Roundtable Discussion; The Future of Mineral Sands. Watch the video here.
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Are you saying Tharisa bought 8.7% Karo for $93.6m, ie at a valuation of over $1 billion, surely I must be reading this quite wrong, please wiser or more financially literate explain it to me and of course Ilja keenly awaiting your wise illumination.
Ilja, it would be great to have your usual illumination on this, many thanks
Any comments from the company??
Re recent third party investments and their disclosure
To save anyone else doing the math's - Tharissa have paid $93.6m to increase their holding in 'Karo mining Holdings' from 66.3% to 75%.
I believe there is a requirement to disclose transactions valued above 5%. The initial larger transactions were RNS'ed. [1,2]. Smaller transactions I believe can simply be footnoted in the accounts. This appears to be what has happened i.e.
19-05-2022 : $8.1m for 1.21 % [3]
02-06-2022 : $9.9m for 1.29 % [3]
19-05-2022 : $10.2m for 1.22 % [3]
30-06-2023 : $27.3m for 2.33 % [4]
19-05-2023 : $37.7m for 2.68 % [4]
Rightly or wrongly the fact that the 8.7% increase has been done piecemeal and footnoted immediately raises a red flag in my mind.
So at the minute I have several problems with Tharissa
1) At this point in time the massive and existential gamble on Karo seems to be facing cycle downturn headwinds.
2) Behind the scenes I suspect some of the principles have agendas that are not in alignment with those of other shareholders. Tharissa shareholder funds seem to thrown with reckless abandon at 'Karo mining Holdings'.
'Medway Developments' appear on both sides of the equation. On the Tharissa side of the equation their investment into 'Karo mining Holdings' is significantly boosted by those of other shareholders. On the 'Karo mining Holdings' side of the equation they are not putting in any money but suffering minimal dilution. Happy days. I'd like to seem them try an make that fly on 'Dragons Den'!
NOTES
[1] : https://www.lse.co.uk/rns/THS/acquisition-of-a-268-interest-in-karo-holdings-8ucwqjaiifpnij9.html
[2] : https://www.lse.co.uk/rns/THS/exercise-of-farm-in-option-karo-pgm-project-pv8xtiaqa5v4fgk.html
[3] : https://www.tharisa.com/pdf/investors/annual-reports/2022/annual-report-2022.pdf - PAGE 166 note 20
[4] : https://tharisa.com/pdf/investors/annual-reports/2023/tharisa-ir-2023.pdf - PAGE 165 note 15
Hxulcolroh, thanks for your detective work, particularly the time time and prices.. To answer your question 1 I can only assume it is not a RNS reportable event but as you suggest it still seems to have been in a jungle of other information in the Annual Report. On your question 2, my understanding is that as 25% owners of Karo Mining, Medway would pay 25% of costs, although in the 30th Sept 2023 Consolidated Financial Statement under note 16, page 62, the total net assets of Karo Mining Holdings plc are $53.899m of which $53.899m are net assets attributable to non-controlling interest (Medway) after adjustments. It is understandable that over time as Karo is de-risked and some investments made and reserves proven that the asset value will increase.
I hope there is some discussion before we increase the shareholding to 80% and beyond and have some justification for this. Usually there is a Sale and Purchase Agreement in place and it would be good to know the terms and who decides on each side to buy and sell.
If you want to see a classic case of valuation and selling at the right time have a look at Eland Platinum. The Pourpoulis family make a big chunk of their fortune when they sold Eland Platinum for $1070 m to Xstrata, now part of Glencore, only for it to be sold to Northam Platinum for ZAR 175M ($13.4m) in 2017.
Hi Mike1959.
There would be an error in the last thing that I wrote. At the point at which Tharissa's share of 'Karo Mining Holdings' went from 70% to 75% for $65m rather than buy the 5% from 'Medway Developments' they would have diluted them by 5%.
It seems that at the point at which 'Karo Mining Holdings' needs funds Tharissa shareholders have the privilege of providing these while joint partners 'Medway Developments' keep their hands in their pockets and accept some dilution.
For the purposes of calculating the dilution the transaction of 31 July 2023 (below) put a valuation of ($37.7m/0.0268) / (0.85) = $1,655m on 'Karo Platinum'. This is absurd. How can the valuation of an unbuilt mine requiring considerable development funds dwarf that of the existing, larger, cash rich parent ?
