1UltimateVALUEFINDER|MARCH2013Dear Valued Readers,In the March 2013 issue of the Ultimate ValueFinder, I cover three very different companies:Aurcana Corporation, which is a victim of therecent industry’s sell off; Marchex, which is justcrazy how cheap it is; and Premier Exhibitions,which is being sold off because shareholders areexhausted again.INVESTMENT SUMMARYWhen I started Classic Value Investors,the financial markets were collapsing.During the last few months of 2008, Iwas sitting at my job at a commercialreal estate brokerage company, and Iwalked into my boss’s office and I said,I am quitting. I said I was startingan investment firm because this wasthe time to invest. At that time, I wasscreaming to all my friends and familyabout all the investment opportunitiesthat I saw. Did anyone listen? Yes, theybut did anyone do anything about it?No, not even a single person becamemy client. Long story short, I was up360 percent in 2009 on my personalaccount. I received my first client inthe middle of 2009, but this was afterAURCANA CORPORATION (AUN, AUNFF)CONSIDERED TOXIC LIKE ALL THE MINERSMariusz Skonieczny1 Editor’s Comments1 Aurcana Corporation - Considered Toxic with All the Mining Stocks8 Marchex - I Cannot Believe This Opportunity Exists 16 Premier Exhibitions - Ok, Let’s Do It AgainCONTENTS
Ultimate VALUE FINDER | MARCH 20132I was already up by more than 100percent.Now, I am SCREAMING again. I can’tmake it any louder. THE MININGSTOCKS ARE SO CHEAP YOU HAVE TOSTOP SUCKING ON YOUR THUMB ANDLOOK AT THEM. They are so cheap andso hated we haven’t seen these kindsof opportunities in the mining sectorsince 1992. If we get returns thatare anything close to what happenedbetween 1992 and 1996, some peoplewill make fortunes. The following isa quote from a recent interview withRick Rule from Sprott Global ResourceInvestments.“My net worth is a consequence athaving the courage to buy marketslike 1992 and 1999 very, very, veryaggressively … from the bottom of1991 to top in 1996, in terms of myown portfolio, in 1996, I paid more incapital gains tax than my net worthwas in 1992. That’s the type of wealththat can be created by aggressivespeculators in what are regarded bythe public as toxic markets. These areopportunities. These are not times ofterror for people who think.”To listen to Rick Rule’s interview, clickthe following link.h t t p : / / w w w . k i n g w o r l d n e w s .com/kingworldnews/Broadcast/Entries/2013/2/28_Rick_Rule.htmlThis brings me to Aurcana Corporation,which is cheap. No, it is not as cheap asVeris Gold or Monument Mining. Nothingis as cheap as Veris or Monument, butI can’t be writing about these two inevery issue of the newsletter, whichI really should. I bought Aurcana acouple of years ago and the marketcap was about $300 million. At thatpoint, the company was producingabout 1 million ounces of silver fromone of its mines. Fast forward to todayand Aurcana is producing at a run rateof 5 million ounces of silver equivalentper year. This is a significant increase,don’t you think? Well, this is why I wasbuying it. The company was expandingone of its mines and was putting abrand new mine into production.Even though the management has beenextremely successful at executing, thestock price is pretty much at the samelevel as what I paid for it. In otherwords, you are getting a 5-million-ounce producer for the price that I hadto pay for a 1-million-ounce producer.But, the story does not end here. Thesecond mine that the company put intoproduction just went into commercialproduction in December 2012. It isnot operating at full capacity. In about12 to 15 months, Aurcana will be a10-million-ounce producer when theproduction ramps up. How is it possiblefor the price to be so cheap? Well, ifthe sellers think that mining companiesin general are toxic investments, thenyeah, you can get it for this price.COMPANY’S DESCRIPTIONAurcana Corporation is a Canadianjunior mining company listed on theTSX Venture Exchange, symbol AUN,and US Pink Sheets, symbol AUNFF.The company just announced a futurereverse split to uplist on a higherexchange. Many investors are throwinga fit about this reverse split.The principal business of the companyis the acquisition, exploration,production, and development ofmineral properties, primarily silver-
3UltimateVALUEFINDER|MARCH2013copper-zinc-lead mines. Since 2007,the company has been operating LaNegra Mine, in which it holds a 99.9percent interest. La Negra Mine is in thestate of Queretaro, Mexico. In addition,in 2008, the company purchased a100 percent interest in Shafter Minein Texas, USA. In December 2012,the company announced commercialproduction at Shafter Mine.La Negra MineThe La Negra silver-copper-lead-zincmine is located in the state of Queretaro,Mexico. The mine was discovered anddeveloped by Industriales PenolesS.A. de C.V. and it was in productionfrom 1970 until 2000. Historically, itproduced 36 million ounces of silver,323 million pounds of zinc, 70 millionpounds of copper, and 161 millionpounds of lead. Aurcana acquired LaNegra Mine in 2006.Shafter MineShafter Mine is a silver mine in PresidioCounty, Southwest Texas. From the late1800s to 1942, it produced more than35 million ounces of silver. In April 2012,Shafter was put into production twomonths ahead of schedule and underbudget. In December 2012, Shafterwas put into commercial production ata rate of 600 tons per day. Currently,it is in the ramp-up phase and shouldbe operating at 1,500 tons per dayby the third quarter 2013 (I am suresomething will delay it as it alwaysdoes with the miners).AURCANA’S PROGRESSIONAurcana Corporation is truly one of themost remarkable turnaround stories inthe mining sector. In 2008, under theprevious management, Aurcana wasnot able to operate profitably. It wason the brink of bankruptcy. The boardof directors was dissatisfied, firedthe previous CEO, and asked LenicRodriguez, who at that time was oneof Aurcana’s shareholders and boardmembers, to turn the company around.Since he took over on May 19, 2009,positive things have started to happen.The company became profitable whilecontinuing to increase production.The following is Aurcana’s progressionsince I got involved in the company.
