Investing is a weird art in that you can be wrong with your theories but still end up ahead. The converse is true (although when you lose despite being correct, I must say it is a lot more annoying).
Ag Growth (TSX: AFN) announced they settled with their customers in regards to a three-year old incident involving an installation of a grain tower:
We are pleased to confirm that a mutual settlement agreement has been entered into with Fibreco that settles all matters between AGI and Fibreco relating to the Bin Incident. AGI expects to record an additional pre-tax charge of approximately $15.6 million in the second quarter of 2023 in connection with the Fibreco settlement, including insurance recoveries that will be received. We believe the settlement between AGI and Fibreco will help to facilitate the finalization of other insurance-related matters.
In the past March 31, 2023 quarterly report, the following paragraph is mentioned:
Over the period of 2019–2020, AGI entered into agreements to supply 35 large hopper bins for installation by third parties on two grain storage projects. In 2020, a bin at one of the customer facilities collapsed during commissioning, and legal claims related to the incident have been initiated against AGI. As at March 31, 2023, the warranty provision for remediation costs is $40.7 million [December 31, 2022 – $41.5 million], with $0.8 million of the provision having been utilized during the period.
… there is a long history of expenses associated with this incident, from Q2-2021:
Based on remediation work completed thus far, we have recorded an additional $7.5M to the previously disclosed $70M accrual. The increase is primarily the result of additional engineering, steel, and labour costs required to ensure a satisfactory product solution as well as additional legal costs. To-date, the Company has spent approximately $25M of the accrual.
… from Q4-2021:
As at the end of December 31, 2021, the Company has spent approximately $43.4 million of the $86.1 million total accrual, which was increased by $8.6 million in the quarter to reflect an updated view of the costs to resolve the issue.
So this whole debacle will have costed AFN about $100 million in total. Needless to say, for a company the size of AFN (generating $102 million in cash flows through operations in 2022) that is a huge amount – over $5/share!
So why is the stock up? Beats me!
It is not like I did not do any due diligence on this case – I went to Vancouver Supreme Court to dredge up the civil case files to see if I could get some colour on the incident. There were some interesting documents in the stack of papers in the file folder. A professional engineer apparently was way out of his depth with the design of the grain towers and I figured the blame would get pinned on his liability insurance (and hence AFN would be able to claim their own insurance against his), and I figured that I might as well hold the shares (instead of dumping it) for the inevitable (favourable to AFN) payout. Obviously I was out of my depth on this one since it is clear that AFN completely lost the case with this settlement where they have to take an additional $15.6 million charge.
Yet, the stock is still incredibly close to its all-time highs and 2023 looks to be a record year for the company. Go figure. It’s a little disturbing that I don’t have a clue what I’m doing with this one. Just reading the financial statements, they continue to have a lot of financial leverage but management has been making noise lately about actually paying down debt which would make everybody involved more comfortable.
It continues to be a huge investment despite how out of depth I am.