On Monday, April 30, 2011, NovaGold Resources will complete the spin-off of NovaCopper, with when-issued trading expected to begin on Wednesday, April 25. Dr. Thomas Kaplan, the Chairman of both NovaGold and NovaCopper, has expressed quite clearly that the primary motivation behind the spin-off is to allow NovaGold to focus on the development of the Donlin Gold asset.
 
In addition to the spin-off of NovaCopper, NovaGold plans to sell its interest in its Galore Creek copper-gold asset. Upon completion of the spin-off, NovaCopper’s primary asset will consist of a 100 percent interest in the Ambler Project, a copper-zinc-lead-gold-silver concern located in northwestern Alaska.
 
On January 11, 2010, NovaGold purchased 100 percent of the Ambler Project from Rio Tinto subsidiaries Kennecott Exploration Company and Kennecott Arctic Company for US$29 million. Inclusive of a one percent royalty interest retained by the sellers that can be repurchased NovaCopper at any time for US$10 million, the enterprise value of the Ambler Project implied by this rather recent transaction is a mere US$39 million.
 
In addition to the Ambler Project, NovaGold will fund NovaCopper with US$40 million in working capital. In consideration of the recent transaction value (US$29 million), the working capital contribution (US$40 million), and even inclusive of both capitalized and non-capitalized mineral development expenses incurred since the acquisition (US$14 million), the resulting combined value is a mere US$83 million. Moreover, NovaCopper’s pro forma book value is US$71 million. With other development-stage mining companies trading at an average of 1.75 times book value, the equivalent NovaCopper market capitalization is quite small at approximately US$125 million.
 
While very little has been expended in the development of the Ambler Project since the acquisition in January 2010, the company recently released its Preliminary Economic Assessment on May 9, 2011 establishing a copper equivalent resource of 1,991 kilotonnes (indicated and inferred, not measured) and outlining the potential net present value of the Ambler Project. Specifically, the report concludes that the base case post-tax net present value is US$505million with an IRR of 25 percent; and, the high case post-tax net present value is US$1.6 billion with an IRR of 50 percent.

While such net present value figures are rather striking in comparison to the values implied by the recent transaction with Kennecott and implied by the book value multiples of comparable companies, one must recognize the such estimates are quite sensitive to both the assumed cost of capital-in this case eight percent-and, obviously, the price of the underlying commodity. Being of a less speculative orientation, it is our preference to heavily discount such figures.
 
More importantly, perhaps, one must also consider that additional capital will be required to advance the Ambler Project. Specifically, pre-production capital costs for the Ambler Project are estimated at US$262 million. Sustaining capital costs are estimated at US$167 million. As well, road access to the project is currently non-existent, with the estimated cost of road construction estimated at US$300 million.
 
As outlined in more detail in the Valuation section of this report, a reasonable value for one copper equivalent tonne of resource is approximately US$479. With 1,991 kilotonnes of copper equivalent resource, a fair enterprise value for NovaCopper may well be US$954 million. Inclusive of the company’s working capital of US$40 million and net of future funding required to develop the resource (US$729 million), the equivalent market capitalization is US$265 million.
 
In light of the fair values implied by comparable valuations relative to book value and copper equivalent resource base-that is, US$125 million and US$265 million-and in consideration of the fair value implied by the January 2010 Ambler Project purchase price (US$29 million), the pending working capital contribution from NovaGold (US$40 million), and capitalized and non-capitalized mineral development expenses (US$14 million)-or, US$83 million-our opinion, then, is that the shares of NovaCopper only begin to appear interesting were they to trade below US$265 million. A more compelling proposition with a more obvious margin of safety would be between US$100 million and US$200 million.
 
It is important to note, however, that the involvement of individuals like Dr. Kaplan and Mr. Paulson could result in a premium valuation for shares of NovaCopper. We would not be surprised if the shares were to trade well above US$265 million and closer to the widely discussed net present value figure of US$505 million. In such a scenario, NovaCopper would be of very little interest to us.
 
Finally, one should also consider that that the company is likely to qualify as a passive foreign investment company under U.S. tax law. Given the burdensome requirements associated with holding such companies, there is the potential for this to negatively impact the ultimately valuation, though the degree to which this may be the case is uncertain.

