Roundtable Discussion; The Future of Mineral Sands. Watch the video here.
I don’t think the read on the Dugbe deal is right (of which I was guilty when it was released). Having been through in more detail, there are three elements of the deal for which ARX gets UP TO 49% of Dugbe: 1) spend on exploration of at c.$10m, this is in addition to the $2m non-refundable deposit to HUM, 2) fund the DFS - I suspect that will cost at least $20m to do over 2 years maybe more, 3) fund ongoing costs of the license which from memory should include various payments to GoL following grant of the MDA. All in that suggests at least $35-40m could be invested by ARX to achieve their 49%. Now that is less than the $78m spent to date, but as discussed, it’s valued at $0 in the share price and would have been valued negatively if HUM decided to go it alone. So we’re giving up some sunk cost that’s valued at nothing by the market for a 51% implicitly valued by ARX at upwards of $35m, allowing HUM to retain control and participate in the upside. Importantly the drill programme is likely to uncover many more oz of gold based on the historic success of the historical drill programme, the Central License appears to offer further upside. Clearly the deal’s not done yet - ARX need to raise the capital, so we’ll have to wait for that to have any hope of this being value accretive, but as a template for the deal this to me feels like a decent deal. That Dan, Ernie and Thomas have decided to invest is then a separate point and is probably personal investor taste as to whether you like it or not, on balance I am in favour: shows their commitment to a forgotten elephant in the jungle, I wouldn’t be surprised if it was a condition of the deal - HUM’s already got majority, so the directors putting the money where their mouth is - should attract other investors and ultimately the independent board is comfortable. If you don’t have faith in the board, again personal taste, frankly you should think about selling your shares... I look forward to hearing about completion of the deal and confirmation ARX have raised the necessary funding.
Worth noting that the Annual Report is now on the website - has some more detail on the balance sheet.
The drop is because gold has fallen 1.5% (or 2% in £s) on back of more positive US job numbers. The whole gold sector is off c.5% - nothing to do with Dugbe.
Hi CD, thank you for your thoughts. Your point about cash from HUM into the $2m investment is well made. I agree that it does have an unhelpful symmetry with the Bunker Hill ‘investment’ in terms of quantum. Nevertheless, I see them as two separate deals, BH was buying into a new project to expand the portfolio (it’s another matter as to whether we agree it was bad deal, yet to be determined but it doesn’t feel good) and another was to diversify risk from an existing investment. On the latter, $10m needs to be invested - a good round number for broadly half of the project, which feels investable. A lower investment may not be as attractive and putting more money into Dugbe was not viable for HUM. Whether the deal was run by shareholders or not, I have no doubt that institutions have been clear that they do not expect Yanfolila cash to be reinvested into Dugbe, so what choice did the board have? Ultimately they need to raise $10m from outside HUM while still keeping HUM in control - which is what they have achieved and can ultimately take control of ARX through conversion of project ownership into the company. That the management team have invested alongside the ARX guys, should make the deal look more attractive to new investors - clear sign of confidence. Whether you like that or not Is in my mind a separate question from the terms of the funding. I don’t think HUM has been ripped off given the work, expense and risk involved. On reflection I would prefer that Dan and team bought more HUM shares and keep their exposure through that, but at this stage I don’t smell a rat.
I would also add, raising equity has the massive disadvantage that the HUM share price remains depressed relative to value. So say you raise equity, you would issue at a discount, and give up short-term Yanfolila value for speculative Dugbe value. I don’t think the existing investors would thank management for that. Perhaps if the share price gets to a sensible valuation then maybe HUM can part fund some of the future Dugbe construction cost and keep a larger share of the project from there.
@retiredbanker: a great deal of historic value sunk on Dugbe on the balance sheet, but zero value in the share price. Given that, spending money from Yanfolila (value positive) into a project that is being valued at zero will be valued destructive irrespective of the sunk cost. This way not only is exploration and DFS funded, but the management / admin cost of Dugbe is too. The alternatives are to continue to sit on the project risking the Government of Liberia taking it off us and draining further cash, or sell outright. I suspect the sale would be at a poor value given no DFS completed among other issues, and we would retain no upside potential thereby requiring a much bigger write off today. I will hold fill judgement for when ARX get their funding in place over the next few months, but subject to that I will be pleased that the project can be advanced.
Can we be clear: the three HUM directors have a stake of 39% in ARX, but that is before the equity raise required to fund the $10m, so I assume they have collectively stumped up $2m for the exclusivity deposit. So $780k, on average $260k each / £200k. The remaining $10m (maybe $8m if the deposit is in the $10m) will dilute them to c.8% of ARX and therefore a see-through 3-4% of Dugbe. We’re really not talking a ridiculous play to the disadvantage of HUM, especially when it is patently clear that HUM shareholders do not want to fund and take the risk on the next steps on Dugbe. As they also say in the announcement other investors had been working and had made proposals which were not as attractive and I can imagine given the relative novelty of this mine in Liberia, the pricing of a 100% sale would have been penal to such an extent that the same people moaning now, would have been spitting. Progress the project at now risk for 2 years and then see if it’s sellable or developable at that point.
