Prem Watsa founded Ontario-based Fairfax Holdings, a world-renowned insurance and investment firm resembling Berkshire Hathaway (BRK.A)(BRK.B). Since inception, he has produced a 24.6% average annual return of Fairfax per share book value. Watsa��s value-oriented portfolio is weighted largely toward technology, financials and telecom. In the third quarter, he made some contrarian investments, and one out-of-character stock, a gold miner. These notable buys and adds for the third quarter are: Primero Mining Corporation (PPP), Continucare (CNU), Citigroup Inc. (C), and The New York Times Co. (NYT).
Primero Mining Corporation (PPP)Primero Mining Corporation is engaged in exploration, acquisition and development of mineral resource properties. Primero Mining Corp has a market cap of $273.6 million; its shares were traded at around $3.1.
Prem Watsa does not typically invest in gold. He told GuruFocus in September, ��We've never invested in gold, so I don't really know what will happen to the price of gold. I just see the price of gold going from $300 to $1800 in a very short period of time, and it's quite parabolic, and I remember what happened to silver, I remember what happened to gold 20 years ago. But mostly commodities, there's a lot of speculation in commodities. The price of copper went from $1 to $4. So whatever commodity you follow, they've gone up very dramatically, lots of speculation in commodities worldwide. And my experience, this is when John Templeton would say, never use "This time is different," but it may be this time is different, but these parabolic curves that I've observed don't end well. The ending is not good, you never know when it will happen, but it always happens and there's lots of pain when these prices come down.��
Watsa bought 230,000 shares of Primero Mining Corp, the only gold-related stock to join his portfolio, in the third quarter of 2011.
Canada-based Primero operates one mining property in Mexico! , the Sa n Dimas Mine, which is located on the border of Durango and Sinaloa states. It also has one exploration property, Ventanas, in the state of Durango, Mexico. It appears the company��s growth strategy is to finish off a gold-silver mine in operation since 1757 called San Dimas, which it expects has a remaining life of 20 years, and acquire other properties.
Canada-based Primero��s San Dimas mine is located in Mexico on the border of Durango and Sinaloa states, and it has an exploration property, Ventanas, located in Durango, Mexico. The company��s dealings in San Dimas are relatively new. Primero (then called Mala Noche), acquired the San Dimas mines, mill and related assets from Goldcorp in August 2010. The purchase price was $510 million, paid in $216 million cash, 31,151,200 common shares, a $60 million convertible note and $50 million five-year note. It had a net debt/equity ratio of 10% at year-end 2010.
Before becoming Primero, Mala Noche Resources Corp was a small exploration company focused on becoming a precious metals producer by acquiring producing mines and mineral properties. Prior to the third quarter of 2010, the young company had to revenues to report, and owned no material assets or helpd any long-term liabilities.
San Dimas, considered one of the most significant previous metal deposits in Mexico, consists of three mines. In total, the company��s has 5,881,052 proven and probable reserves and resources. At the time of purchase, the San Dimas mine had produced 113,000 ounces of gold and 5.1 million ounces of silver in 2009. In 2010, it produced 100,266 gold equivalent ounces and in the fourth quarter, it increased production 14% over the previous quarter.
Primero has concentrated on increasing gold and silver output since it acquired the minutes. It saw considerable top-line growth in 2011, reporting $121 million for the first nine months, compared to $19 million in the first nine months of 2010. Net income also increased to $31 million from a ! net loss of $38 million for the same period.
In addition to the amount of gold sold, the price of gold helped the company��s ballooning revenues. It sold 59,002 ounces of gold at an average price of $1,524 per ounce in the first nine months of 2011. The company does have issues with its silver sales. From its third-quarter 2011 report: ��The current high commodity price environment would normally be beneficial to a precious metals producer. The recent rise in the price of silver has, however, decreased the Company��s cash flows due to the negative tax consequences of the silver purchase agreement. Everything else being equal, each $1 increase in the market price of silver to be sold to Silver Wheaton Caymans under the silver purchase agreement reduces the Company��s cash flow from sales under the silver purchase agreement by $0.30 per ounce.��
The company��s exploration property, Ventanas, is composed of 28 near-contiguous mining concessions. Though the mine has been worked before, Primero believes there are still many under-explored areas.
Continucare (CNU)Continucare Corporation provides a continuum of outpatient and ancillary healthcare services with a primary focus on outpatient treatment of musculoskeletal injuries and diseases, such as arthritis, osteoporosis, stroke and traumatic injuries. Continucare had an annual average earnings growth of 41.1% over the past 10 years.