Shaft Sinkers specializes in the sinking of vertical and decline mine shafts and in the development of underground infrastructure. The company has long been one of the preeminent vertical shaft sinkers in South Africa, with a particular area of expertise in constructing especially deep and/or wide vertical shafts. Shaft Sinkers is responsible for constructing South Africa’s deepest man-and-material shaft at 3,131 meters and is currently constructing seven of nine South African vertical shafts in excess of 350 meters.
 
Originally incorporated as a subsidiary of Anglo American in 1961, Shaft Sinkers recently came to market through a partial initial public offering on December 23, 2010 and has since experienced a rather abrupt and severe diminution in market value. The recent decline in market value is likely the result of the illiquidity created by the exceedingly small market capitalization and the 48 percent interest that has been retained by the company’s primary shareholder, International Mineral Resources.
 
The ultimate holding company of International Mineral Resources is Summerside Investments Sarl, which is owned by three individuals-Patokh Chodiev, Alijan Ibragimov and Alexander Mashkevich, founders and significant owners of publicly-traded Eurasian Natural Resources Corporation (ENRC LN), a key participant in the privatization of Kazakhstan’s mining industry during the mid-1990s.
 
In addition to the effects of the minute market capitalization and limited liquidity, the company recently reported the delay of its most significant project, which comprises nearly 30 percent of the current order book. Moreover, the company has entered into negotiations with the client to either amend or terminate the contract. While the delay and potential cancellation of such a large percentage of the order book is clearly cause for alarm and likely explains the severe diminution in equity market value, the remaining order book appears sufficient to support the current valuation. In other words, this event appears fully discounted in the share price.
 
Importantly, the current contract tender pipeline is substantial, with over £1.0 billion in outstanding tenders on nine development projects. Most importantly, perhaps, is the fact that International Mineral Resources intends to expand the company’s operations outside of South Africa. The risk associated with pursuing such an endeavor is significantly reduced-arguably eliminated-by the fact that the principals of International Mineral Resources are the founders and the largest shareholders of Eurasian Natural Resources and quite familiar with the mining industry and its politics in South and Central Asia.
 
Though the company is quite small and perhaps unsuitable for larger portfolios, we feel compelled to bring it to our subscribers’ attention, as its shares are significantly mispriced. With an equity market capitalization of £35.9 million (GBp 75.50 per share) and trailing twelve months adjusted net income of £11.7 million (GBp 24.64 per share), the shares trade at an net income multiple of little more than three times. With £10.6 million in net cash (GBp 22.35 per share), the current enterprise value is £25.2 million. Relative to trailing twelve months EBITDA of approximately £26.1 million, the company’s enterprise value is currently less than one times EBITDA. And, with cash from operations of £19.4 million and capital expenditures of £12.5 million, free cash flow amounts to £6.9 million, equivalent to a free cash flow yield of more than 27 percent-that is, relative to the company’s net cash adjusted market cap or enterprise value.
 
Notably, the November 2007 purchase by International Mineral Resources of a 60 percent interest in Shaft Sinkers for £18 million-or an implied enterprise value of £30.0 million-represents a 19 percent premium to the current enterprise value of £25.2 million. Not surprisingly, the multiples reflected by the current valuation represent significant discounts to other shaft sinking companies. Furthermore, the depressed valuation at which the company currently trades is clearly not a consequence of the company’s capital structure. As detailed in the Valuation section of this report, the company currently trades at 0.74 times book value-a book value that is comprised almost entirely of tangible assets, including a total cash position of £31.3 million (GBp 65.96 per share).

As well, the company has stated that it intends to pay an annual dividend of 33 to 40 percent of net income. Assuming the trailing twelve month figure is a fair basis for the level of profitability that one should expect going forward, the annual dividend would be between £3.9 million and £4.7 million (GBp 8.21 per share – GBp 9.86 per share), or a dividend yield of between 10.9 percent and 13.1 percent at the current market capitalization of £35.9 million.
 