I'd still ask why these transactions were not RNS'ed but buried in footnotes of the Annual Report ?
If as you say the plan is to increase Tharissa's share of 'Karo Mining Holdings' to 80% is this same travesty repeated ? Do Tharissa's shareholders only find out the details in footnotes in the next Annual Report ?
I'd still be of the opinion that something unsavory is going on here.
Hi Mike1959.
Tharissa's Karo valuations do look bizarre! Indeed if 'Medway Developments' managed to persuade Tharissa that 'Karo Mining Holdings' was worth >= $1,300m ie the overall project 'Karo Zimbabwe Holdings' was worth $1,529m (given that they own 85% of it) then they must be laughing all the way to the bank having shifted 5% for $65m. It does look like a wealth transfer from Tharissa shareholders to the principals of 'Medway Developments'.
Timeline
[1] : 13 June 2018 : a 26.8% interest is acquired in Karo Mining Holdings for $4.5m ( Karo Mining holdings valued at $16.8m)
[2] : 31 March 2022 : a further 39.5% interest is acquired in Karo Mining Holdings for 13.69m Tharissa shares/$27m ( Karo Mining holdings valued at $146.3m)
[3] : 31 March 2022 -> 30 September 2022 : a further 3.7% interest is acquired. ( Karo Mining holdings valued at ???? )
[3] : 30 June 2023 : Karo Mining issued an additional 3 800 new ordinary shares for a cash subscription of US$27.3 million to the Company. The additional shares issued represented 2.33% of the issued share capital of Karo Mining which increased the Company’s shareholding to 72.33%. ( Karo Mining holdings valued at $1171.8m )
[3] : 31 July 2023, Karo Mining issued an additional 5 248 new ordinary shares for a cash subscription of US$37.7 million to the Company. The additional shares issued represented 2.68% of the issued share capital of Karo Mining which increased the Company’s shareholding to 75.00%. ( Karo Mining holdings valued at $1,406.7m )
Questions
1) Why were the 30/06/2023 and 31/07/2023 transactions not RNS'ed ?
2) As currently 25% owners of 'Karo Mining Holdings' do 'Medway Developments' pony up 25% of all costs ? ( though if I was them I'd sell their 25% to Tharissa for the $325m that seem to be willing to pay (based on $65m for 5%)!
NOTES
[1] : https://www.lse.co.uk/rns/THS/acquisition-of-a-268-interest-in-karo-holdings-8ucwqjaiifpnij9.html
[2] : https://www.lse.co.uk/rns/THS/exercise-of-farm-in-option-karo-pgm-project-pv8xtiaqa5v4fgk.html
[3] : https://tharisa.com/pdf/investors/annual-reports/2023/tharisa-ir-2023.pdf - PAGE 165 note 15
The PGM supply/demand equilibrium with Marge Ryan
https://www.youtube.com/watch?v=n7BjuMqTADg
Feynzz, it is not just the capex investment but also buying the additional share in Karo.
In March 2022 Tharisa took a controlling stake in Karo paying the equivalent of $27m in Tharisa shares for an additional 39.5% stake (to the Leto Settlement Trust being the beneficial shareholder of Medway Developments Ltd which appears to be a Pourpoulis family investment vehicle. Medway Developments is also the biggest shareholder in Tharisa). In the interests of Tharisa shareholders, this deal had to be approved by an independent expert
Then in June/July 2023 Tharisa subscribes for more new shares in Karo for a cash figure of $65m increasing our shareholding from 70 to 75%.. I cannot get my head around this valuation and to my knowledge has not been explained.. The $65m paid for 5% implies that Karo Mining is worth $1300m or $1529m for Karo Platinum (allowing for the 15% free carry).Even the March 2022 Phase 1 Karo project had a post-tax Net Present Value of $770m based on a Karo basket price of $2500/oz (currently less than half that number). This $1300m valuation is more than double the Equity of Tharisa attributable to shareholders at the end of Sept 2023 of $616m.
We are told this 75% shareholding will increase to 80% this year, presumably for $65m+?This increase to 80% will still leave 20% with the Leto Settlement/Medway, would Tharisa look to buy this 20% in the future?
