Why Does MFC Industrial Ltd (MIL) Have a Low PE?

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MFC Industrial Ltd (MIL), formerly Terra Nova Royalty, has an interesting history and now specializes in global commodity supply chains – it delivers commodities and materials all over the world.  It provides logistics, financial and risk management for the buyer and sellers of commodities.  The stock has an abnormally low P/E for a company not in an awful industry or on the brink of failure.  Adding to the confusion is the stock chart and the dramatic decline in the shares a few years ago.  These two issues warrant further investigation.

MFC Industrial Ltd (NYSE:MIL)

MFC Industrial Ltd (MIL) – A new platform for an old firm

MFC has a twenty-five year history, but has changed significantly in recent years.   That said, management maintains its focus on unlocking value from undervalued or troubled assets.  Shareholders have a compounded return of 20.4% over the past ten years.  It has turned around and restructured firms it acquired.  It spun off assets over the years, most recently in 2010 with KHD.

MFC was involved in many transformative transactions over the years.  In 2010, the  company in its current form emerged.  The business changed its name that year to Terra Nova Royalty and decided to reorganize and focus on its resources businesses.  Industrial services were separated from Terra Nova Royalty and KHD Humbolt International AG was formed.  KHD shares were then distributed to shareholders and it trades in Frankfurt hence the dramatic drop in the share price in late 2010.  In 2011, the firm’s focus was now as a global supply chain platform and it renamed itself MFC Industrial Ltd.

MFC Industrial principally manages its Commodities and Resources segment for their own account.  It is different than competitors since it is larger and can leverage its financial position to improve operations.  In addition, MFC does commit capital and take positions in commodities.  MFC invests in production assets and also purchases them from third parties.  It owns a position in the Wabush iron mine, an iron ore mine in India, a metal refinery in Europe, as well as other operations.   MFC often profits from trades where one of the parties has currency or credit risk that makes finding counterparties more difficult.

Acquisition of Continental Resources

MFC has a TTM price to earnings ratio of 2.42x, very low for any company not facing serious trouble. Even though it is a unique company in the resources and refining industry, shouldn’t it have somewhat of a similar valuation? Nucor Corporation (NYSE:NUE) also extracts iron ore and has refining operations and its PE is 16.  Nucor’s PE is over 6 times the PE of MFC.  Another iron and refining giant, ArcelorMittal (ADR) (NYSE:MT), has a forward PE of 21.  Both ArcelorMittal and Nucor are much larger than MFC with market values of $27 and $15 billion compared to $500 million for MFC, so they may warrant a slightly higher valuation but not 6 times higher.

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