With respect to the potential fair value, one could argue that the company’s minute market capitalization and limited liquidity are deserving of lower multiples. While this may, in fact, be warranted, even at very conservative multiples to net income and EBITDA of seven and three times, respectively, one arrives at per share fair values of GBp 172.48 and GBp 184.89, more than double the current share price (see Valuation section for details). At the same time, the current discount to tangible book value and the likelihood of a sizeable dividend provide one with an attractive margin of safety. Not only would one be purchasing the company at a 26 percent discount to book value, but at the current level of profitability-and assuming a dividend of GBp 8.21 per share-the effective cost basis would be reduced by nearly 11 percent every year.
 
As well, one must note that such a valuation is derived from the trailing twelve months performance figures and assumes very little about the company’s prospects for future growth owing both to the sizeable contract tender pipeline and to the potential for future business outside of South Africa. In light of such optionality, it would not be unexpected if the ultimate return proved to be many multiples of the current share price. In other words, it appears that one is taking very little risk in order to gain exposure to a rather uncommon return profile.
 
In consideration of the depressed valuation relative to competitors and previous purchases by the company’s largest shareholder, as well as the current level of profitability, cash flow, tangible book value, a potentially high dividend yield, the existing contract tender pipeline, and the possibility of a significant expansion of operations with the support of International Mineral Resources and Eurasian Natural Resources, the shares of Shaft Sinkers Holdings Limited (SHFT LN) are recommended for purchase.

Safilo appears to be a dramatically undervalued company. Following its recapitalization in 2009, its position as one of the world’s two largest manufacturers of premium label eyewear has improved markedly. The new effective controlling shareholders of Safilo, HAL Holding N.V., have succeeded in reducing the company’s debt obligations to the current manageable level. Now that the financial (i.e. balance sheet or default) risk appears to have passed, Safilo is once again placing emphasis on the strategic growth of its proprietary brand franchise, as recently evidenced by the acquisition of Polaroid Eyewear.
 
In many turnaround or restructuring situations, the investor must patiently wait for drastic action taken by the company to improve shareholder value. In the case of Safilo, such action has already been taken via a significant restructuring/recapitalization by HAL. After only two years, the operating profitability of Safilo has improved remarkably. With this catalyst in place, the investor, at this juncture, merely needs to allow time for further margin enhancement to continue, and for the investment community to properly assign value to the company’s likely normalized earnings. If one accepts a holding period of perhaps three years, the doubling of one’s investment in Safilo appears quite plausible. Therefore, these shares are recommended for purchase.

Compañía Sud Americana de Vapores S.A. (CSAV) is the largest shipping company in Latin America and the sixteenth largest in the world by container capacity with approximately 332,000 twenty-foot equivalent units (TEUs). At the current market capitalization of US$1,127 million, CSAV trades at a moderate premium to a valuation based on depressed revenues, margins, and multiples. Moreover, there appears to be significant room for improvement in margins as spreads between freight rates and fuel costs dissipate and as the company transitions from a primarily leased fleet to an owned fleet, as well as the potential for revenue growth as the industry recovers from a cyclical low. Conservative assumptions regarding the company’s ability to improve margins is suggestive of a per share fair value upwards of approximately CLP 92 per share, a significant premium to the current price. Importantly, such a scenario assumes little in the way of revenue growth; in other words, the ultimate, longer-term return has the potential to be significantly higher.

Sociedad Matriz Sudamericana Agencias Aéreas y Marítimas S.A. (SAAM) is Latin America’s largest supplier of port services and logistics. SAAM is currently the largest tug boat operator in the Americas and the fourth largest in the world. It is important to note that the company has not issued a circular outlining the merits of the demerger. As a result, insufficiently little information is available about the relative profitability of SAAM’s various operating segments (i.e., tugboats, logistics, and port services). What one can observe, however, is that at the current market capitalization and enterprise value of US$1,311 million and US$1,371 million, respectively, SAAM is trading at multiples of net income and EBITDA of 25.6 times and 13.4 times. While the company appears to possess a very stable business model imbued with attractive growth prospects, such factors appear firmly established in the current price.