With the ongoing debate on this board regarding the commercial rationale for going ahead with Karo we should ask is this additional spend on Karo shares the correct thing to do and at what price.
So I still argue if we go ahead with Karo taking the capex and share spend into account is going to be considerably more that $100m. Great if the PGM basket goes up but if it does not.....
Ilja, thanks for your response and clearing that up and I put my hands up and apologise for any confusion caused. Can I please ask a few questions.
So you are saying that Tharisa has already capexed on Karo $98.6m up to early December 2023 and will commit to a maximum $130m (a further ~ $31m), then there is the $36.8m VFEX bond ($10m invested by Tharisa owned Arxo Finance) which is guaranteed by Tharisa . So the remaining required capex of about $160m will come from funding supported by the Export Credit Insurance Corporation of South Africa and will be ring fenced for Karo, alone, to totally fund without any parent company guarantees or liabilities from Tharisa? If Tharisa is guarantor to the Karo debt then it is not really ringfenced to Karo alone.
The same report states " Karo Platinum FY2024 capital spend budgeted at US$244m, subject to ring fenced funding" so 4 months into the 12 month financial year, as the ring fenced funding has not been announced can we conclude that it is highly unlikely that the US$244m will be spent by the end of September and that the revised FOIM targeted as June 2025 is no longer achievable.
When do you expect news on this ring fenced funding? If the ECIC does not like the commercial case for the investment and declines the funding then where does that leave the project (having already invested up to $130m and backed the bond of $36.8m)?
.
Thanks for clarifying Ilja, that is exactly what my understanding was. Rest of the capex dependant on Karo securing ring fenced project finance which is the protection we need as Tharisa shareholders.
Mike 1959, your analysis is wrong, we showed the numbers at our results presentaion in December, the line "Tharisa capital allocated with US$98.6 m invested to date" being key while we make it very clear that the ~260 outstanding is ringfenced for Karo to fund, Tharisa is not stepping in, we have committed our $130m as always stated, karo raised ~36m in the bond and the rest they need to fund as per below and as per the presentation
FUNDING
Multiple funding streams with different timing requirements
Current equity stake increased to 75%, on flow of balance of Tharisa equity commitment will increase to 80%
Tharisa capital allocated with US$98.6 m invested to date
VFEX bond listing – raised US$36.8 m
Ring fenced project funding:
ECIC supported funding – ~US$160 m
Balance funding – working capital, pre-pay, project finance
It’s a great shame that Tharisa have bet such a large amount of shareholders funds on the future of PGMs when it might have been more prudent to invest in another metal such as copper.Think of what a $400 million investment in copper could have yielded for the shareholders -a metal with a very rosy future with less uncertainty than PGMs
Mike, I was of the impression that 2/3rd of the cost is not committed yet as they have not signed mining contracts yet and that would only be done once they secure ring fenced project finance. Maybe Tharisa could confirm
Good synopsis Mike1959.
Having successfully invested in THS in the past I recently revisited it quite shocked by it's current valuation.
I've walked on by as IMO Karo poses an existential risk and the die appears to have been cast.
Regardless of whether it eventually all comes good the 'bet it all on red' strategy from management represents a gross mis allocation of capital and Phoevos's 'patient capital' rational doesn't cut it. Anybody who knows anything about commodities knows that the cycle can move against you and such risks need to mitigated. No hindsight was required to anticipate the current situation.
For now I'm an interested bystander.
Feynzz, we have discussed before and I totally agree with you that Tharisa is crazily undervalued on all metrics and with 4 months of the HI financial year now completed I think the market is underestimating the H1 result.
But on Karo the capex with the latest 12 month delay is going to be around $430m and I reckon nearer $150m has already been spent rather than the $100m you mention and that investment could be nearer $300m by the end of this calendar year. Furthermore, by now Tharisa must be legally committed to 80%+ of this capex even if they have not yet parted with the money. Extensive purchase agreements will already be in place for the long lead items and it would now be difficult or press the stop buttons. Tharisa could delay for another 6- 12 months but this will increase the capex costs further and would still incur some running costs particularly the hundreds of people already employed. So even abandoning Karo now could cost $300m + in write-offs.