Ultimate VALUE FINDER | MARCH 20134When I acquired Aurcana (Point A),the company was only producing silverfrom one of its projects, La NegraMine. Because the plant capacity wasonly 1,000 TPD (tonnes per day),the company was only marginallyprofitable, producing approximately 1million ounces of silver. By July 2010,the company expanded La Negra’scapacity to 1,500 TPD. By March 2012,the company expanded La Negra’scapacity to 2,000 TPD. By April 2012,the company expanded it again to2,500 TPD. Today, La Negra is almostoperating at 3,000 TPD and producingapproximately 3 million ounces ofsilver, which is significantly higher thanthe 1 million it was at when I bought it.InApril2012,thecompanyputitssecondmine, Shafter Mine, into production.This was a very big accomplishment.In December 2012, the companyannounced that Shafter Mine hadreached commercial production at arate of 600 TPD. This was another bigaccomplishment. Because December isthe last month of the year, productionfrom Shafter is not really showing up inthe financials yet.What is next?The next step that the company isplanning to achieve is to expandLa Negra Mine to 3,000 TPD andramp up Shafter Mine to 1,500 TPD.This should happen in 2013. At thatpoint, the company will be producingapproximately 7 million ounces of silverper year.As of the date of this report, La Negra ispretty much at 3,000 TPD and Shafteris at about 900 TPD. Based on this, thecurrent production run rate is about 5million ounces of silver. The companyestimates that next quarter, Shafterwill be at 1,200 TPD and the followingquarter at 1,500 TPD. When Shafterreaches 1,500 TPD, Aurcana will be a7-million-ounce producer.Then, when Shafter reaches 1,500TPD, the company will immediatelystart the expansion towards 2,500 TPD.The estimate is that from 1,500 TPD,it should take about a quarter to reach2,000 TPD and another quarter to reach2,500 TPD. So, in total, it should takeabout 12 months for Shafter to go from900 TPD to 2,500 TPD.With La Negra operating at 3,000 TPD(it already is there) and Shafter at2,500 TPD, Aurcana will be a 10-million-ounce producer. It will have made thetransition from being a junior minerwhen I bought it to a senior miner.As a senior miner, it will not only begenerating lots of cash flow, it will alsoattract institutional investors who willreprice the stock significantly.VALUATIONA few days ago, Aurcana’s market capwas approaching $300 million afterbeing crushed almost 50 percent fromits high. As I am typing this paragraphon Sunday, February 24, 2013, the stockhas recovered a bit and now, the marketcap is about $350 million. I am justgoing to stick with the 300-somethingmarket cap because I can’t keep upwith the market seesawing this thingday in and day out. Who knows whereit is going to be by the time I wake upon Monday.To value Aurcana, let’s look at it fromtwo angles. One, let’s compare it toother silver producers, and two, let’sestimate the kind of cash flow that the
5UltimateVALUEFINDER|MARCH2013company can generate based on thecurrent silver production and futuresilver production.As I mentioned before, Aurcana’sproduction is at a run rate of 5 millionsilver equivalent ounces.Comparable Company Number 1:Fortuna Silver MinesFortuna Silver Mines is silver producerwith two low-cost operating minesand landholdings of more than 87,000hectares in Peru and Mexico. Fortunaproduces about 5 million ounces ofsilver per year. The market cap is slightlymore than $500 million. Aurcana’scurrent run rate is also 5 million ouncesper year while its market cap is closerto $300 million. While Fortuna is alsoa growing company, it doesn’t havethe same growth potential. Aurcana ison its way to becoming a 10-million-ounce producer. Don’t you think itshould have a higher market cap thanFortuna? I think so.Comparable Company Number 2:Endeavour Silver CorporationEndeavour Silver Corporation is a mid-tier silver mining company in Mexico.Currently, the company has threeproducing mines and five explorationprojects. In 2012, Endeavour’s silverproduction was 6.4 million ounces.The current market cap is almost $600million but this is because Mr. Markethas had its emotional breakdown whenit comes to the miners. In September2012, Endeavour’s market cap was$1 billion. While Endeavour’s currentproduction is higher than Aurcana’s,it doesn’t have the same growthpotential. When Aurcana reaches a10-million-ounce-production mark, itshould surpass Endeavour’s valuationpretty quickly.Comparable Company Number 3: FirstMajestic Silver CorporationFirst Majestic Silver Corporation is asilver-producing mining company witha portfolio of projects focused on silverin Mexico. First Majestic producesapproximately 9 million ounces of silverand has a market cap of $2 billion.While First Majestic’s goal is to produce16 million ounces by the end of 2014,its valuation just gives you an idea ofwhere Aurcana’s valuation can be onceit achieves its 10-million-ounce silverproduction target.Comparable Company Number 4: HeclaMining CompanyHecla Mining Company is a silverproducer in the U.S., with explorationproperties and operating mines in fourworld-class silver mining districts inthe U.S. and Mexico. Hecla producesapproximately 11 million ounces ofsilver per year and has a market cap of$1.3 billion. Just a few months ago, themarket cap was $2 billion, but this wasbefore Mr. Market went crazy.All of these comparable companieshave higher valuations than Aurcanaeven after the recent meltdown inthe mining sector. Yes, they are alldifferent. Some have more growthpotential than others. Some have moreprojects or resources than others.There is no single silver produceridentical to another silver producer.I just wanted to show you what kindof valuations Aurcana can get once itreaches its production target. Actually,Aurcana should already be revaluedbased on the current production rateof 5 million ounces. However, the
Ultimate VALUE FINDER | MARCH 20136problem is that the current productionis a run rate production meaning thatit is not showing up in the financialsyet because financials are backward-looking. In 2012, Aurcana producedonly 2.5 million ounces of silver. Thisis significantly less than the current5-million-ounce production rate.However, this is because Shafter Minewas barely producing anything in 2012and also La Negra was being expanded.Shafter was put into commercialproduction in December 2012, whichmeans that the bulk of its productionwill show up in the 2013 and 2014financial statements.The following is the income statementand balance sheet (next page) ofAurcana.As you can see, these financials are notvery meaningful because they showthat Aurcana is not very profitable.Actually, what they show is thatAurcana has not been very profitablein the past. Of course Aurcana has notbeen very profitable in the past – it wasa turnaround in the making. Here is agood illustration of the turnaround.Now, with La Negra’s capacity at 3,000TPD and Shafter ramping up to 1,500TPD and then to 2,500 TPD, the magicwill start happening.