That said, the recent inability of shipping companies to offset rising bunker fuel costs with higher freight rates may lead to the need to cut costs elsewhere. A natural target for such cost cutting efforts may very well prove to terminal and port operations like those owned and operated by SAAM. While the current valuation is not suggestive a meaningful mispricing (at least with the information at hand), the company does appear poised to grow going forward. Moreover, with net debt to EBITDA of only 0.6 times and a rather stable operating profile, the company appears to be in a position to support significantly more debt. In our opinion, such a profile makes for a potentially attractive acquisition target for competitors such as Dutch company Royal Boskalis Westminster N.V.

Most importantly, perhaps, at the respective helms of the newly recapitalized CSAV and recently demerged SAAM is the Luksic family, headed by Chairman Guillermo Luksic. As demonstrated herein, the family—through their company Quiñenco—has established a long-term track record of creating value for shareholders, with annual book value per share growth of 14.5 percent from December 2001 through September 2011 (i.e., inclusive of dividends). This would not be the first instance, recently, of a wealthy private investor making a substantial investment in a shipping company. Much like your authors, presumably such investors are of the opinion that this most cyclical of industries is near a cyclical bottom and poised for a reversion in profitability.

While SAAM’s shares do not appear to significantly mispriced, CSAV’s shares appear quite compelling, even in light of their recent and significant appreciation following the completion of the company’s recapitalization. Shares of CSAV currently provide one with what we deem to be an ample margin of safety in a significantly undervalued company with an improving business model now being run by able owner operators (i.e., Luksic family) and in an industry ultimately poised for a cyclical recovery. Moreover, whereas all shipping companies will undoubtedly benefit from the decreasing spread between freight rates and fuel costs, CSAV is also positioned to benefit from its increased focus on owning rather than leasing its fleet. This is a dimension of the investment thesis contained herein that should not go without due consideration, as it is a characteristic that appears to differentiate CSAV from other operators in the shipping industry.

Ergo, the post-demerger shares of Compañía Sud Americana de Vapores S.A. are recommended for purchase.

On Tuesday, May 24, 2011, Telecom Corporation of New Zealand Limited, New Zealand’s leading telecommunications provider, announced plans to split its telecommunications services and telecommunications network infrastructure operations into separate companies by the end of 2011. The separation of the company”s network infrastructure operations as Chorus Limited is the culmination of the process of local loop unbundling that began with the Telecommunications Act 2001. The Act was implemented in an effort to cure New Zealand”s dearth of telecommunications competition and consequent underinvestment in telecommunications infrastructure (e.g., broadband).

The Government’s decision to grant Chorus the contract to build out the country”s broadband network as part of the Ultra-Fast Broadband (UFB) Initiative was contingent upon the separation of Chorus from Telecom Corp.  As the cornerstone partner in the Government”s initiative, Chorus has been charged with deploying the network to 830,900 premises in 24 of the country”s 33 UFB candidate areas, or 70 percent of the coverage area under the UFB Initiative. The contract includes the biggest city, Auckland and the capital Wellington, the lower North Island, and most of the South Island. Chorus commenced the design and construction of the new fiber network in August 2011.

Under the agreement, the Government’s Crown Fibre Holdings will invest a total of NZ$1.35 billion to build the network, of which Chorus will have access to approximately NZ$929 million progressively throughout the UFB build period ending December 31, 2019. The Government”s investment will be made through a combination of debt and equity securities purchased from Chorus as the broadband network is built. The shares will be non-voting and no dividends will be paid before 2025, while the debt will be unsecured and non-interest bearing. The government has promoted the plan to supply ultra-fast broadband to 75 percent of the country by 2019 through a fiber-to-the-premises network (FTTP) as a key policy to boost economic growth.

