An Extremely Hidden Asset
I love finding value in the most obscure places. Off the beaten path. So bombed out that no one in their right mind would be looking here. Companies so dark you have to get on the phone and beg the executive team to give you their financials.
It is in these dark realms where you can find stocks so interesting it makes you second guess yourself. Valuations so cheap you are getting paid to buy the stock. Equities so strange that you don’t dare bring these companies up at parties as you know you will be laughed out of the room.
Today we will be looking at one of these obscure companies. A company that has been left for dead since the Great Recession. A company I would never look at. Until I saw something hidden at the bottom of their most recent financials that made me turn my head. Something so interesting that it materially changes the business model of the company and potentially re-rates the valuation once other individuals figure it out.
This asset is so unique and has the potential to generate extreme levels of free cash flow. And the best part? The company has a share price under $0.10, meaning, this might be one of the only penny stocks I know that could actually generate real free cash flow.
Of course, with nano-cap investing, there are multiple risks. But for something this interesting, it might be worth it to swing the bat.
Let’s dig into this interesting little company.
ECC Capital Corporation (ECRO) was a former financial company that invested in non-conforming residential mortgage loans. The company elected to convert from a REIT to a C-Corp on January 1st, 2020 and continues to own and manage interests in securitization trusts which issued securities collateralized by residential real estate mortgages.
However, the company is not in the business of managing mortgage loans. In fact, the liabilities of the securitization trusts are not obligations of the company or any of its subsidiaries. This is important. If the mortgages are underwater, ECC Capital shareholders are not liable.
So what is ECC Capital Corporation if it is not a financial company? If you scroll down to the bottom of the recent annual report, you can see that ECC Capital Corporation is in fact, in the thermal coal mining business.
Per the annual report:
On April 9, 2024, subsequent to year ended December 31, 2023, PhenixFIN Corporation (“PhenixFIN”) has acquired 84,000,000 newly issued shares, representing approximately 44% of the outstanding shares of the Company, for $0.05 per share.
As part of the aforementioned transaction with PhenixFIN, the Company acquired from PhenixFIN 100% of the membership units of Kemmerer Holdings, LLC (“Kemmerer”) and indirectly acquired its wholly-owned subsidiary, Kemmerer Operations, LLC. Kemmerer Operations, LLC, located in Kemmerer, Wyoming, runs an open pit mine that produces sub-bituminous coal for electrical generation and industrial uses.
Additionally, PhenixFIN provided senior secured seller take-back $34 million debt financing to the Company as consideration for the Company’s acquisition of Kemmerer. Interest on this promissory note is accrued at a variable rate per annum equal to the sum of the applicable three-month term SOFR rate plus 500 basis points. The unpaid principal balance of this note shall be due and payable from the excess cash flow according to the senior secured promissory note agreement. The note matures December 31, 2031, without regard to cash flows and is secured by substantially all assets of the Company. As contemplated and as a part of the transaction, on April 10th, 2024 the Company paid down the financing balance by $12.7 million leaving a current outstanding balance of $21.3 million.
If you pull up MSHA.gov date on Kemmerer you can see that the mine was formerly owned by Westmoreland Coal Company and is a currently operating thermal coal mine. In fact, the mine has generated 2.41 million tons in the last twelve months.
The operation looks legit and there are many sources confirming that ECC Capital Corporation has bought this mine. And buying the mine for only $30 million or so seems like a steal. In 2011, Westmoreland bought the mine for $193 million. The mine was then seized by creditors when Westmoreland went bankrupt. Then billionaire Tom Clarke, formed a new company to buy the mine, Western Coal Acquisition Partners LLC, but the takeover failed. Although this valued the mine at $215 million.
Prior acquisitions of a mine provide a decent gauge for what this mine could be worth. But what is it really worth? Let’s try to figure that out.
First, ECC Capital Corporation has 194 million shares outstanding and a $0.06 share price, giving the company a market cap of $11.6 million. They also have $21.3 million of net debt or an enterprise value of $31.94 million.
The Kemmerer mine is generating 2.4 million tons of thermal coal per year. Thermal coal in the Wyoming area sells for around $15 per ton. Assuming the company makes around $3-4 per ton of margin, the company should be generating $7.2-9.6 million of mine level EBITDA. We can then assume the company is running $1-2 million of corporate per year and another $1-2 million of Capex per year. This brings us to $5-7 million of free cash flow. With an enterprise value of $32.94 million, we get a free cash flow yield of 15-23%.
It should be noted that all of these numbers are forecasts. All I know is what production is and the company only reports their financials once per year. We have no idea what they are doing with cash, if any was even generated and my costs could be completely wrong.
Despite all of this, ECC Capital Corporation has acquired a really interesting asset. Should thermal coal prices increase, the model of a coal mine is extremely fixed costs, which means more cash flow will drop to the bottom line. The opposite is also true. Finally, I take comfort in the margin of safety, given the prior valuations of Kemmerer Coal Mine and what other people were willing to pay for this asset just a few years ago.
This is a penny stock and it will be extremely illiquid. The company is also semi-dark and only files their financials once per year. Do your own research. This is not financial advice. I do not own ECC Capital Corporation (ECRO).