7UltimateVALUEFINDER|MARCH2013Current Production of 5 million ouncesBased on the current production of 5million ounces per year, the companyshould generate the following cashflows from mining operations.As you can see, if the price of silverstays around $30 per ounce, Aurcanacan generate $100 million of cash flowfrom mining operations. Notice thatcash flow from mining operations isnot the ultimate bottom line. It doesnot include general and administrative.With that being said, mining companiesusually trade at some kind of multipleof mining cash flows. Obviously, themagnitude of the multiple depends onthe future growth.Now that we know that Aurcana’scurrent earning power is $100 million ofmining cash flows, what kind of multiplecan we assign it? Well, the market isassigning it a multiple of about 3. Isthis reasonable considering Aurcana ison track to grow its production to 10million? I don’t think so. I believe thatthe multiple should be at least between6 and 8. Consequently, Aurcana shouldbe trading for between $600 and $800million today.Future Production of 10 million ouncesBased on the future production of 10million ounces, the company shouldgenerate the following cash flows frommining operations.As you can see, if the price of silverstays around $30 per ounce, Aurcanacan generate $200 million of cash flowsfrom mining operations. By that time,the market cap should be higher than$1 billion.Obviously, the current and futurecash flows will depend on the price ofsilver. I will not be discussing silver inthis report, but investing in Aurcanamakes the most sense for investorswho believe that silver prices are eithergoing to stay at the current price levelsor increase in the future. I believe that itwill increase because of the continuousmoney printing by our government,but at this point, I am in the minority.Everybody else seems to believe thatour economy is improving and that theFed will stop with its QE experiment.
Ultimate VALUE FINDER | MARCH 20138CONCLUSIONAurcana went from almost goingbankrupt, to being a profitable juniormining company, to being a mid-tiermining company. It is now on trackto being a senior mining company.Even though the current CEO savedthe company and turned it into whatit is today, he is still down on hisinvestment. In order for him to breakeven, the stock has to double from thecurrent levels. And, I can tell you thathe is not just interested in breakingeven. He is set on making Aurcana oneof the major silver mining companiesand making a killing on his investment.Disclosure: I, or persons whoseaccounts I manage, own sharesof Aurcana Corporation. Thisreport is not a solicitation to buyor sell securities. Neither MariuszSkonieczny nor Classic ValueInvestors, LLC, is responsiblefor any losses resulting frompurchasing or disposing sharesof Aurcana Corporation. You areadvised to consult your financialadvisor or conduct the due diligenceyourself.
Ultimate VALUE FINDER | MARCH 201310MARCHEX, INC. (MCHX) -I CANNOT BELIEVE THIS OPPORTUNITYIS STILL AVAILABLEINVESTMENT SUMMARYAs an investor in the stock market, youhave the ability to invest in companies ofall sizes. However, most investors preferto invest in large cap companies becauseWall Street successfully persuaded themthat small companies are risky. As aresult of this, the kind of mispricing thatcan be found in the small cap spacecan be jaw-dropping. For this reason, Ifocus on these kinds of companies whenwriting ideas for Ultimate Value Finder.Marchex is the kind of investmentopportunity that makes you want tosay, “Is this for real? What is Mr. Marketthinking?” Marchex is a company thathas two separate business segments.One of the segments is growing fast andhas a tremendous future. The secondbusiness segment is profitable, but dueto the growth of the first business, wasneglected until now.To unlock value, the management hasdecided to separate these two businesssegments through a tax-free spinoff.The first business will continue to berun in the same fashion, but the secondbusiness will get its own managementteam that will focus on growing anddeveloping it. When you look closely ateach of these businesses, it is obviousthat the combined value is more than thecompany’s current market capitalization.Actually, the value of second business,which is being spun out, is probably morethan the company’s current market cap,which means that you are essentiallygetting the first business for free. And,it is really the first business that is thecrown jewel.COMPANY’S HISTORYMarchex was founded by Russ Horowitzand three other executives whosuccessfully built another companycalled Go2Net, which they sold at thepeak of the Nasdaq bubble to InfoSpacefor $1.5 billion. Actually, Go2Net mergedwith InfoSpace, but the transaction wasvalued at $1.5 billion.The founders of Marchex
11UltimateVALUEFINDER|MARCH2013Upon the merger with InfoSpace, they alljoined the newly formed company. Littledid they know that they were joiningforces with one of the biggest con menof the Internet bubble days. Naveen Jainwas the founder of InfoSpace, whichwas nothing but a big illusion of successcreated by lies and deception. At onepoint, Wall Street was in love with Jainand his company, pricing InfoSpacehigher than Boeing. To hide the behind-the-scenes problems of InfoSpace, Jainengaged in all kinds of shenanigans suchas creative accounting and dubious deals.The merger with Go2Net was one of hisways of covering the revenue shortfallsof InfoSpace.After Horowitz and his team joinedInfoSpace upon the merger, they soonlearned how dire the situation was underJain’s leadership. Long story short, WallStreet woke up to what was going on,the stock price collapsed, and investorsand employees lost a lot of money. Afterrealizing that the situation was hopeless,Horowitz and his team left InfoSpaceand began their search to start anothercompany.MARCHEX IS BORNBecause of their previous success withbuilding Go2Net, they did not havemuch trouble raising money for anothercompany. In 2003, they raised $20million and used this money to acquiretwo companies which would form thebasis for Marchex. Then, in 2004, thecompany held an IPO through which itraised an additional $27 million, whichwas used to buy more companies. Unlikeother technology companies, Marchexwas not about innovation but aboutidentifying underperforming assets andacquiring them on the cheap.MARCHEX PROGRESSIONIn some ways, companies are like peoplemeaning that they change and evolveover time. When Marchex was startedthe company was focused on connectingbusinesses to potential customers mainlythrough the Internet. In other words,Marchex was the middleman betweenclients and businesses.To accomplish this, Marchex acquiredvarious businesses that would enable thecompany to make these connections. Forexample, Marchex acquired more than200,000 domain names with addressessuch as Beijing.com, Corporations.com, Cuisine.com, and Remodeling.com. Because these domain names weregenerating millions of visitors, Marchexwas able to funnel them to variousbusinesses and be paid advertising fees.Clients usually paid Marchex fees basedon performance meaning that they paida certain rate per click.To build its network of domain namesand other advertising services, Marchexacquired a handful of companies.But one particular acquisition was soinstrumental that it completely changedthe company’s business model. Thatacquisition was VoiceStar, and Marchexacquired it on September 29, 2007, for$28 million.VoiceStar was one of the largest providersof call-based advertising servicesincluding pay-per-call and call-tracking.Pay-per-call is a way for advertisers tomarket their products or services andonly pay when a potential customer callsthem. Call-tracking is a way to analyzephone calls in ways such as how oftenthey convert into final sales.At first, it wasn’t apparent that call-based advertising was going to be awinner, but in 2009, it took off. It was