Watsa bought 61,100 shares of Continucare at an average price of $6.27 in the third quarter.
Continucare showed an ability to produce consistent and growing revenue and free cash flow over the last decade. It also has a relatively strong cash position. It retained virtually all of its $23.9 million net income as cash flow in fiscal 2011, and it has $50 million on its balance sheet, with long-term liabilities of $8.3 million.
The company was acquired by Metropolitan Health networks Inc. on Oct. 4, 2011. Metropolitan paid an aggregate of $403 ! million in cash and issued 2.5 million shares of its common stock to Continucare��s stockholders and option holders for their shares of Continucare common stock and options to purchase share of Continucare common stock. The acquisition made Metropolitan the largest provider service network serving the Medicare and Medicaid eligible population in Florida and one of the largest in the U.S.
Citigroup Inc. (C)Citigroup Inc., the global financial services company, has some two hundred million customer accounts and does business in more than hundred countries, providing consumers, corporations, governments, and institutions with a broad range of financial products and services, including consumer banking and credit, corporate and investment banking, securities brokerage, and wealth management. Citigroup Inc. has a market cap of $72.57 billion; its shares were traded at around $24.82 with a P/E ratio of 6.7 and P/S ratio of 0.8. The dividend yield of Citigroup Inc. stocks is 0.2%.
Prem Watsa added a small amount of Citigroup in the third quarter �� 5,000 shares at an average price of $32.70, bringing his total holding to 15,000 shares. On average, he has lost 38% on this investment. His portfolio is composed of 24.4% financials.
Citigroup improved its return on equity and return on assets since their lows in 2008 and earnings returned to a positive for the first time in 2010.
Recently, a Manhattan federal judge rejected a $285 million SEC appeal against the bank. In the ruling, he said he disagreed with the SEC settling credit crisis lawsuits without requiring defendants to speak to their guilt or innocence. The SEC has accused Citigroup of selling $1 billion in mortgage-linked CDOs in 2007, then betting against the transaction, costing investors $700 million. The judge set the trial for July 16, 2012.
The bank will also cut about 4,500 jobs soon to help reduce expenses.
New York Times Co. (NYT)New Yo rk Times Company is a diversified media company including newspapers, television and radio stations, magazines, electronic information and publishing, Internet businesses, and forest products investments. New York Times Co. Cl A has a market cap of $1.06 billion; its shares were traded at around $7.19 with a P/E ratio of 11.1 and P/S ratio of 0.8. New York Times Co. Cl A had an annual average earnings growth of 0.1% over the past 5 years.
Watsa increased his holding of the New York Times 40% in the third quarter, adding 10,000 shares at an average price of $7.70. He owns 35,000 shares in total at an average cost of $8 per share. The price has declined an average of 10% since then.
The New York Times Company is currently in advanced talks to sell its Regional Media Group, composed to 16 regional newspapers, other print publications and related businesses, to Halifax Media Holdings LLC. The New York Times will then be able to focus on its core newspaper business as print revenue declines. Revenues have been trending downward since 2005, and fell from $2.4 billion in 2009 to $2.4 billion in 2010. Cash flow has remained strong, and its gross margin is at its highest level in a decade, while operating and net margins all improved in 2010. In the last ten years, its stock has fallen 82%.
In 2010, the company��s strategy of continuing to transition to a multiplatform organization to improve its financial position was successful in many ways. Operating profit increased to $234 million in 2010, more than triple the $74 million reported in 2009. Their total digital revenues increased 15% in 2010 compared with 2009, accounting for 16% of overall revenue.
In the third quarter, there was evidence that digital was helping offset declines in other areas. Overall revenues declined 3.1 percent, though circulation revenues rose as the introduction of digital subscriptions at The Times offset a decline in print copies sold across the News Media Group. Digital revenues increase! d 6.2% a s well, partially offsetting a 10.4% decline in print advertising revenue.
��This quarter we continued to execute on our strategy to transform our business,�� said Janet L. Robinson, president and chief executive officer, The New York Times Company. "We made significant progress in developing a robust digital subscription revenue stream, reduced our operating costs, meaningfully improved our liquidity through the early repayment of high-interest debt and tripled our initial investment on the sale of a portion of our stake in Fenway Sports Group. And despite a challenging advertising environment, our operating profit grew reflecting our strong cost performance and growth in circulation revenues, which rose 3 percent.
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