This post was written on August 18th to be posted on August 21st.
Portfolio holding Dacha Strategic Metals (DCHAF) discussed recently here and here, announced a transaction late last week. The company is buying Aberdeen International in a stock transaction. Aberdeen is an investment company. Currently, Aberdeen reports an NAV of $0.826/ share. Aberdeen shareholders will receive 0.80 shares of Dacha for every share of Aberdeen they currently own. Thus, Dacha paying $0.40 may actually be a very good deal.
From our point however – this is not what we signed up for when we bought Dacha. We invested in Dacha to gain cheap / safe exposure to rare earth metals. Given this transaction, it appears like Dacha is going to increasingly invest in small cap equities, junior miners, etc. Frankly, its the kind of mission creep we could do without in this investment. Stan Bharti is on the board of both companies and probably the driver of the transaction.
Given reports of management being unable to sell rare earth metals it currently has on hand, I don’t think management is going to be investing more in the rare earth metals sector. It appears much more likely that DCHAF will take on Aberdeen’s business model going forward – investing in equities, junior miners etc. Management even hinted that we would see more equity investments than commodity investments going forward.
The transaction does change transparency and risks that investors face. Dacha’s investments were easy to value and the discount to NAV was extremely transparent. Aberdeen invests in public and private equity. For the public investments, we can take market prices but the private investments (~20% of investments) arent anywhere near as transparent. Additionally, we aren’t looking to increase exposure to junior miners through Dacha – investors can buy equity of junior miners directly and does not need to go through Dacha for this exposure.
To be clear, Aberdeen may be a great buy for Dacha. It appears at first glance to be a case of buying a dollar for seventy five cents. Here are a few write-ups describing what a good buy Aberdeen was at $0.50 – Long-Term Value, Kelpie Capital, Seeking Alpha. Despite these excellent write-ups, I think Dacha shareholders needed to re-evaluate whether owning Dacha makes sense.
We are currently up about 20% on our investment. In light of the transaction and the changed nature of Dacha’s business going forward, I have placed limit sell orders to take profits here. The thesis used to buy the stock is no longer valid. While I could justify holding here to see what happens once Dacha lists on the Toronto exchange and junior miners start recovering, I think that would be undisciplined and wishful thinking on my part. At the end of the day, the margin of safety has eroded in my mind and I think it does make sense to take profits and move on. Having said that, I don’t think this calls for a panic sell – hence the limit sell orders.