Ultimate VALUE FINDER | MARCH 201312so successful that the company basicallystopped focusing on other parts of thebusiness and concentrated on buildingcall-based advertising. Today, call-basedadvertising generates more than 80percent of its revenues.COMPANY DESCRIPTIONMarchex has evolved into an advertisingcompany that helps businesses reachtheir potential clients. To achieve this,the company offers performance-baseddigital call advertising and non-calladvertising.Digital Call AdvertisingDigital call advertising is the company’smain business which, as mentionedbefore, was born out of the VoiceStaracquisition. To provide digital calladvertising, the company offers twoproducts: Marchex Call Marketplace andMarchex Call Analytics.Through Marchex Call Marketplace,clients are able to reach potentialcustomers and only pay for advertisingwhen they actually receive phone calls.Here is how it works.Step Number 1: Potential clientsearches on the mobile device for aparticular product or service.Step Number 2: Various results aregenerated on the mobile device.Step Number 3: Potential client callsthe business that fits his or her searchcriteria.Marchex Call Analytics is a technologyplatform that measures and analyzesphone calls.This platform helps advertisers getdata and insights needed to accuratelymeasure advertising performance,including the number and type of callsdriven from mobile, online and offline adcampaigns. The idea behind this productis to help advertisers make more informedad campaign optimization decisions todrive quality customer phone calls andmaximize their return on investment.Why is Digital Call Advertising Successful?If you have ever run a business, youknow very well that getting clients iskey to generating revenues. With noclients, you have no business no matterhow good you are. To get clients, mostbusinesses have to do some kind ofadvertising. However, the problem withadvertising is that in many instances, itdoes not generate meaningful results. Forexample, I used to run a ballroom dancecompany where we taught people how todance. We ran a phone book ad that cost$3,000 for one year. You know what wegot in return? Five phone calls. I kid younot. If you do the math, we paid $600per phone call and you know very wellthat a phone call does not necessarilymean a new client. After one year of thisrip-off, we stopped advertising.There are thousands and thousandsof business owners out there who arenot happy with the return on theiradvertising dollars. They are willingto pay for advertising as long as it
13UltimateVALUEFINDER|MARCH2013generates meaningful results and thisis where performance-based advertisingcomes in. This is exactly why digital calladvertising has been so successful overthe last several years – businesses aredesperate for a pay-for-call advertisingmodel. They want and need to receiveinformational phone calls from potentialclients, but they don’t want to pay foradvertising that doesn’t deliver results.With the invention and acceptanceof smartphones, the world changedbecause smartphones allowed people tosearch the Internet without the need ofa desktop computer. While you realizethat searching on the phone is a littledifferent than searching on a desktopcomputer, you might not realize thatmobile searching is more importantfor advertisers. When people searchon their desktop computers, they aremore likely to do a lot of clicking andvisiting websites. Because the screenson smartphones are so tiny, Internetbrowsing is cumbersome. Consequently,people are more likely to call thebusinesses to find out what they wantand phone calls are much more valuableto advertisers than clicks. Because ofthe human contact, phone calls have aconversion rate 10 times greater thanthe rate generated by clicks. Thesedynamics are understandable because ifsomeone calls me about ballroom dancelessons, I can explain things better andmost importantly I can use my sales skillsto convince them to sign up for lessons.Non-Call AdvertisingWhile digital call advertising is the mainbusiness, Marchex provides non-calladvertising products and services. Non-call advertising is what Marchex was allabout before the VoiceStar acquisitionwhich transformed the company and tookit into a completely different direction.Non-call advertising products andservices include pay-per-click advertisingand proprietary website traffic (peopletyping in website addresses directly intothe browser) from the 200,000 domainnames that the company owns. Similarto pay-for-call advertising services, pay-per-click advertising services are allabout performance-based advertising,meaning that advertisers pay a fee whensomeone clicks on their advertisements.To provide pay-per-click advertisingservices, Marchex built a distributionnetwork that gets lots of Internet traffic.This distribution network consists ofwebsite publishers, distribution partners(Google, Yahoo, etc.), and more 200,000domain names. When a particular adis clicked on by an Internet user, theowner of the ad pays a fee. This fee issplit between Marchex and the websitepublisher or distribution partner. If theInternet user clicks on a the ad locatedon a Marchex-owned domain, the entirefee goes to Marchex.SPINOFF TO UNLOCK VALUEWhen you listen to the company’sconference calls, you will hear the CEOsay that if you add up the values ofthe company’s assets, which includethe digital call advertising businessand 200,000 domain names, thecompany is undervalued. Because of thisundervaluation, the insiders are buyingthe stock for their personal accounts andthe company itself is buying shares.To unlock value, the managementdecided to separate its two businessesinto two distinct, publicly-traded entities:Marchex and Archeo. Marchex will be apure play mobile advertising companyand Archeo will include the non-calladvertising business with more than200,000 domains. For more informationabout Archeo, visit www.marchex.com/
