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IMO it would have been better for the company and management to have simply sodl Dugbe outright to a validated third party even for a low $M figure and to have move on to focus on Mali. This is KEY - this deal is not finalised, has multiple CPs and IMO unlikely to complete as laid out in the RNS. THIS IS NOT A DONE DEAL. When this deal trips and fails - questions will be asked again about Dan and what the hell he is upto. Thats the point - it makes HUM look inept, and IIs will not invest in such companies.
JTS, I’m not suggesting they paid more, for all I know they each paid 10k for their 19% of Dugbe, that’s the point. Why was this 39% shareholding not retained by HUM? Clearly DB et al think there’s a big personal profit here on the back of HUMs development of the project.
Junior minors are the last to hit a big rise in gold bull run but they also make bigger rises. HUM's time will come and it starts once we announce we are net debt positive and it's explained what we will be doing with the money.
If we announced today that we were spending this money ourselves I can assure you I would be looking to sell. Dugbe has been a back of the queue project for years, now it's a low risk project moving forward.
We're not spending money on Dugbe, so what are we spending it on? Cora/ M&A? Divi or buyback? Surely any of these options are better than Dugbe and will move our SP in the short term once announced?
To those looking at zero downside from a deal falling through. HUM benefits from II taking positions and moving the stock higher through valuation expansion. If Dugbe deal falls through, as is more likely than not, then II investors will be (even) less likely to support crooked Dan. This will have a meaningful impact of the prospects of realising the true value of Mali.
And I havent even address the related party issues here.
I dont understand when 95% of other gold miners are doing fairly straight forward deals/mergers/partnerships, Hum and Dan cant get anything done. The old adage a simple deal is a good deal applies in this environment ($1700/ox GP).
There is downside to HUM reputation and valuation if (and when) this deal blows up - its too complicated and ARX is an unvetted counterparty. It looks and smells just like Bunker Hill
Dugbe has not been mentioned on this board for bloody years. It's been forgotten about yet it's suddenly a crappy deal where we lose all the upside?
Dugbe moves to the next stage without our shares getting diluted. Check.
We can now concentrate on how HUM is going to spend the $35million it is about to have in the bank/ assets by the end of this month.
DB is doing this for his own personal interest (he is very selfish - think of the 1p otions) and he is anticipating make big personal profits from this deal!! If there are big profits to be made why can't we keep them within HUM?
Got to love the SP here. 2 years ago we had a mud field and another project we couldn't fund in Dugbe. Now we have a solid producing mine with not one but two mills. We have gold in the ground all around as indicated in drill results. We have shares in CORA with finds that will support a stand alone profitable mine. We have a JV to move Dugbe forward and we are worth a lot less today. Go figure.
@Aw2414: If I'm prepared to accept that mgt paid 1mill, but you want to suggest they paid more. Then I'm happy to accommodate that. Clearly 1 mill is considerably more pessimistic
@Dropinmonkey: If the deal fails, HUM lose nothing. They won't even have the bill to pay. If the deal works, then there's upside. Just less of the upside than a lot of people were hoping for... So don't quite get your point
Plenty of views this morning on the fundamentals of the ARX deal. I never considered Liberia as being investable, and with the Anglo Pac royalty it was always going to be a hard sell.
BUT......my biggest concern is that this is another super spivy deal which has a low % chance of being successful. ARX have to raise funds, show funding, has related party elements etc.
I would say chances of this deal happening and getting to feasibility at 25%, yes I'm a pessimist.
If this deal fails, then it will be 3 from 3 for Dan and his useless exec/BoD. His entire reputation will be gone and HUM SP will suffer until he is ejected. If the deal succeeds then the upside is tiny, as the project will still need to be funded and will be heavily discounted. To me this deal shows little upside and opens up reputational downside if it falls over.
I hope I'm wrong, but Dan really is hopeless as a deal maker - and presenting this deal to the market half baked shows his naivety.
@aw2414: what gives rise to the debt comment? There’s no way that ARX will be able to fund their work through debt, for a start, ARX will hold a minority stake in the project and therefore nothing on which to secure the debt for which any lender could take control. This is an equity funded development play until such time as it is construction ready. I don’t think this should be a concern.
