ECC Capital Corp (ECRO) is an Interesting Real Estate Play on AI
With the resurgence of coal due to AI's high power needs, ECC stands to greatly benefit
ECC is a very simple idea for those with small funds or personal accounts. Due to its small size, this one has been overlooked by the broader market even though some recent developments likely warrant it to trade for a price much higher than where it currently is trading at.
I came across this idea on Micro Cap Club (great job, Kingdom Capital, finding this one!) back in September 2024 and while the price has crept up a bit since then, it is nowhere near the intrinsic value I believe it has.
My opinion is that ECC is objectively cheap with potential catalysts and has some other “free call option” elements to it that I’ll dive into.
Background
ECC started as Encore Credit Corp sometime around 2002, which was a residential lending business. ECC was then formed to restructure Encore and IPO’d in early 2005 with all Encore assets wholly owned.
They were a subprime lender with all the goofy loan products that ended terribly with the GFC in 2008. Leading up to this they begin posting huge losses and effectively liquidate in late 2006, and they delist in mid-2007.
In late 2021 they resurface, posting their annual reports for 2018, 2019, and 2020 and have since posted their annual reports through 2024 around April every year. This is the only information posted publicly from the company, so a lot of sleuthing is required to piece this one together.
The Kemmerer Mine and $500 million in NOLs
From 2018 when reports were posted again through 2023, there is not much noteworthy activity. They make a few tiny deals here and there, but their business is mainly to service about $220 million in legacy mortgage loans, which is offset by about $380 million of debt. On paper, the company’s net worth is about -$150 million, however, all of the debt tied to the mortgage portfolio is non-recourse to the company. This is probably another reason this hasn’t gotten much attention as it screens poorly.
In 2024 things get interesting as they purchase a coal mine in an interesting transaction. A publicly-traded BDC named PhenixFIN (PFX) acquires a 44% stake in ECC on 4/9/24 and simultaneously sells a ~13,000 acre open pit mine that produces sub-bituminous coal, which is also known as thermal coal used to heat homes, primarily. The mine was originally purchased for about $165 million in early 2012 by Westmoreland Coal, which was publicly traded until around 2018 when they filed bankruptcy. Their latest report where information on Kemmerer can be found is 2017, which is where most of my info from the mine came from.
The consideration was $34 million and this is financed via a seller take-back for 100% of the sale price. Essentially, PhenixFIN had or formed a relationship with ECC and bought a position and sold them the mine at a cheap price in order harvest the ~$500 million in NOLs that ECC has. Their goal seems to be to run as much income as possible through ECC in order to use the NOLs.
Now, the issue is not the mine’s reserves, which are around 70 million tons in 2017. In the 2010’s they produced about 4-4.5 million tons annually, but this has gone down as coal plants have gone offline. The issue is that this appears on paper to be a runoff situation where eventually there will be no more demand for coal. Their large customers have contracts ending entirely by the end of 2026. The good news is that the mine seems to be generating a lot of cash relative to their $34 million purchase price and there is likely terminal value beyond these contract expirations if cash is allocated intelligently.
PhenixFIN
Obviously, with PhenixFIN owning 44% of ECC (effectively gives them control), and holding debt as well, they are in the driver seat here, in my opinion.
My analysis on them is that current management is intelligent and can be trusted to allocate capital efficiently. From 2011 through 2020 PhenixFIN was externally-managed in a terrible fashion by MCC Advisors, seeing their share price fall 88% during this time.
A board member named David Lorber, who joined in 2019, became CEO on 1/1/21 as they internalized management. Since 1/1/21, the price is up over 73%, and is up over 200% if you factor in the appreciation from when they announced an internalization of management prior to this. For comparison, the VanEck BDC Income ETF (BIZD) is up about 16% from 1/1/21 until today.
Trusting PhenixFIN is important here because they are in charge of allocating capital that the mine generates. David Lorber and team have proven to be effective with PhenixFIN thus far.
The Kemmerer Mine gushed cash in 2024
If we take ECC’s revenue associated with mining operations and subtract all expenses other than those pertaining to mortgage servicing, the operating income is over $19 million and this only covers about 9 months since the mine was acquired on 4/9/24. Annualized, this is over $25 million against a market cap of $14.67 million.
Summing it all up
ECC owns:
A mine generating more cash annually for the company than their market cap.
Over $500 million NOLs.
4 securitization trusts and mortgage servicing rights with all associated debt being non-recourse.
An asset-retirement obligation (ARO) tied to the coal mine that appears to be overfunded by about $5 million currently.
A 4% stake in MB Precision Investment Holdings LLC (aerospace/defense component parts manufacturer), carried at fair value, which is $745k as of 12/31/24. PhenixFIN led a refinance for them in November 2024 and this ultimately stemmed from their arrangement with PhenixFIN allocating the cash generated.
The net equity value (excluding all mortgage-related assets and liabilities) is $29.35 million, or $.154/share as of 12/31/24.
The free call option
The proverbial free call option in this scenario is the resurgence of coal, brought on by AI’s insane demand for power. The Trump administration has been coal-friendly, with a federal royalty rate for coal dropping from 12.5% to 7% from the Big Beautiful Bill. It appears Kemmerer’s leases are federal, so this helps to reduce expenses for them. The Wyoming state tax on coal dropped from 6.5% to 6% also, so this is a big OPEX reduction for Kemmerer.
But beyond reducing the tax burden for existing and future mining operators, the BBB opened up coal-rich federal land for new leases. Here is a very interesting anecdote that seems very positive for Kemmerer and ECC. A 440 million ton coal lease seems extremely interesting, especially given that it is very close to Kemmerer.
If AI-related ventures continue to draw as much power as they are predicting, this is a very interesting picks/shovels play that can be bought extremely cheaply.
And even if the mine does eventually shut down in the next few years, the cash generated in the interim controlled by PhenixFIN seems to warrant a purchase.
Important: This information is for general purposes only and is not financial advice. Always seek professional guidance for investment decisions.