Ultimate VALUE FINDER | MARCH 201314archeo. Archeo shares will be distributedto existing Marchex shareholders on apro rata basis.Marchex will continue to be run by thesame management and the focus will beon digital call advertising which is stillrelatively new. Most businesses are noteven aware that there such a thing aspay-for-call advertising.Archeo will be run by a completelydifferent management team thatwill focus on growing this business.As mentioned before, the non-calladvertising business has been neglectedbecause Marchex was mainly focused onits fast-growing digital call advertising.With the new management team, Archeohas the potential to deliver superior valueto shareholders.Currently, the non-call advertisingbusiness mainly comprises more than200,000 domain names such as Beijing.com, Corporations.com, Cuisine.com,and Remodeling.com. The domaininventory also includes more than 75,000U.S. ZIP code sites, including 98102.comand 90210.com.If you visit some of these websites,you will notice that they are not reallydeveloped to their full potential. Onthe next page are the screenshots ofRemodeling.com and Cuisine.com.As you can see, these two websiteshave the same layout with some kind ofpicture in the middle and various linksaround it. If you click on some of theselinks, you get various advertisements.When people click on theseadvertisements, Marchex gets paid a feeby the advertiser.The goal for Archeo will be to sell off someof these domains, selectively developsome of them, and opportunistically buyother domain names to grow the pay-per-click business.In real estate terms, these domain namesare like parking lots. They generaterevenues, but when they are developedwith buildings, they will generate morerevenues. But developing these domainsrequires resources and focus becausewebsites don’t develop themselves. Thereason why the company is planning toselectively develop some of the domainsis because it is not cost effective todevelop them all. In certain instances, itis better to sell them to someone else orjust keep them as parking lots.
Ultimate VALUE FINDER | MARCH 201316VALUATIONThe following is Marchex’s incomestatement and balance sheet.
17UltimateVALUEFINDER|MARCH2013Currently, Marchex has a market capof about $140 million. As of September30, 2012, the company had $35 millionin cash so the enterprise value is $105million. Let’s see what we get for this.Non-Call Advertising Business (Archeo)Let’s first start with the non-calladvertising business which is in theprocess of being spun out. This businessmainly includes over 200,000 domains.What are they worth? We don’t knowexactly but we can get an idea.In February 2005, Marchex acquiredmore than 100,000 domain names fromName Development. The price that thecompany paid was $164 million. Noticethat this is just for 100,000 domains.Before the acquisition, Marchex alreadyowned 100,000 domain names. If weuse this transaction as a comparable,we can conclude that these domainsare worth about $300 million. Let’s notforget that the enterprise value is only$105 million, which means that thedomain names alone could be worththree times as much as the price tag ofthe company and we didn’t even get tothe call advertising business. But let’snot get ahead of ourselves here becausejust because the company paid a certainamount to acquire domain names doesnot mean that they are worth this much.It is not uncommon for companies tooverpay for acquisitions.Let’s look at it another way. When Ilooked through the company’s domainnames, I was particularly interestedin one domain: Salsa.com. I like Latindancing and I thought it would be coolto own this domain. So, I went to thisdomain name and clicked “This domainmay be for sale. Click here for moreinformation.” This is the page that I got.
Ultimate VALUE FINDER | MARCH 201318Notice two things. One is the price rangesthat Marchex wants possible buyersto check and second is the statementsaying that most generic domain namessell for a minimum of $50,000. I filledout my information and said that I aminterested in buying this domain, andhere is the e-mail that I received.“Thanks for your interest in the domainSalsa. I wanted to personally follow upwith you on your inquiry.Domains similar to this domain havesold in the 6 figure range. Do you mindme asking what your budget is for thisdomain? We receive many inquiries aday for our domains so it’s important tous to verify if we can meet your pricingexpectations prior to initiating theappraisal and sales processes.I look forward to hearing back from you.”There is absolutely no way in the worldthat I would pay 6 figures for this domain,but this is how much some people arewilling to pay to get prime digital realestate. The way I responded to thise-mail is the following.“If domains like this sell in the range of 6figures, we can just stop our conversationhere. It is not even close to what I amwilling to pay. The top I would pay is$2,000.”Obviously, there is no chance that Ican get this domain for $2,000. But forillustration purposes, let’s say that thecompany could get $2,000 on averagefor domain names that they own. Thistranslates into $400 million ($2,000 x200,000 domains). This is about fourtimes the current price tag of Marchex.Let’s look at the valuation in another way.Over the last several years, Marchex soldabout 5 percent of its domain namesto people who contacted the companythe same way I did, meaning that theyvisited the website and saw that it was forsale. The company received $30 millionfor less than 5 percent of its domainsand the management stated that themost valuable domains are still ownedby the company. Here is the list of somehistorical domain sales.http://www.marchex.com/assets/pdf/marchex_historical_top_500_domain_sales.pdfIf the company received $30 million for5 percent, then the remaining domainscan be worth as much as $600 million.This is six times the current price tag.Let’s look at it in a final way. On theincome statement, there are two revenuesources: Partner and Other RevenueSources and Proprietary Website TrafficSource. The second revenue source,proprietary website traffic source, isfrom the domain portfolio. This sourcegenerates about $20 million in annualrevenues. This business model is veryhigh margin (higher than 50 percent),and the income that it generates is about$10 million per year. So, how much is$10 million per year worth? Let’s say$100 million, but remember this incomestream is based on the “parking lot”business model. These websites arebarely developed. With that being said,let’s just stick with our $100 millionvaluation.I don’t know if the domain portfolio isworth $100 million, $300 million or $600million. But, it doesn’t matter consideringthe enterprise value is only about $100million. Actually, even if the domainportfolio was only worth $100 million($500 per domain = highly unlikely), thestock is still extremely cheap because wedidn’t even start talking about the digitalcall advertising business.