On Tuesday, March 22, 2011, the Board of Directors of Punch Taverns plc announced its decision to proceed with plans to spin off the company.s managed pub business as Spirit Pub Company plc. The decision follows the announcement made in October 2010 that the company had started a comprehensive review of company strategy, operating performance, and capital structure. This strategic review was initiated to address the effects of a sizeable debt burden in an environment of slowing discretionary spending, falling property values, and a UK ban on smoking that took effect on July 1, 2007, all of which have contributed to the company.s significantly diminished market capitalization since peak valuations in mid-2007.
Punch Taverns is one of seven LSE-listed pub companies and has a portfolio of 6,432 managed and leased pubs. The leased division.known as Punch Partnerships.comprises 5,629 pubs across the United Kingdom, whereas the managed division.known as Punch Pub Company.comprises 803 pubs. Punch Taverns originally spun off the managed division on March 2, 2002 as the Spirit Group through the issuance of a special dividend to private equity sponsors Blackstone, Texas Pacific, and CVC Capital. Subsequent to the separation of Spirit Group, Punch Taverns successfully completed its IPO on May 27, 2002. The managed division (i.e., Spirit Group) was later reacquired by Punch Taverns in 2005 from its original private equity sponsors for ¡Ì2.68 billion.
The demerger resolution was approved by the company.s shareholders on Tuesday, July 26, 2011. As a result, 803 managed pubs.Punch Pub Company.as well as 549 leased pubs will be spun off as part of Spirit Pub Company plc, with 5,080 pubs within the leased division.Punch Partnerships.continuing as Punch Taverns plc. Of the 549 leased pubs assigned to Spirit, it is expected that up to 100 will be converted to managed pubs, with the balance disposed of through periodic sales. Similarly, of the 5,080 pubs assigned to New Punch Taverns, 2,126 have been designated as non-core pubs and will be disposed of over the next five years at a rate of approximately 500 per annum. In addition, New Punch Taverns will continue to hold the company.s 50 percent interest in Matthew Clark (Holdings) Limited, a drinks wholesaler and distributor and joint venture with CHAMP Private Equity.

Aker Solutions ASA is a leading Norwegian oil services, engineering and construction company serving a variety of industries, namely oil and gas, refining and chemicals, mining and metals, and power generation. In 2010, Aker Solutions operated with four reportable business segments: Energy Development & Services (ED&S), Subsea, Products & Technologies (P&T), and Process & Construction (P&C). On December 9, 2010, the company announced its intention to split its existing operations into three independent companies: New Aker Solutions, Aker Contractors (i.e., Kvaerner ASA), and Process & Construction International.
As the first step of the separation process, it was envisioned that Process & Construction International would be listed on the Oslo Stock Exchange through an initial public offering; however, on February 1, 2011, the company completed the sale of the division to U.S.-based Jacobs Engineering Group, Inc. (JEC US) for a total purchase price of approximately NOK 5.5 billion (i.e., USD 913 million). Care of approximately NOK 1.1 billion in cash, the net purchase price amounted to NOK 4.4 billion, or approximately 8.5 times and 8.8 times 2010 EBITDA and EBIT, respectively; with total debt of NOK 354 million, the implied equity value of approximately NOK 5.1 billion represented 14.6 times 2010 net income of NOK 352 million.2
With the sale of Process & Construction International, Jacobs Engineering Group acquired the majority of the P&C business, which focuses on the supply of engineering and construction services to certain onshore industry segments, namely mining and metals projects, power generation facilities, and other downstream processing facilities. According to Jacobs” management:”Aker Solutions” P&C operations significantly expand Jacobs” global presence in the mining and metals market; provide a new geographic region with South America; and strengthen Jacobs” presence in China. Jacobs” regional presence in Australia, Europe and North America is also enhanced as a result of the transaction.”3

Kvaerner’s downstream operations have clearly struggled as of late due to the completion of the Cameron Liquid Natural Gas Project and the reversal of previously recognized profits related to the construction of a 700 megawatt coal fired power plant (i.e., the Longview Project). As well, the recent order intake history is suggestive of continued negative to modest performance in the downstream segment. And, though Kvaerner‟s historical results and the nature of recent losses suggest the potential for a return to profitability in the downstream segment, in the event that the business continues to struggle, the mere sale of the group is all that is required to significantly increase Kvaerner‟s overall level of profitability.

More importantly, despite the recent Deepwater Horizon tragedy in the Gulf of Mexico, the most significant oil discoveries are being made in deep water, recent examples being discoveries off of the coasts of Brazil and West Africa. This is expected to continue. Moreover, the upstream products manufactured by Kvaerner, such as semisubmersibles, floating production, storage, and offloading vessels, and gravity base structures are more unique and less commoditized than the traditional jack-up rig, for example, and, therefore, are less subject to issues of oversupply and competitive pricing pressure. Such specialized products should benefit Kvaerner in an environment of increasing offshore oil demand.

