I recently found another net-net/cigar-butt type of business in my treasury hunt.

Steep Hill Inc. (formerly Canbud Distribution Corporation) is a tiny Canadian shell company that once provided hemp-based products. The business wound down operations at the end of 2022 and has since been trying, unsuccessfully, to acquire another business to continue operations.

This type of situation is exactly where Benjamin Graham often found value: companies trading below their net current asset value (NCAV).

Key Numbers (CAD)

• Cash: $56,000
• Term deposits: $2,000,000
• Liabilities: $106,000
• NCAV (liquidation value): $1.95M
• Market cap: $1.05M
• Share price: $0.065
• Undervaluation: 46% discount to liquidation value

Risks

• Possible share dilution of around 8 percent.
• Cash burn: if management continues searching without success, a burn rate of roughly $300,000 per year would erode value.
• Shell companies on the CSE are often vulnerable to slow leaks in NCAV if acquisitions drag on.

Scenarios and Potential Returns

• Acquisition or restart of operations (most likely): stock rerates closer to NCAV, about 57 percent return.
• Immediate liquidation or sale: 86 percent return.
• Liquidation in one year: 57 percent return.
• Liquidation in two years: 29 percent return (after cash burn).

My Position

I have allocated 5.5 percent of my capital to this stock. My plan is to hold for two to three years, expecting that either an acquisition or liquidation will unlock value well above today’s price.