19UltimateVALUEFINDER|MARCH2013Digital Call Advertising BusinessBased on the current stock price andthe valuation of 200,000 domains, thedigital call advertising business is beingthrown in for free. Yes, you read thatright. It is free even though this businessis profitable and growing.Currently, the digital call advertisingbusiness generates revenues at a rate of$120 million per year. EBITDA is about$13 million, so based on this informationalone, it has to be worth about $100million. It could be worth more becausethe management states that once thisbusiness gets bigger, margins will growto as high as 20 percent.One can argue that the digital calladvertising business is worth less than$100 million. I disagree, but even if it isonly worth $50 million, you are getting itforfreeso it doesn’treallymatter.Ibelievethat this business has the potential to beworth north of $300 million consideringits growth potential. Businesses are onlyat the early stages of accepting pay-for-call advertising models, and Marchex isone of the leading companies that will bebenefiting from this trend.One other thing that I did not mention isthat there are approximately $50 millionof deferred tax assets on the balancesheet that can be used to offset futureincome taxes. Because we already haveplenty of value, I don’t even feel likediscussing it.CONCLUSIONAny way you slice it, Marchex’s stock isundervalued. The management knows itand this is why they are buying the stockfor their personal accounts and using thecompany’s cash to buy back shares. Theywant to unlock value and this is why theyare separating Marchex into two separatebusinesses. The stock is way too cheapin relation to the underlying value.Disclosure: I, or persons whoseaccountsImanage,donotownsharesof Marchex, Inc. This report is not asolicitation to buy or sell securities.Neither Mariusz Skonieczny norClassic Value Investors, LLC, isresponsible for any losses resultingfrom purchasing or disposing sharesof Marchex, Inc. You are advisedto consult your financial advisor orconduct the due diligence yourself.Why Don’t I Own This Stock?I am asked this question on everysingle company that I don’t own butwrite about so I decided to includethe answer here. And, the answer issimple – I cannot own everything Iwrite about even though I like it. Ionly own 8 to 10 positions and whenI buy something, I commit to it forseveral years. I can’t be changing myportfolio every week just because Ifound something “better.” If I didthis I would only be investing inpotentials and never riding them.When one of my positions reachesmy target, I will sell it, and then, Iwill go back to the ideas that I wroteabout and pick one that will take itsplace.
Ultimate VALUE FINDER | MARCH 201320PREMIER EXHIBITIONS (PRXI) -OK, LET’S DO IT AGAININVESTMENT SUMMARYIf you are a long-time subscriberto Ultimate Value Finder, you willremember that I launched thenewsletter in December 2011.Originally, I planned to release thefirst issue on January 1, 2012, but Irushed the release because of majornews that took place during the lastfew days in December 2011. PremierExhibitions made an announcementthat it was putting its Titanic Artifactscollection for auction, and this was atimely decision because 2012 was the100th anniversary of the sinking ofthe ship. Amazingly, the stock pricedid not move up immediately becausethere were some hedge funds thatwere liquidating it. I quickly realizedthat once these hedge funds ran out ofstock to sell, the price would skyrocket.So, I released the newsletter early.It turned out that I was right eventhough I am almost always 100 percentwrong on the price movement in theshort term. The stock price increasedfrom $1.65 per to $3.75 per share byMarch 29, 2012. This was an increaseof 127 percent in just three months.Not bad. At that point, I was sitting atmy computer thinking that at $3.75per share, there was not much upsideleft, but that the downside was hugebecause they might not close on thetransaction or the closing might taketoo long for investors. Consequently, Isold my position not that far from thepeak.Since then, the auction produced abuyer of the Titanic Artifacts collectionwho signed a non-binding letter ofintent for $189 million. You might thinkthat this is great – you put your itemon the auction, the buyer shows up,and you close the transaction. Thereis one problem, though. The closingpart of transaction is taking time andyou know how much Mr. Market enjoyswaiting around.Anyway, by now, investors are simplyworn out from waiting even though theletter of intent was signed only fourmonths ago. When they were excitedabout the news of the auction, theydrove up the stock price to almost $4per share. Now that they are mentallyexhausted, they are driving it down toalmost $2 per share. The market capis approaching $100 million while thebuyer is willing to pay $189 million forTitanic Artifacts collection. So I say, ok,we made money on it before becauseprevious market participants lostpatience. Now, they are doing it again.Fine, let’s do it again.
21UltimateVALUEFINDER|MARCH2013COMPANY DESCRIPTIONOn September 29, 2011, themanagement separated PremierExhibitions into two operating divisions:an exhibition management subsidiaryand a content subsidiary. The purposeof this separation was to monetize itscontent subsidiary, which holds theTitanic Artifacts collection.Exhibition Management SubsidiaryThrough the exhibition managementsubsidiary, the company is in thebusiness of presenting museum-quality touring exhibitions around theworld. They are presented at exhibitioncenters, museums, retail locations andother high-traffic venues. The companymakes its money through admissionticket sales, co-production agreements,third-party licensing, merchandise,and sponsorships. The two most well-known exhibitions are the Bodies andTitanic Exhibits.BodiesThe Bodies Exhibition, which showspreserved human bodies dissectedto display bodily systems, has beenviewed by more than 15 million peopleworldwide. The following photographsare a sample of what the BodiesExhibition has to offer.TitanicThe Titanic Exhibition has been viewedby approximately 20 million visitors.It features artifacts recovered fromthe wreck of the famous ship and tellsthe Titanic’s story from constructionthrough sinking, discovery andconservation.Content SubsidiaryThrough its content subsidiary, thecompany owns the Titanic Artifactscollection. Premier Exhibitions hastwo sets of Titanic artifacts: the “1987Artifacts” and the “Post-1987 Artifacts.”The “1987 Artifacts” set consists of2,000 pieces that were recoveredfrom the wrecked ship in 1987. The“Post-1987 Artifacts” set consists ofmore than 3,000 artifacts that weresalvaged during expeditions in 1993,1994, 1996, 1998, 2000 and 2004.Until August 12, 2011, the companydid not have the title to the “Post-1987Artifacts.”