In an environment of increasing demand for offshore resources, such specialized products will undoubtedly benefit Kvaerner; however, the same can be said for New Aker Solutions. The primary difference appears to be the relatively lower variability in those profits derived from services as compared to heavy equipment. Even in the event of a decline in offshore exploration—which would significantly impact the operations of Kvaerner—the services provided by Aker Solutions designed to maintain and extend the output of existing fields will continue to be in demand. In other words, one should expect Kvaerner‟s performance to exhibit a greater degree of sensitivity to oil prices.

The potential for improved profitability in the downstream segment—or, more simply, the complete divestment of the downstream segment—and the macroeconomic dynamic of increasing demand for offshore resources lend credence to the supposition that a recovery in overall profitability is possible. The corresponding rates of return in such scenarios— even in the most conservative case—suggest that the reader carefully consider both Kvaerner and New Aker Solutions as potential investment opportunities. This is especially true for Kvaerner, whose opening share price as of July 8th of NOK 14.00 is suggestive of very little in the way of improving profitability.

Mondi Limited, a South African international paper and packaging company, is spinning off its container and packaging business, a unit that is currently known as Mondi Packaging South Africa (MPSA) but will change name to Mpact Limited at the time of the demerger. Mpact will be listed on the JSE on July 11, 2011. The demerger will be implemented by way of a dividend in specie to Mondi Limited ordinary shareholders on Monday, July 18, 2011 on the basis of one Mpact ordinary share for every one Mondi Limited ordinary share held as of the last trade date on Friday, July 8, 2011. It should be noted that although Mondi trades in the UK as well, under the name Mondi plc, shareholders of that entity will not receive the newly issued shares of Mpact. Instead, they will receive a commensurate value in the form of additional Mondi shares. Therefore, the shareholders of Mondi plc will increase their aggregate ownership of the parent company (Mondi) vis-à-vis the South African shareholders who will receive Mpact shares. Currently, just over 70% of Mondi Group is trading in London (Mondi plc) with the remainder trading in Johannesburg (Mondi Limited).
After the demerger and the Mondi Limited Consolidation (to be explained below), Mondi Limited shareholders will hold New Mondi Limited shares as well as the newly listed Mpact demerged shares. The New Mondi Limited shares will, as a result of the Mondi Limited Consolidation, replace the existing Mondi Limited shares and will represent, in aggregate, a correspondingly decreased proportionate interest in the Mondi Group. It should be noted that none of these events will affect the Equalization Ratio used to determine the economic and voting interests represented by Mondi Limited shares relative to the economic and voting interests of Mondi plc shareholders, which will remain 1:1.

On Tuesday, March 1, 2011, the Board of Directors of Carrefour SA announced its decision to proceed with plans to spin off the company’s 100 percent interest in hard discount store operator Distribuidora Internacional de Alimentacion SA (“Dia”), as well as a 25 percent interest in real estate operator Carrefour Property. On May 5, 2011, however, Chief Executive Officer Lars Olofsson announced the departure of James McCann, Executive Director for France, and requested that the Board defer the proposed listing of 25 percent of Carrefour Property. It is expected that the listing of Carrefour Property will occur at a later date. The proposed spin-off of Dia was approved by shareholders at the annual general meeting on June 21, 2011.
The last day to trade in Carrefour shares with entitlement to participate in the demerger is Monday, July 4, 2011; though, one should note that the distribution will be in the form of an in kind dividend of Dia shares, and, as such, will be subject to the same tax treatment as applies to cash dividends. The taxable distribution of Dia shares will be conducted on the basis of one Dia share for every one Carrefour share. It is expected that Dia shares will begin regular-way trading on the Madrid Stock Exchange on Tuesday, July 5, 2011.
With sales of over €90 billion in 2010, Carrefour is the world’s second-largest retailer (i.e., behind Wal-Mart) and the largest retailer in Europe. The company currently operates four main grocery store formats: hypermarkets, supermarkets, hard discount stores, and convenience stores. In 2010, the breakdown of sales and recurring operating income (i.e., “activity contribution”) by operational segment and by format was as follows:4