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Continued from here:

Now we can finally home in on my Top 6 most undervalued farmland companies. I’ve listed them according to their level of undervaluation:

Landkom (LKI:LN):  Ukraine – Oilseeds & Cereals  [(0.5) years]

Alpcot Agro (ALPA:SS):  Russia (92%, but half is leased) & Ukraine (8%) – Cereals  [0.8 years]

Black Earth Farming (BEFSDB:SS):  Russia – Cereals  [0.7 years]

Trigon Agri (TAGR:SS):  Russia (2/3) & Ukraine (1/3) – Cereals  [2.5 years]

MCB Agricole (4GW1:GR):  Ukraine – Cereals & Oilseeds  [(0.5) years]

Sintal (SNPS:GR):  Ukraine – Cereals  [(1.4) years]

These stocks certainly look a hell of a lot more attractive from a Mkt Cap/hectare perspective, with values ranging from about $300 to $900 per hectare. These valuations offer significant potential for appreciation in the medium to longer term. But note the [final figure] listed after each stock above. This highlights how much longer each company’s Cash should last, based on their current Cash burn rate. A negative number indicates that point has already been passed… For example, Landkom’s Cash should have been exhausted 6 months ago. I couldn’t confirm the rumour that they’re now paying for everything with sacks of wheat…

Unfortunately, I think this Cash burn metric is now key for these stocks. We’re in dangerous territory, territory I’ve wandered into too many times. Sometimes Safe takes precedence over Cheap. The problem with a lot of secular trend stocks is not the (seductive) longer term – it’s the short term! Too often, investors ignore current P&L losses and (and probably larger) negative cashflows. But these can prove lethal. Far too often, as a result, investors get shaken out by a collapsing share price, diluted by new stock, or even wiped out by restructuring or bankruptcy. In fact, there’s one other Russian ‘agri’ business I haven’t listed above. Its valuation is absurdly low (a $46 Mkt Cap/hectare valuation!) but it’s a real ‘hairy’ stock, it’s only got 2 months of Cash on hand right now, and Losses/Cashflows will remain significantly negative for the foreseeable future. Not worth disclosing here right now, and certainly not an investment candidate – there’s far too many difficulties to navigate before there’s any chance of realizing value. I’m reminded of the story of the 6 foot man who drowned crossing the river with an average depth of 5 foot…

Early/mid stage exploration companies often tell the same story. Petroneft Resources (PTR:LN) is a good example: Unlike many of its peers, PTR has buckets (sorry, barrels!) of Proved & Probable Reserves and is obviously undervalued on this basis. However, its production ramp-up has been slow and beset with problems, and shareholders have suffered a recent 70% price decline. I don’t believe this is about production, that’s simply an engineering issue. The real problem is that the market’s now alarmed that the company will need extra funding to reach a positive cashflow situation. And, boy, I’m constantly amazed how far a stock can fall ahead of a possible share placing! Biotech stocks present the same problem. For example, I’m fascinated with Aqua Bounty Technologies (ABTX:LN) as a play on fish farming. But even if their AquAdvantage Salmon receives final FDA approval, it’s low on Cash and I’m not at all confident existing shareholders will properly reap the benefits…

Incidentally, the classic London placement process is absolutely appalling. Private investors are generally offered no opportunity to purchase shares (in their own bloody company!). And the usual pre-placing decline in the share price just adds insult to injury. Jesus, a broker chats to his institutional chums about a potential placing, and the share price dumps… I thought this type of egregious ‘behaviour’ was defined as insider trading? Can somebody better informed please tell me I am mistaken?

OK, back to Landkom: God, what a garbage stock – a real AIM special! Seems like many investors and commentators piled into this stock simply because it was the only UK listed and domiciled stock offering Black Earth farming exposure. What a terrible example of ‘home bias’. Cash starvation is not a new story with Landkom. Yes, it’s under-valued in theory, but it’s always been woefully under-capitalized and management ambitions are far in excess of their abilities. In their latest interim report, they have the audacity to lead with a ‘Maiden interim profit – on target for full year profit headline. They neglect to mention that $1.1 mio Net Income turns out to be a $(6.1) mio Loss when the Gain on Biological Assets is excluded. And Free Cashflow is predictably even worse at $(10.9) mio. No wonder their shares have been hammered down 97% from their highs…

MCB Agricole and Sintal are small-cap and very slow/sparse in their disclosures, so this narrowed my selection down to Trigon, Black Earth and Alpcot. These all have similar valuations and strategies, so it was difficult to choose between them. In the end, I preferred the stock with the largest Market Cap and an exclusive Russia focus (as land is owned in Russia, vs. leased in Ukraine): Black Earth Farming. Based on my Fair Value estimate, my Upside Potential was in excess of 150%. I was also encouraged on seeing Vostok Nafta and Kinnevik on the register. Both are well-respected emerging markets investors, and each has a 25% shareholding.

So why am I now letting go of Black Earth Farming? As I’ve highlighted above, Black Earth is down to just 8 months of Cash. This is getting far too tight for me. And the recent interims were not encouraging either, with the CEO signaling increased costs and capex to enhance yields. The company already has $121 mio of Debt, so increasing Debt is not a practical (or wise) solution. And in the current market environment, raising fresh funds will be a tall order and likely to whack the share price. I suspect the break of SEK 16.50, key support for the past 3 years, flags a fresh move to SEK 12 or lower. Finally, as I’ve mentioned, I already have other Russia/Ukraine/agri exposure. So, reluctantly, and despite its obvious undervaluation, I’ve sold my 1.7% portfolio holding in Black Earth Farming. My SEK 18.10 entry price was reasonably good, so I’ve fortunately (?!) limited my loss to (12)%.

I did consider switching into Trigon Agri, as it clearly stands out with 2.5 years of Cash on hand. However, in this risk-averse climate, and with the wave of financing difficulties to come in the sector, I don’t see TAGR managing to kick the trend. So, I’ll save my powder here, or re-invest in something with better near-term potential. But I’ll continue to monitor Black Earth farmland stock prices and developments with great interest, and look forward to possibly re-establishing a position at some point!

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