Ultimate VALUE FINDER | MARCH 201322The company fought in court for 17years to resolve the ownership issueof the “Post-1987 Artifacts” and finally,on August 12, 2011, the United StatesDistrict Court for the Eastern Districtof Virginia, Norfold Division, issued anopinion granting an in specie salvageaward of the “Post-1987 Artifacts” toPremier Exhibitions with a value ofapproximately $110 million ($2.13per share) as compensation for therecovery and conservation of morethan 3,000 artifacts salvaged from theTitanic wreck site.DARLING OF WALL STREETThe stock of Premier Exhibitions usedto be a darling of Wall Street as shownin the following graph.As you can see, the stock price wentfrom $0.08 to $18.00 per share in amatter of four years. How could WallStreet not have loved this companyconsidering one could have turned$100,000 into $22.5 million in fouryears assuming one got in at thebottom and sold at the top?COLLAPSEUnfortunately, on Wall Street, there isno such thing as unconditional love. Ifyour stock price continues to go up,they love you even if your underlyingbusiness is struggling. However, whenthe stock price starts falling, then theromantic affair comes to an end. Thisis exactly what happened as shown inthe following chart.The stock of Premier Exhibitionscompletely collapsed because thecompany was mismanaged by theprevious CEO. He spent a lot of moneyto chase growth initiatives at allcosts. As a result, operating expensesincreased significantly and whenrevenues started trending downwardin 2008, profits collapsed. If he had notbeen ousted, the company would havegone bankrupt.TURNAROUNDAbout four years ago, Mark Sellers, amajor shareholder, replaced the formerCEO with a turnaround CEO, to helpstop the bleeding and get the companyback on its feet. Since then, the newCEO was able to save the companyfrom bankruptcy and gain control ofexpenses. However, turnarounds aresimilar in a way to the rehabilitation ofhouses. You never know what you aregoing to find until you open up the wall,and usually it costs more money andtime than originally anticipated. PremierExhibitions was no exception. Theturnaround efforts were not supposedto take as long at they did. As you canimagine, investors did not hold backtheir criticism. In the end, that’s what
23UltimateVALUEFINDER|MARCH2013investors are best at – complainingand telling managers how they shouldbe running their companies.After four years of hard work, theturnaround is finally showing verygood results, although the market iscompletely oblivious to it. The followingis the company’s income statementfrom Fiscal Year 2008 through the firstnine months of Fiscal Year 2013. Thefiscal year ends in February.As you can see, Fiscal Year 2013 willbe the first year in four years that thecompany will be profitable. EBITDAfor the first nine months was $6.5million with the third quarter beingthe slowest. By the time the fourthquarter is reported, EBITDA should beapproaching $10 million. I will addressthe valuation later.
Ultimate VALUE FINDER | MARCH 201324IT IS NOT ABOUT THE EXHIBITIONBUSINESSThe turnaround that I just describedis about the exhibition managementsubsidiary, but this is not why investorshave been investing in PremierExhibitions for the past four years.Since Mark Sellers brought in the newCEO to turn the company around, theinvestment thesis has been all aboutthe Titanic Artifacts collection, whichwere appraised at $189 million whilethe market cap of the company wasmuch lower than that.Because this was an asset play, thestock price fluctuated based on whatinvestors believed was going to happenwith the Titanic Artifacts collection. Atone point, many believed in the valueof the Titanic Artifacts collection sothey bid up the stock price. Then, theylost patience so they sold it off. Then,the company announced that it wasputting the Titanic Artifacts collectionup for auction so they got excited andbid up the stock price again. Soon, theyrealized that the auction is not the sameas the final sale so they got bored andsold it off. Then, the company signeda letter of intent with the buyer for$189 million, and they bid up the stockprice again. Now, they are realizingthat the letter of intent is not the sameas the final sale and they are selling itoff again. This is so ridiculous that youcould not write a better movie script ifyou wanted to. Why can’t they just takea seat and wait until the investmentthesis plays out? If they could, I wouldnot be writing about it because priceswould be efficient.Anyway, where we are now is thecompany put Titanic Artifacts up forauction last year. As a result of theauction, several potential buyersshowed interest in the artifacts, andon October 15, 2012, the companyannounced that it had entered into anon-binding letter of intent to purchasethe Titanic Artifacts collection for $189million. After this news, the stock priceincreased 32 percent from $2.20 to$2.90 per share. However, it didn’t taketoo long for investors to get bored again.We are now at the end of February andthe transaction has not closed yet. So,what are they doing? They sell it offagain back to the $2 something level asif the letter of intent never happened.Obviously, I do not have a crystal ballso there is no way to be 100 percentcertain whether the transaction willclose because there are severalcontingencies. With that being said,picture this. You have a house on themarket for $200,000, which is whata realtor told you to list it at. After aweek, you get an offer for this amount.Soon, you learn that the buyer cannotget his or her financing and has to walkaway from the transaction. What doyou do? Do you throw in the towel anddecide that your house is worthless ordo you put it back on the market withthe intention of finding a new buyer? Ofcourse, you put it back on the market.It is the same situation with the TitanicArtifacts collection. I don’t know if thetransaction with the current buyerswill close, but even if it falls apart, theTitanic Artifacts collection is still worthabout $189 million. If it is not this buyer,there will be another buyer. It might notbe at $189 million, but considering thatthe market has thrown in the towel anddriven the market cap back to almost$100 million, I think there is enoughmargin of safety.Also, everybody is so tired of waiting onthe sale of the Titanic Artifacts collection