JTS, not sure why clearly they have invested a max of 1m in ARX, the point is we don’t have a clue what they paid for their 19% of the asset that they as directors have invested 70m Of HUMs money into. Indeed if they have invested that much why did they not invest that into HUM? We should also be cogniscent that when we end up with 51% of ARX, we will end up consolidating 51% of whatever debt they have on their balance sheet. So we will end up paying for 51% of whatever they do in terms of borrowing to pay for their earn in.
Thanks visitor. Should have checked.
Jammer - minor pedantic point but intangible asset value attributed to Dugbe is $65m, with the remainder for Mali. Section 13 of the Annual Accounts (page 76, or PDF pg.78) provides an update.
This is a very interesting development to say the least. At face value, it looks questionable. However, rationale is clearly stated: “allowing the Company to develop other prospective strategic opportunities to capitalise on the platform we have built through the exploration of potential M&A opportunities.” (i.e. ARX cover all costs at Dugbe, HUM spends elsewhere). This raises 2 main things for me:
1) We are pending updates on other opportunities. Whether that be extended LOM, Cora, or other. This will all take investment – hence why net cash positive was stated as end of 2020 rather than this month (let’s see on that one!). I’d also expect these to be more near term and therefore value accretive to SP.
2) To engage in Dugbe & above (as of yet indefinitive) other opportunities would require a prohibitive amount of capital.
Therefore, management viewed a form of JV structure as the best option.
I can only assume that mgt views these “other” development opportunities as manageable in a minimal dilutive sense. Whilst we linger at <30p, the last thing we want is dilution or a large debt package. It’d wipe out current shareholder value and that is our (my) priority.
My hope for this is that ARX can cover all development costs for the next 2 years, during which time HUM is able to rack up some cash & expand via it’s other smaller/local opportunities. 2 years from now (assuming gold still >1600), I’d like HUM MC to be at least a multiple of where we are today. At that level, if we needed to raise 100 mill (debt alone or equity an equity element) we would be in a much better position to do so without wiping out shareholders. Especially as by then, with gold having maintained a higher price, the market would be considerably more bullish and favourable towards financing a gold producer, whereas that is still not the case now.
Consequently, view this form of agreement as in the mid-long term interest (i.e. 5yrs) of current shareholders.
The bothering part for most of us is not the fact that this is an earn-in agreement. I somewhat support that. The bothering part is (a) mgt will gain a huge private stake in this, beyond what they already hold in HUM, and (b) 49% is a huge stake for a role that doesn’t even assume full funding.
Clearly mgt will have invested a max of 1 mill into ARX. Clear? Yes, as that’s >39% of the 2 mill that ARX can offer immediately without result of further funding needed for the other 8… Equally, the timeframe does motivate them to get their finger out and work on this.. So at least there’s a skilled & committed team behind it all.
Not the best, but far from the worst in my mind
Otho, thank you for your well thought out and balanced post. My immediate reaction is the proposed arrangement is an excellent start to monetising the $72m of intangible assets on the balance sheet at little if any risk to Hummingbird. Keeping the majority stake in the venture as well is better still. Of course this is just the start of a long journey with no certainties of eventually a large operating gold mine at Dugbe. Your final point about the current lack of public plans for the capital allocation of the current operating free cash flow is well made.
At least we know why Dan hasn't been buying shares in HUM hand over fist, hes been savi6his pocket money up.
Aw2414
If they put in cash and we put in the asset, then the deemed value of Dugbe is $20.4 million and we retain our 51% of the bigger number.
The spend of that $10 million, used wisely as planned, should generate a project that has real value for HUM: even if they do not ultimately proceed, the project will have moved on at no cost to us.
It does look as if we have gone for experience in all the relevant skills: we have managed to attract the "big boys" albeit not in the conventional way. Their interest, particularly the additional exploration intention, does indicate that this could be a major project in due course.
I really hope that they can confirm this deal, which is much better than that struck for CORA, where we only ended up with a third and further dilution from exploration etc.
If they were to list that company on AIM to raise the $10 million, how many of us would invest?
