Money and Investing Thoughts

Verasun Energy – Investors – Press Releases.

As I hypothesized on Thursday, VeraSun Energy (VSE: 0.00 N/A N/A) has filed for Chapter 11 bankruptcy. The cause can be condensed to two sentences from the press release:

The Company suffered significant losses in the third quarter of 2008 from a dramatic spike in its corn costs, reflecting in part costs attributable to its corn procurement and hedging arrangements, and historically unfavorable margins. Beginning in the third quarter, worsening capital market conditions and a tightening of trade credit resulted in severe constraints on the Company’s liquidity position.

The main culprit was their badly managed corn hedging followed by the inability to raise capital to bail themselves out.

The current financial climate makes one forget how completely different the world was 6 short months ago. Commodity prices were zooming up. Oil was on its way to $150 with most predicting $200 by now. If the predictions of the spring and early summer had been accurate, VeraSun would have been generating huge profits in the 3rd quarter rather than being pushed into bankruptcy. The lesson here is that thin margin businesses are one bad economic turn away from disaster.

Chapter 11 means the company will stay in business and restructure their debt to get back on their feet financially. Common share holders will probably get squat. This site’s Opportunities Portfolio started October 2008 with a 2% position in VSE which is now effectively zip.

Longer term this should help VeraSun as a company to structure itself for success in a tight margin environment. I will be watching to see where they go from here.

When I find a company of interest and then find very little readily available information about the company, my interest is definitely increased. Luecadia National (LUK: 29.60 +1.07 +3.75%) definitely fits the bill. LUK is a diversified holding company that is the result of the vision of two men, Chairman Ian Cumming and Presidend Joseph Steinberg. They took control of the company that is now Leucadia National in 1978 and have invested in a wide range of industries and companies with these guidelines:

Don’t overpay, no matter what the maddening crowd is up to.

Buy companies that make products and services that people need and want and provide them as cheaply as possible with consistantly high quality. Lower cost and higher quality is an relentless and never ending-task.

Earnings sheltered by NOLS are more valuable than earnings that are taxed!

Compensate employees for performance and expect hard work and honesty in return.

Don’t overpay!

Source: 2006 Letter from the Chairman and President.

In my hunt for information on Luecadia I found the best overview of the company’s current businesses at Reuters. You can read the overview for yourself here. When you visit Luecadia’s website you find a very bare bones, minimum information necessary site. I think the best way to get a feel for the company is too read through a couple of the Chairman and President annual letters. They are very candid about the businesses they own and what they are trying to accomplish with them.

What you get here is a company that is willing to wait for their investments to yield profits and not managed for year over year earnings. This shows up in the volatility in annual earnings. The long term results have been out standing with book value compounding at a 21% annual rate and the stock at 26% per year. What you have here is a $10 billion market cap company with tremendous long term results and it has earnings estimates on Yahoo Finance from exactly zero analysts. Just they type of stock that I like.

A final positive, Luecadia is the owner of my absolute favorite winery, Pine Ridge in Napa Valley. During the 4 years we lived in Sacramento we visited wine country several times a month and Pine Ridge was definitely the favorite of all that we tried. Pine Ridge makes excellent wines year after year, and if they are indication of how the other Luecadia companies run, I am not surprised at the long term results.

I am adding LUK to this site’s Special Opportunities Portfolio and plan to start adding shares to my own account.

Note: At this time I do not have a position in LUK.

Silver Wheaton (SLW: 35.96 -0.69 -1.88%) has released their 2nd quarter results and they look a lot like the first quarter, flat earnings! When I wrote about the Q1 results I noted the company had been level at 9¢ to 11¢ per share earnings for several quarters and this quarter they made a field goal at 10¢ per share.

Listening to the conference call gave me a little more of a warm fuzzy about SLW. A non-cash charge reduced the net income by $5 million or about 5¢ per share. This charge, as I understand it, is against future income tax benefits and will never affect the actual cash flow of the company. Actual silver sales were also flat from 2007 and Q1 at 2.9 million oz. As silver sales so far this year have totaled 5.7 million oz. company management has reduced their guidance for 2008 sales from 15 million oz. down to 13 million oz. This is still 7.3 million oz. for the remaining two quarters of 2008, a 28% improvement on the first half of the year. From what I read and hear, I am a little skeptical they will hit the new lower number.