@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.
My read is also that ARX will cover running costs associated with Dugbe over the farm in period, so reducing ongoing cost and drain from Yanfolila. Again, that should be helpful to cash return for shareholders.
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.
@Iaintittle: the big differences between EBITDA and the $9.4m net profit is depreciation and interest. They will heavily depreciation the investment in the mine given write-off period.
Surely it’s “one swallow does not a summer make”? What have Sparrows got to do with anything? Will read the rest with interest, but the pedant in me couldn’t let this go...
Some key points:
- £53m passing tent (1% pa inflator)
- £400m equity value (based on 100%)
- £377m of outstanding debt (£211m Highbury - 7% interest rate, and £167m Dragon - floating rate notes - unclear whether swapped to fixed rate)
- £777m Enterprise Value
- equates to a gross yield of 6.8% with break in 2023
Amortisation profile of £62m over for 2021 and 2022 plus c.£17-18m interest cost if Dragon not swapped. Leaves net £9m of free cash.
- unclear what market rent looks like against passing, but given referred to a ms reversionary and it’s been stepping up at 1% should mean there’s more yield to extract. Feels very good for a predominantly South East portfolio.
Yes, they could walk away, but I suspect the portfolio will predominantly be high performing stores otherwise the team wouldn’t have gone for it. Majority of the stores are in keeping with the strategy and there appears to be a load of reversionary potential. I expect that either they will be relet to Sainsbury at an attractive yield with a refi at very attractive rates or Sainsbury will buy the whole thing back netting a healthy capital value gain for SUPR. Feels like 10% plus per annum capital gain with opportunity to convert into high yielding investment post lease regear / refi. Wouldnt want all the portfolio in this sort of structure but £51m is 10% which feels fine. Would be nice to see some more deployment in direct assets in the not too distant future.
https://www.londonstockexchange.com/exchange/news/market-news/market-news-detail/SUPR/14553812.html
@Iaintittle - agree with the thought process. Above a level of POG the business is generating excess cash. If they are ‘sustainable’ at or below that level, then the excess can be distributed unless there’s another immediate good use. It may be slightly too early for this year (although I don’t think it is) but $10-15m return split part sustainable dividend part special (cash or buyback) would be appropriate or at least a signal of intent. The framework for how they will think about and calculate such a return policy will be as, if not more important short term, than the return itself, demonstrating confidence, discipline and that they know what they are doing. Roll on FY19 results and Q2 update!
My feeling on dividend / share buyback is about the board setting out a clear capital allocation policy, that sets out the order of priority for capital. So they should reiterate desire to get debt down to zero (is that net or as far as gross before next order of priority? Surely net), then what will they do with excess cash? How much will be used for expansion drilling for resource / reserves? Then after covering that what will they do with excess and how do they define that. To some extent that will be a judgement on gold price ie if the gold price is above a certain level then the business is generating excess cash. That could then be used to inform the market on what it should expect ie. up to a certain point you’ll bet a dividend, beyond a certain point you’ll get special return for the excess cash generated from the extra gold price. They could then say that subject to the board’s judgement on the share price, this special return could come by way of share buyback or cash return. That way the market can be more certain around usage of cash / capital, timing and quantum of payments based on investors own views of POG and the channels between which the board will act to deliver returns to shareholders. I expect that to come with the final results for 2019 in the next few weeks - to give comfort that the board is considering how it returns capital to shareholders short of value enhancing M&A or a JV in Dugbe. Doesn’t mean they will announce a return but the structure for decision-making on future returns (although I think some return by cash or buyback would now be appropriate).
Don’t shoot - I’m a decent size holder and am bullish on HUM, but in interests of balance here are the negatives from today:
- Transport issues are delaying gold sales and likely causing other issues in supply chain (materials, agents, people and spare parts) which could pose a major operating risk
- Cash down to $8m, means they needed to refer to the RCF as a necessary backstop
- Drill programme not very far advanced, still feels like mine life extension could be not until the back end of the year
- BunkerHill: profitable? I don’t understand the rationale or end game for this
- Dugbe: sounds like no progress at all.
I suggest that the first two points were effectively priced in to the share price. No value for Dugbe currently priced in, but I was looking for management to earn crust on this. BunkerHill is weird and drilling could be further advanced. Overall I’m content with update but I don’t see it driving massive share price increase. Hold for H2 results...
@Blackfisk - that would be insider dealing.
It’s not a poor RNS, it was a necessary one as they had to tell the market what shares were vesting to management and which ones lapse. As it stands, Dan Betts stands to make c.£57k from these shares (227k shares at 25p) as of today, as the majority of the potential award lapsed. He’s running (we can debate how well separately) a £100m company and is getting a share award of £56k - while a lot in the context of U.K. average wage, for a CEO of a listed business, operating in something of a challenging environment, now hitting its target, that’s really not very much money. Had a much greater portion of the scheme vested given performance last year, some of the mistakes etc, I would have been irritated, but this does not feel egregious.