25UltimateVALUEFINDER|MARCH2013that they completely forgot that PremierExhibitions also has an operatingbusiness. Remember, the managementhas been diligently working on turningthe exhibition business around, whichaccording to Greggory Schneider, 6percent owner of Premier Exhibitions,is worth $75 million or $1.50 per share.In other words, at a price of almost $2per share, the crazy market is not toofar away from giving away the TitanicArtifacts collection for free because thebuyer is taking too long to close thetransaction.VALUATIONAs mentioned before, for severalyears, the investment thesis in PremierExhibitions was the following – thevalue of Titanic Artifacts is higher thanthe market cap of the company.This is the valuation that I presentedwhen I wrote about Premier Exhibitionsin the January 2012 issue.• “Post-1987 Artifacts” = $110million or $2.13 per share• “1987 Artifacts” = $35 million or$0.75 per share (based on an outdated2007 appraisal; it should be muchhigher)• Intellectual Titanic Property (Filmfootage, digital archives, etc.) = $44million or $0.94 per share (based onan outdated 2007 appraisal; it shouldbe much higher)• Exhibition business = $0 (eventhough it has value, I completely ignoreit)Total Value = $189 million or $3.82per share. This is the amount that thebuyer signed the letter of intent for.Notice one thing – I assigned zerovalue to the exhibition business. Atthat time, the exhibition businesswas in the middle of being turnedaround and it was just breaking even.The management’s ability to turnthis business from losing money intobreaking even was a big milestone,but I didn’t feel that at that point ithad much value. But now, more thana year later, the exhibition business isdoing much better. In other words, theturnaround efforts are finally showingresults. The interesting thing is thatinvestors are so tired of waiting for theclosing of the Titanic Artifacts collectionsale that they are not even botheringto look at the progress that has beenmade with the exhibition business. AsI mentioned previously, the exhibitionbusiness will be profitable in FiscalYear 2013 which ends on February 28,2013. I estimate that EBITDA will bearound $10 million. Consequently, theexhibition business is probably worthbetween $70 and $80 million. If thecompany continues with its progress,this business could be worth even morenext year. But, let’s not get ahead ofourselves. The following text is takenfrom Form 13D filed on November 14,2012, by Greggory Schneider.“Mr. Schneider believes PremierExhibitions’ common stock isdramatically undervalued at currentlevels. With a $189 million ‘tax efficient’sale of the Titanic assets (RMS TitanicInc.) underway, which will likely netthe company $3.30-3.50/share,and a profitable operating businessthat has experienced a successfulturnaround, the sum of parts value caneasily exceed $4.50/share. Given theseasonality of the operating companyit should not remain a public entity.The company suggested in its mostrecent conference call that it will beprofitable in its current (slowest dueto seasonality) quarter and expects
Ultimate VALUE FINDER | MARCH 201326to be profitable going forward, and isworking on interesting/exciting newcontent/exhibitions. The companymanaged to earn nearly two times asmuch EBITDA (nearly $5,000,000) inthe quarter ending August 31st whichoccurred after the 100th anniversaryof the Titanic buzz (quarter ending May31st) had settled, which speaks to itssubstantial operational improvementand makes the timing ideal for a saleof the remainder of the company.Mr. Schneider believes the operatingsegment of the company can easilyfetch $75 million ($1.50+/share) usinga conservative EBITDA assumptionfor the next two quarters withoutadding value for the upcoming newexhibitions and content which thecompany mentioned in its most recentconference call. While the company hasindirectly hinted that it may seek to sellthe operating subsidiary during variouspress releases, Mr. Schneider wouldlike the company to initiate a publicand formal process for monetizing theoperating company so as to ensureshareholders that they are receivingmaximum value. Mr. Schneiderbelieves the market is completelyignoring the value of the operatingbusiness and also misunderstandingthe tax consequences of the Titanictransaction. With the Titanic assetswell on their way to being sold for anamount that far exceeds the company’scurrent market capitalization, Mr.Schneider believes the best way toreflect the company’s true value is toimmediately initiate a formal processto privatize or sell the operating portionof the business (Premier Exhibitions).”While you might argue whether theexhibition business is worth $75million, at these price levels you don’thave to be that precise. If you add $75million to $189 million from the TitanicArtifacts collection, you get $264million, which is significantly higherthan the current market cap. In otherwords, there is enough room to bewrong on the valuation and still comeout ahead.Here is the balance sheet forinformational purposes.
27UltimateVALUEFINDER|MARCH2013CONCLUSIONI doubled my money on PremierExhibitions because I was patientand did not get exhausted like othersdid. I sold my entire position becauseinvestors happily bid it up so high thatit didn’t make much sense to hold itanymore. Right after I sold it, investorsgot exhausted again and drove thestock price so low that it is becomingridiculous again. At this point, there isa lot more value in Premier Exhibitionsthan what the market is assigning toit. Now, what you have to decide iswhether the value that you are gettingis enough for the price that you arepaying. Obviously, the best casescenario would be if the market drovethe stock price to as low as $1.50 pershare. This way, the price tag would becovered by the exhibition business, andthe Titanic Artifacts collection wouldbe given away for free. I don’t knowif the market will get crazy enough tosend it this low, but it might. Just giveit a few more weeks and we might seeit there. Or, if the buyer of the TitanicArtifacts collection does not close thesale, investors will likely sell it off thislow saying something like this, “See,I told you no one wants these Titanicartifacts. They are worth nothing. Sell,sell, sell.” If this ever happens, I think Iwill back up the truck. In the meantime,I am just going to be watching, but thisdoes not mean that it is not a good dealto buy shares at these levels.Disclosure: I, or persons whoseaccounts I manage, do not ownshares of Premier Exhibitions. Thisreport is not a solicitation to buyor sell securities. Neither MariuszSkonieczny nor Classic ValueInvestors, LLC, is responsiblefor any losses resulting frompurchasing or disposing sharesof Premier Exhibitions. You areadvised to consult your financialadvisor or conduct the duediligence yourself.Why Don’t I Own This Stock?I am asked this question on everysingle company that I don’t own butwrite about so I decided to includethe answer here. And, the answeris simple – I cannot own everythingI write about even though I like it.I only own 8 to 10 positions andwhen I buy something, I committo it for several years. I can’t bechanging my portfolio every weekjust because I found something“better.” If I did this I would onlybe investing in potentials andnever riding them. When one ofmy positions reaches my target, Iwill sell it, and then, I will go backto the ideas that I wrote about andpick one that will take its place.
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