by taking advantage of opportunities in three distinct areas which were combined into one portfolio.   Value Based Long Positions: These included spin offs, liquidations, and a few concentrated positions in continuing businesses which were growing their intrinsic value.   Fully Hedged Convertible Securities: Hedged at or very near to 100% of their convertible feature when conversion premiums were below 20% and cash flows were generally in excess of 20%, and call dates… Read More »

Date Added: August 14, 2017 | | Filed under: Blog

Takeover arbitrage, also known as merger arbitrage, is an investment strategy that focuses on the successful completion of mergers and acquisitions. An investor that employs this strategy is known as an arbitrageur. Risk arbitrage is a type of event – driven investing in that it attempts to exploit pricing inefficiencies caused by a corporate event.  A couple of recent examples. Example #1: The Swiss firm Syngenta was the subject of an announced takeover bid from China’s ChemChina.  The bid was at $92.95 and one could buy the shares in the market for approximately $85 given the uncertainty of a shareholder vote, antitrust approvals, and the time value of money.  A dividend was also declared and paid.  The approximate 2 month holding period yielded us a 10% return which obviously annualizes out very  favourably. Example… Read More »

Date Added: August 8, 2017 | | Filed under: Blog

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