There are some positives for the slightly more distant future. Silver Wheaton inked 8 new contracts for future silver streams durning the second quarter, a couple of which will start shipping silver immediately. Also, Goldcorp’s (GG: 47.61 -1.09 -2.24%) Peñasquito mine is just starting to ship silver. This mine is expected to reach 8.5 million oz. of annual sales for SLW (someday!). SLW management is projecting 25 million oz. of silver sales in 2010.

My conclusion is: Silver Wheaton has a unique business model that should yield tremendous cash flow at some point in the future. The prospects for higher silver prices is just a silver lining to their model. At this time I am looking for the quarterly silver sales to bust out of the 3 million oz. per quarter range they have been in for the last 6 quarters. Until then this will be a trading range stock based on silver prices and market rumors. I would be very interested in the stock if it settles down to around $12 or lower, LEAP options could be an aggressive option.

Note: I currently have no position in SLW.

A few months ago I wrote several articles about the relationship between Terra Nitrogen L.P. (TNH: 197.31 +1.349 +0.69%) and Terra Industries (TRA: 0.00 N/A N/A) concerning the earnings and dividends of Terra Nitrogen. You can see the articles here, here and here. For background, TNH had until the last quarterly dividend a deficit of accumulated minimum dividends to work off. As of the last dividend, the deficit had been repaid and TRA was then entitled to about 44% of TNH’s earnings before dividends were paid to share holders. I warned that unsuspecting TNH unit holders may not get the payout they were expecting. This quarters results vividly show that outcome.

Here are the comparative results for the two quarters:

First quarter 2008:

• Revenue: $174.5 million
• Net income: $81.6 million
• Dividend: $4.20 per unit

Second quarter 2008:

• Revenues: $256.7 million
• Net income: $130.2 million
• Net allocated to common units: $74.2 million
• Dividend: $3.63

As you can see net income increased by $48.6 million and the amount paid out as dividends decreased by $7.4 million. The recent $3.63 dividend still give a robust 12.9% yield on the current ($112) share price, but it is probably a disappointment to those who bought at $164 in April without checking into the partnership details or reading this blog. Going forward any hit on profitability will hid double hard on the payout to common unit holders. One other item from the figures above: I am truly impressed at the 51% profit margin! These people are minting money at their current pricing levels.

I added TNH to this site’s portfolios in Nov 2007 at about $102 and dropped it at the end of April 2008 at $144 in favor of Terra Industries (TRA: 0.00 N/A N/A). Terra also owns about 75% of TNH, so TRA shareholders reap the majority of the benefit of TNH’s profitability. Another issue I found with TNH units was the volatility of share prices around earnings and dividend release. It is not uncommon for the share price to fall 4 to 5 times the dividend as the ex-div date approaches. Finally, TNH earns from the production of a single fertilizer plant and has been running at 100% capacity. The only upside TNH has is through pricing, there will be no additional production.

At this point, I definitely prefer TRA over TNH. The company is generating huge amounts of cash with which they are looking for ways to enhance shareholder value. The are buying in shares, starting up a moth-balled ammonia plant and have started paying a small dividend. Terra Industries has earned $2.91 a share for the first 6 months of 2008 and even matching Q2 earnings for Q3 and Q4 put 2008 earnings at $6.80, giving a PE of 7.5 at the current share price. TRA is a component of this site’s Special Opportunities Portfolio. For someone looking for something different (not POT) in the fertilizer space, TRA deserves a look.

Note: I currently do not have a position in either TRA or TNH.

DTN Ethanol Center

The article linked above is full of interesting facts about Brazil’s ethanol industry. The point I found interesting and used for the headline is the fact that ethanol exports from Brazil to the U.S. is expected to be 793 million gallons to the U.S. for 2007. This is in the neighborhood of 8% of the total ethanol used in the U.S and about 14% of total Brazilian production.

It seems the 54¢ per gallon tariff is not slowing imports much and certainly a nice piece of change in Uncle’s pocket. This also shows there is room in the U.S. ethanol market for corn and sugar based fuels  and that market continues to grow. A note for the “get rid of corn use sugar” crowd: The U.S. ethanol consumption is now almost two times the total Brazilian production and I am pretty sure Brazilian drivers do not want to give up their cheap fuel to put American ethanol companies out of business.

Finally, now that corn prices are falling steadily following the runup due to spring floods in Iowa and elsewhere, there is zero news about the fact. VeraSun Energy (VSE: 0.00 N/A N/A) should issue their 2nd quarter earnings report early in August. This is one report I am very interested in hearing/reading!

Note: I have a long position in VSE.