Sunday, November 14, 2010

ATPG - Final Comments

First off, I have made some changes to my Blog. Anonymous comments will not be allowed. If you want to comment you will need an ID. If you don't want your name attached to your comments you won't be able to leave them here.

Comments on Profit

Now, I seemed to have struck a nerve with my comments on profits (or lack thereof). One example is,

You suggested that OracleofMumbia "start your own company and learn the importance of profits." I pretty sure that he does, but he also understands how the industry and profits within it works. This is a skill that you seem to be lacking. Please reread his last post and try and learn something for a change!

Your right I don't understand profits.

Let's keep it simple.

Revenue - Costs = Profit

If revenue and costs are the equal you have not earned a profit. Do you make believe that profits exist in companies you own? Some people think investing is hard or complicated but it isn't. You want to own companies that earn large returns on capital and equity.

There is no such thing as a free lunch. All losses have to be paid for, either out of equity or increasing debt. You cannot defy economic gravity.

The OracleofMumbia said,

That said, your comments about "profits" are a bit strange. Most plays I invest in don't have them - or so low as to be virtually meaningless. The name of the game for early stage plays (juniors) is to reinvest cash flow back into operations and grow production - then comes profits, although they typically like to sell out at that point and repeat the cycle. The TSX Venture is full of guys making millions doing the same thing over and over.

Listen, I understand early startups do not earn a profit as overheads can be large, but you have to overcome that eventually (sooner than later to stay solvent). ATPG has been around for a while now, overpromising and underdelivering. Perhaps management will deliver this time and perhaps they won't. All I raised were red flags that investors can and should understand if investing in ATPG. The longs didn't even take the time to value the assets before making their purchases, they call it value investing.

Attention - Millions to be had over at the TSX-V

According to the OracleofMumbia everyone is making millions on the TSX-V. Whenever you hear comments like that run, don't walk, for the exit. It's almost as bad as the commercials on Sirius/XM 129 (CNBC). Those who listen know exactly what I am talking about.

The only ones making millions on the TSX venture are the promoters and financial engineers who know how to exploit the individual investor.

I really wonder what the Oracle of Omaha would think of your comments?

Asset Valuation

Now you can also own assets that don't generate profits, gold is an example. I know a lot of people who own shares in a non producing diamond mining company based in Saskatchewan (Shore Gold - SGF). I was asked by several people what I thought of it, and my initial reaction was I have any idea what the assets were worth. I have subsequently reviewed their NI 43-101, and the project is marginally economic with an IRR of 12.2%. Using a discount rate of 10% the NAV is $1.15/share. The project is borderline economic. Many people lost a great deal of capital on this investment.

As Buffett says, "the market like the Lord helps those who help themselves, but the market unlike the Lord does not forgive those who know not what they do."

Now here is the funny part. When I shared my findings with a fellow engineer from Edmonton he told me I was missing a whole bunch of their assets. Now doesn't that sound familiar...

Final ATPG Comments

Lastly, I made a mistake (not the first). I said in a comment last night that interest expense was $80 million per day for ATPG. It actually comes out to be $600k per day. Regardless, interest expense was 68% of revenue in the third quarter. Incredible!

I was also forced to amend my article on ATPG as it was disputed by one of the fanatics over there. I had only read the 10-k and the financial covanents had been removed. However many over there were stating that all covanents had been removed, this is simply false. The amendment can be read below.

Best Regards & Go Riders,

Kevin Graham

All information in the article was taken from the latest 10-K filing for ATPG. On April 20th, 2010 the BP Deepwater Horizon oil rig exploded. Then on April 23rd, 2010 the company refinanced its outstanding debt. Subsequent filings have shown that the financial covenants listed in the article (and the 2009 10-K) have been removed. However, the additional covenants were added and are discussed below. This information is from the latest 10-Q filed November 9, 2010.

The Notes and New Credit Facility contain certain negative covenants, which place limits on the Company’s ability to, among other things:

•incur additional indebtedness;
•pay dividends on the Company’s capital stock or purchase, repurchase, redeem, defease or retire the Company’s capital stock or subordinated indebtedness;
•make investments outside of our normal course of business;
•incur liens;
•create any consensual restriction on the ability of the Company’s restricted subsidiaries to pay dividends, make loans or transfer property to the Company;
•engage in transactions with affiliates;
•sell assets; and
•consolidate, merge or transfer assets.

As of September 30, total long-term debt totaled $1.8 billion compared to $1.2 billion and the end of 2009. The effective annual interest rate on the long-term debt was 12.3% at September 30, 2010. The notes and credit facility also contain some steep provisions for ATPG to repay the notes. The company states the cost of repurchasing up to 35% of the notes on or before May 1, 2013 at 111.9% of face plus accrued interest, if any. The loan shark obviously wants to ensure he gets paid well regardless of whether ATPG pays the debt back early or not.

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