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Investors looking to buy $1 worth of value for the bargain price of around 60 cents might be able to find such a deal in the shares ofPinetree Capital Ltd. (PNP-T3.15-0.07-2.17%)

Pinetree, a mutual fund-like company that invests in junior resource companies, recently has traded for about $3 a share, but has a net asset value of $5.01, or the amount of money that would be returned to stockholders if its holding of resource stocks were liquidated, and all its liabilities repaid.

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It isn’t every day that investors can buy the equivalent of a $1 bill for only 60 cents. So the big question: Is Pinetree an intriguing value play mispriced by the market, or do the shares have drawbacks that justify a sizable haircut from net asset value?

Getting an answer to this critical question is difficult. There are no analysts listed by Bloomberg as following the company, unusual on the Canadian market for a business with shareholders’ equity of about $800-million.

The company doesn’t have a big institutional following either, and is mainly owned by retail investors. Sprott Asset Management, the Toronto-based money manager with gold bug tendencies, is the only major institutional holder of any size in the stock, with 6.7 per cent, according to Bloomberg.

'Very, Very Hot To Trot'

Company director and spokesman Marshall Auerback attributes the discount to the ebb and flow of interest in junior exploration companies. In early 2007, during the peak in the pre-crash mania for all things resources, the shares traded at a premium of more than twice net asset value.

“When people are really very, very hot to trot on resources, particularly the junior Canadian resources sector, they look at this company. ... [The current discount is] more a gauge of investor psychology than anything else,” he contended.

In its structure, Pinetree resembles a closed-end mutual fund. It pools money from many investors to buy shares it deems attractive. But it has no obligation to allow shareholders to cash out at net asset value, as in a conventional mutual fund, hence it trades on the stock market at a price that reflects the day-to-day buying and selling activity of investors.

About 40 per cent of its investments are in junior precious metal explorers, the rest spread among companies looking for uranium, other metals, coal, and oil and gas, giving a diversified portfolio. Pinetree believes macro-economic trends, such as growth in emerging markets and disdain for the U.S. dollar, are driving a long-term-bull case for companies looking for these commodities.

A benefit of gaining exposure to junior resource stocks through Pinetree is that investors get access to its professional analysts, led by chairman Sheldon Inwentash, an attraction the company touts in its presentations.

Access to professional money management in the junior space should be a draw. No one would mistake these startup companies for blue-chip stocks, and they are one of the easiest market sectors for the unwary to be fleeced by dubious promoters.

Tax inefficiencies don’t seem to explain the discount. Half of Pinetree’s capital gains are subject to taxation, according to CFO Gerry Feldman. That makes it similar to what an individual would pay Ottawa by buying and selling directly the same companies as Pinetree.

Then What Gives?

One knock against any company that, like Pinetree, holds a big portfolio of stock investments, is that there is no guarantee of receiving current market prices if it sold positions. The shares of many juniors are thinly traded and prices would tank if a big holder tried to liquidate.

However, Pinetree doesn’t face pressures to liquidate because shareholders can’t demand their money back. The company’s strategy is to hold juniors, hope they hit pay dirt, and then sell out to a takeover or to less risk adverse investors once the juniors graduate to the development stage.

Mr. Auerback says Pinetree accepts that some of its investments won’t pan out, part of the risk of the sector, and is mindful of the liquidity problems, sometimes selling positions into market strength to be prudent.

A possible reason for the discount is the supersized bonus paid to Mr. Inwentash. He receives 10 per cent of the capital appreciation of the company’s portfolio, and last year got nearly $25-million. Mr. Auerback admits the payout is high by Canadian standards, but is “not egregiously outrageous” compared with Wall Street. Hot U.S. hedge fund managers often pocket 20-per-cent fees.

Pinetree has options and warrants outstanding that potentially could dilute existing shareholders. But all the securities have strike prices above the current market, making it difficult to assess how many will be exercised.

OSC Investigation

Pinetree and Mr. Inwentash also received a notice from the Ontario Securities Commission in late 2006 that they were facing an investigation into alleged manipulative and insider trading, another risk for investors.

The company believes the probe has ended, which would be a vindication. “We haven’t heard anything from the Ontario Securities Commission” since 2006, says Pinetree CFO Gerry Feldman. “Time is not your enemy here.” The OSC declined to comment.

One approach to Pinetree would be to make direct investments in the some of the junior companies it holds, based on the view that it has a high level of acumen in the sector. Pinetree’s stock positions are listed on its website, and such direct buys would avoid the OSC baggage, dilution and Mr. Inwentash’s big fees.

But given that the juicy discount to net asset value may be excessive, another idea – for those willing to take the risk – would be to buy the stock, and sell if and when it moves to a premium. A premium would probably signal the end of the bull run for junior resource stocks and a time to run from this speculative sector.