The model portfolio is composed of international investments and is priced in US dollars. All foreign currency holdings are converted to US dollars, based upon closing currency valuations as of the date of publication. Views are solely that of the author, and will differ materially from conventional analysts as well as the investing public at large. The purpose of the model portfolio is to monitor performance of investments written about in this blog, and is not to be construed as research. The blog is written for entertainment purposes only, and does not represent investment advice in any way, shape or form. Always consult an advisor prior to engaging in any investment activity.

 

 

The blog model portfolio owns shares of FLL and 0357.hk.  On April 5th, 2012, at the market open,  I will be adding to those positions.

FLL has sold a management interest in a casino for $48.75 million, before fees and taxes.

Full House Resorts disposed of partial management interest, in a Michigan casino contract, featuring an expiry date of August 5th, 2016.  While nicely profitable, the ability to extract cash from the partial interest was subject to a host of restrictive covenants.  I estimate that net cash proceeds from the sale may be in the range of $36 million. $25.3 million of this amount will be applied towards fully retiring all outstanding debts.  When added to the $14.7 million of cash on hand, Full House should find itself with net short term cash of roughly $25.4 million. 

http://finance.yahoo.com/news/full-house-resorts-announces-closing-120000154.html

Full House Resorts has also announced the purchase of the Silver Slipper Casino in Mississippi.

The purchase price is $70 million.   Management has indicated that the purchase price is roughly 6.3X trailing 2011 EBITDA.  This implies that the Silver Slipper generated  2011  EBITDA in the range of $11.1 million US.

 Assuming no meaningful delays, Full House should begin generating revenue from this property sometime in the 3rd quarter of 2012.    The purchase price will be paid for from estimated cash on hand of $25.5 million, estimated cash to be generated from present operations in the next two quarters of $6 million, and debt financing of up to $45 million.   Based upon the large cash balance on hand and the totally debt free position that FLL finds itself, there seems no need for any equity financing to complete the purchase.

http://finance.yahoo.com/news/full-house-resorts-acquire-silver-120000912.html

http://finance.yahoo.com/news/full-house-resorts-obtains-financing-120000739.html

 

Silver Slipper is the largest purchase in the history of Full House Resorts.

The Silver Slipper is a relatively modern property, having been constructed in 2006.   It features 37,000 square feet of gaming space.

 http://www.silverslipper-ms.com/

The cost of $70 million for Silver Slipper greatly exceeds the $52 million total consideration paid in the  April 2011 acquisition of the Rising Star Casino in Indiana. 

In less than 24 months, Full House has undergone a corporate metamorphosis.

In 2010, FLL was a microcap company.   Revenue was earned on one wholly owned property in Stockman, Nevada featuring just 8400 sq. feet of gaming space.  This revenue was augmented by an assortment of temporary casino management contracts; these contracts lacked any certainty of renewal, were often subject to litigation among the partners and carried punishing depreciation & amortization schedules that impacted earnings. 

Assuming that the Silver Slipper purchase closes, FLL will end 2012 as a company with 3 wholly owned properties featuring 75,400-85,400 square feet of wholly owned gaming space.  Normalized revenues from these properties could exceed $170 million.   2012 EBITDA could range from $17.5 million to $20 million  basis from the three wholly owned properties, depending upon the timing and amounts of rebranding and various one-time charges associated with the Silver Slipper acquisition. Going forward, depreciation and amortization charges as a percentage of revenues will decline steadily; this should enhance earnings over time.  Two management contracts of third party casinos were entered into during 2011. Unless they are terminated prematurely, these contracts offer the potential to generate several million dollars of incremental EBITDA annually.

By the end of 2012,  Full House Resorts  will be completely transformed; the business model will have changed from that of a management subcontractor of casinos to that of an owner/operator.  Between April 2011 and a potential closing date of September 30th, 2012, FLL will have purchased $122 million worth of casinos and associated real estate and will carry less than $40 million of financial debt attached to those purchases. This pace and size of the acquisitions suggest that a clear disconnect exists in the marketplace; the current market cap of  FLL is $55.8 million US. 

Upon completion of the Silver Slipper acquisition, I believe a rerating of Full House Resorts is likely.   

Should the owned properties continue to perform in lines with current expectations, there appears to be plenty of potential for a revaluation of the company.  I believe that at some point in the next year, Full House Resorts may deserve a multiple in line with other regional casino operations.  At present, FLL sells for a 2012 EV/EBITDA multiple that I estimate will be 4.8X.   Century Casinos (CNTY), a roughly comparable peer, could report total 2012 revenues of less than $85 million and generate roughly $10.5 million of EBITDA.  Century presently sells for 7X my estimated 2012 EV/EBITDA multiple.  