It is so strange for a company generating $40m in OCF per quarter ($160m p.a.) to be trading at an EV of £90m. I wonder what would it take for Tharisa to abandon Karo? If they write off their $100m invested so far and scrap the project, the share price will double from here. Ironic!
Sotolo, the first one is the important one, the other two are just a guide to check against the South African chrome concentrate price (40-42% chrome content CIF Chinese port. Incidentally this was very slightly higher this week.
Thanks Mike, so ignore theSA HC Ferrochrome and Turkish prices, wonder why Ilja posts them,
Sotolo, we have been here before!
The first one, which is what Tharisa produces (plus the higher quality).
The other 2 are just guides (South African High Carbon ferro chrome is produced from concentrate and the 3rd is lumpy chrome produced in Turkey).
Ilja, thanks for your weekly basket figures but please which of these three is most important to us or all equally so as the first seems to be gently descending while the last rising?
SA Cr203 concentrate 40-42%
SA HC FerroChrome 50%
Turkish CrO, lumpy 40-42%
Here in the UK I suppose wewill have to see how the Zero Emissions Vehicle mandate which started this month goes. This requires all car manufacturers to sell minmum 22% ZEV's this year , increasing to minimum 28% nezt year and eventually 80% by 2030.othwise they are fined.
Https://www.reuters.com/business/autos-transportation/ford-reduce-f-150-lightning-production-2024-01-19/#:~:text=Jan%2019%20(Reuters)%20%2D%20Ford,has%20been%20lower%20than%20expected.
EV issues -
INCREASED CARBON EMISSIONS: over it's life time an EV with decent range will be responsible for MORE NOT LESS carbon emissions than an ICE (explained in 90s below). Considerably more 'stuff' needs to be mined, refined, processed and manufactured to create an EV. On the road there may be zero emissions but these will probably just have been moved to the nearest fossil fuel power station.
RANGE ANXIETY: For longer journeys the recharging infrastructure is poor and the overall experience is a highly unsatisfactory. It takes a long time to charge a battery. If there is a queue it will take even longer. Where multiple stations the available load is probably reduced and shared amongst the stations. To interact with the station you may well have to 'download an App' and register with numerous service providers.
TYRES: EV batteries are extremely heavy (Eg Kia EV6 : 477.1Kg). Electric motors are more powerful than their ICE equivalents. Put the two things together an you have a vehicle that will chew through expensive tyres.
FIRE HAZARD EV batteries are a massive fire hazard. Considerable effort is taken to mitigate the risks but it is always there.
INSURANCE: Any damage that might compromise a battery will require an extremely expensive battery replacement. Minor shunts can turn into total write off’s (a replacement battery would cost more than the residual value of the car). Further EVs are much heavier with power to match so any collisions will be more serious (there probably needs to be a review of road crash standards). Consequently insurance costs for EV's are significantly higher.
DEPRECIATION: with increasing 'flying hours' it is becoming clear that EV hype does not match reality. Unfortunately early adopters are finding that their very expensive purchases have very poor residual values.
RAW MATERIALS: current mining capacity is incapable of delivering enough raw materials to deliver 'GEN 1' of an EV fleet, never mind the massive upgrade to power generation and distribution infrastructure that would be required to make it work. World wide there is a moratorium on opening new mines. This is incompatible with 'we need more copper, lithium, cobalt, graphite etc for EV batteries'. Little or no thought seems to have been given to what will happen with the large pile of toxic 'GEN 1' batteries when they are thrown on the scrap heap.
THE CAR OWNS YOU AS MUCH AS YOU OWN IT: An EV typically comes with lots of 'smarts' and may well require that you interact with it though an 'App'. It will have lots of opinions about it's use. There are many reports of owners being locked in or locked out of their vehicles when 'computer says no'. Manual knobs may well be replaced with touch screen menus that are a distraction hazard. Manufacturers will log GPS records, internet activity etc.
Carbon footprint of an EV explained in 90 seconds https://www.youtube.com/watch?v=S1E8SQde5rk&t=510s @ 8:30 min -> 10:00.
Interesting read
Https://www.acea.auto/pc-registrations/new-car-registrations-13-9-in-2023-battery-electric-14-6-market-share/