A bird in the hand is worth two in the Bush (horneythologist)
Dugbe has not helped SP in last few years, it has cost money.
51% of something is worth more than 100% of nothing.
If these professionals with past experience get gold out of the ground ,great.
If not , we get to keep the deposit, great.
I suppose we just carry on as a cash cow, Q2 appears to be going well.
Agree OL. Let's also remember Liberia Government have 10% free carry and there is a large 2% royalty on project for Anglo Pacific Group PLC.
So for $10-12m, ARX get 49% of 90% (44%), valuing Dugbe in its current form at circa $27m - seems about right. Doesn't matter that "Intangible Assets" in books are deemed to be $65m - no one would pay this. Only way to get additional value would be to go it alone and for HUM to spend the $12m itself to get it to DFS stage and then try a farm-in again at the more advanced stage. You may get more, but you've spent some $12m extra and diverted Project Management & Engineering Resources away from Yanfolila + increased G&A.
Err no the sale + commitment are $10-12m for 49% of Dugbe, whether they get a loan to cover this or a private/ public equity raise makes no difference - it doesn't suddenly mean they're paying $4.9m for 49% of Dugbe.
As a shell company with no assets not sure who would loan them $10m, so means they already have the funds or will need a very large equity raise, meaning huge dilution to ARX.
However that doesn't detract from some other key questions here: how much did 3 directors pay for their ARX equity - why did HUM keep stating over and over again they've spent $70m on Dugbe in their slidepacks, yet effectively sell 49% of it for $10-12m. I'm playing devil's advocate and never been a huge fan of Dugbe so $25m valuation for it seems about right (pre DFS/BFS, huge work to be done, Capex intensive, logistically challenging, Liberia, low grade etc.) no matter how much was previously spent, but do need answers. I hope more people turn up to the AGM than the last one (assume will be Zoom or some such with COVID19) - I appeared to be the only PI last year!
My view for what it’s worth:
1) HUM have made an agreement with some serious industry names for them to buy into a (large) minority stake in Dugbe
2) ARX is a cash shell but, from my read, unless they secure the capital they don’t get their stake not their non-refundable deposit back. I doubt they would have made this agreement without confidence in raising the money
3) ARX is run by very credible names and the management team have co-invested with them to demonstrate their confidence in Dugbe. Again from my read the managements reported stake in ARX will be diluted by the new money, so it’s not like they are really getting a see through 20% but depends how much of their money they are putting on the line - I doubt it is £ms
4) there is no way HUM shareholders would have tolerated 100% investment in Dugbe and there was increased risk that it simply withered on the vine. The Gov of Liberia won’t tolerate no progress for a protracted period especially having spent political capital on the license.
5) the announcement says that a) this was market tested, b) leaves HUM in control at 51% and c) the NOMAD has signed off on the related party transaction (while I’m not naive enough to believe that copper-bottoms it, as part of the fact pattern, it is helpful as they know they need to get this right; so
6) I see this as positive. Cash cow production from Yanfolila not being diverted into the sacred cow of Dugbe, 3rd party investors demonstrating the attractiveness of pursuing Dugbe and we still have 51% of a potentially enormous gold resource, made more economic in the current good climate.
7) I doubt the share price will react positively to this in isolation and the big issue for me on the results yesterday was that it gave absolutely no clue as to what they WILL do with cash flow from Yanfolila (the board had the opportunity to set out a capital allocation policy), but this is a step forward, not back.
Agree
If ARX has borrowed or will borrow the 10m and we end up with 51% of the company then the actual sale proceeds are only 4.9m for 49% of Dugbe. I would like to know what the 3 directors paid for their 19% of Dugbe. Why did they not buy HUM shares instead. This is absolutely appalling behaviour.
Mixed feelings. did we just write off 12 million to covid yesterday yet sell half of dugbe for 10. Sorry folks still getting my head round yesterdays RNS
Ordinarily I would completely agree with the last comment aw, but on this occasion the tiny company is led by some real big hitters who have significant contacts in the industry. I'm willing to guess if they say the project is a good one after doing the exploration work then project finance will be forthcoming.