Full House Resorts has quietly developed a reputation as a good property manager.  Their recent acquisition of the Rising Star Casino has somewhat surpassed expectations in terms of EBITDA generation.  Should management at Full House prove equally adept at running the Silver Slipper, 2013 EBITDA has the potential to surprise to the upside.   The Silver Slipper property lacks a hotel at present; there is sufficient land attached to the purchase to construct a hotel and conference resort of some size.   Full House management indicates that the building of a hotel on this property is a high priority; evidently hotels in this region are routinely overbooked. 

http://www.sunherald.com/2012/04/02/3860363/ferrucci-silver-slipper-sale-is.html

 

The blog model portfolio will be adding a further 2800 shares of Full House Resorts and up to a further 10,000 shares of Hainan Meilan Airports Inc.

Hainan Meilan traffic soared in the first quarter of 2012.

http://www.mlairport.com/Meilan_Airport_Web/en/12InvestorRelates3_Content.aspx?id=35

http://www.bloomberg.com/video/90649249/

Traffic data supplied by Aeroports De Paris, a global bellwether for airport traffic and a holding of the blog model portfolio, suggests that global travel is accelerating.   The few analysts worldwide that follow airports may shortly have to start increasing their concensus 2012 forecasts.

http://www.reuters.com/article/2012/04/18/adp-traffic-idUSWEA836520120418?feedType=RSS&feedName=industrialsSector&rpc=43

 

This purchase funds will be made available through the disposal of 14,000 shares of Aura Minerals (ORA-TSX, $1.00).   Aura’s fiscal year-end report and subsequent analyst call was profoundly disappointing.

  1. Management failed to fully inform shareholders about a critical primary crusher mechanical failure at their largest Brazilian gold mine for almost 4 months.   The cost of production at the San Francisco mine has risen to the point that I do not believe further production is feasible or sustainable.
  2. Management, based upon publicly available conference calls to analysts, appears somewhat evasive when questioned about arsenic concentrations at their Aranzazu mine. They will only comment that arsenic concentrations are above 1% and high arsenic concentrate deliveries carry a penalty when delivered to refineries for processing.  
  3. Management, in their year-end review, indicate that a potential expansion of their Aranzazu mine will be paid for by cash flow from the Brazilian mines.  However, the present high cost of production, the significant cost inflation that has been experienced in Brazil and the recent pullback in the price of gold has changed the outlook for the worse. I cannot see how their earlier cash flow projections can be achieved in 2012-2013. If one of the two mines shuts down, at some point in the next year, and the other mines fail to generate much cash flow, based upon rapidly increasing production costs, the only way to pay for an expansion in the Mexican copper mine will be through a share price rollback and subsequent dilutive equity financing, a cash flow limiting forward sale of metals, an expensive debt undertaking, or some combination of the three.
  4. Management is heavily banking upon the future of the company with the potential development of their Brazilian iron/copper ore deposit.  Aura now has a track record as a producer since their reopening of the Aranzazu mine and the acquisition of the three gold mines from Yamana Gold.  Sadly, that track record is one of the sorriest that I have yet seen in the public markets. I would consider it self-evident that management lacks credibility in the eyes of the mining industry. Given the inability of management to successfully operate low grade open pit operations thus far, it is appropriate to be highly skeptical of forecast projections of the firm to develop a new ($600 million plus forecast capital cost) low grade-high tonnage project on time or remotely close to budget.      

In order to complete an expansion of their Aranzazu copper mine and develop their Brazilian iron ore/copper deposit, significant capital will be required.  Given the pullback in the price of gold of late, and given the fact that management does not seem to have a handle on how to control costs at their current operations, it appears that little of this capital can be generated internally. 

In short, I am calling it quits with Aura Minerals. As a self-described long term investor, I accept that sometimes there will be certain events that fall beyond the control of management to predict. However, a critical error of omission, in the form of a failure to fully publicly disclose a primary mechanical breakdown, for more than a fiscal quarter, is where I draw the line.  The entire 14,000 share position will be sold at market*; all proceeds, plus present cash on account, will be sufficient to pay for the investment in Full House and Hainan Meilan.

 

*on April 5th, the 14,000 shares of Aura Minerals were liquidated for net proceeds of $13,148 US, net of full service commission.  2800 shares of Full House Resorts were purchased at a net cost of $8,472 US including a $100 US commission.  8,900 shares of Hainan Meilan Airports were purchased at a net cost of $6,233 US, inclusive of a $100 full service commission.     The blog model portfolio had held a cash balance of $1562.45; this will be applied against the investment purchases to pay them off in full.