I’ve now had a chance to digest the deal. Here are my thoughts on some topics.
Funding gap
The first thing that stood out to me about the funding U-turn is that the entitlement offer is not under-written. I’ve crunched the numbers below:
- Obviously the placement proceeds of $19.9m can be locked-in. It is a firm commitment split between Appian Way and new insto, Greenstone Resources Inc (see bio, my view below).
- Bullet point 6 also says that ‘the financing is supported by firm commitments from existing insto shareholders…’. Further, on page 3 ‘Entitlements Issue - $44.2m’, that last sentence says that ‘the parties participating in the Placement will also be eligible to participate in the Entitlements Issue’. From these two comments, I have assumed that placement proceeds are locked in from Xstrata, BlackRock and Appian Way who together control 36%. We also know that there are a few other instos on the register – say another 5%. So all up, you can lock in 41% of the $44.2m or $17.9m.
- Now comes the tricky bit. The rest of the EO needs to be raised from the rest, i.e. us. Retail investors, big & small. The total that needs to be raised from this pool is $26.3m. If you do not take up your rights, you will suffer substantial dilution – but you never get 100% raised. Say we have a 75% take-up rate @ 8c which gives you $19.7m. This leaves a funding short-fall of $6.6m which is sizeable. However, there is a $2m gap between what needs to be raised ($77.7m) and what is being raised ($79.7m), so let’s call this $4.6m. If it is 50% it is higher, if it is 85% it is lower etc.
- It is clear from the release that the Royalty Transaction of $15.6m is contingent on the successful completion of the Placement and the Entitlement Issue. So we can insert some ‘sanguine speculation’ or scaremongering in here depending on your opinion.
- My big question mark then is who steps in for the $4.6m - $6.6m (assumes 75%)? Conventionally, this would be Bell Potter who sub under-writes this. Somewhat of a structural flaw as if there is a whiff of a short-fall, the share price will fall putting even more pressure on the EO.
- This makes me return to the comment that ‘the parties participating in the Placement will also be eligible to participate in the Entitlements Issue’. X-factor here is Greenstone so are they the ‘unofficial’ under-writer here?
The other issue I have is that we are raising funds in AUD and paying for stuff in BRL/USD. So we all need to pray that the AUD does not crater. The final risk with a structure such as this is that EO create large overhangs for the stock – this includes individuals selling stock to participate (assumes SP is above 8c) and individuals potentially bailing once stock has been received (stag profits or due to sp movements due to the timing gap between sending the check and receiving your stock).
Who is Greenstone Resources?
Next issue is who is Greenstone Resources? Our friend Google will help you all but here are some key observations from their web-site:
- It is a new firm – it started in 2013. The co-founders (Michael Howarth and Mark Sawyer) are mining industry veterans. Howarth is an ex JP Morgan MD and Head of Mining/Metals Corporate Finance who also has experience in listing junior miners. Sawyer worked in senior mining roles for Xstrata/Rio Tinto. They have a team of 4 analysts with plenty of relevant experience.
- Their philosophy is comforting – they describe themselves as ‘industry insiders’ who take a ‘long-term’ view. Their expertise is listed as ‘house a depth of real industry experience managing projects, construction programmes and financing developments’.
- My take is a solid and longer-term focused strategic investor that has done extensive due diligence on this from a technical, commercial and financing view-point. So i like having them on the register despite the lack of track record.
- Once again also proves how successful TP and Co are at raising funds in London.
Capex
Are we beginning to see the early signs of the project benefitting from the mining services annihilation?
The original capex budget was US$70m. We are now raising funding for US$60m. If you go to the accounts, assets under construction has $7.7m AUD; assuming an ER of 80c, suggests USD of $6m has been spent. So has a saving of US$4m been crystalised? What does that do to the project NPV? We won’t know until we see the capex spend for the quarter.
My view
- The most bullish aspect to this is that we have 4 separate and major mining specialist investors who are telling us that the corporate strategy stacks, that they like management, that Antas North stacks, that PB has great potential to stack and that Brazil will muddle through. They like the real estate and commodity and believe that AN gets us to self-funding PB. Good stuff.
- I have some concerns in the short-term around the funding gap – this is alluded to in the announcement but if it was under-written then I would not have to worry about it. So that is annoying. Does Greenstone step in? If not and BlackRock needs completion, then is this more dilution? Not a massive issue but sloppy and worth flagging.
- What happens here if the AUD tanks? Mgt has a natural hedge in place by having bought the large USD-denominated items already. Also the AUD and BRL will probably move in lock-step given the exposure of both economies to bulk commodities/China. But this risk is hard to quantify and we are unhedged for the project life.
- There is an almighty credit crunch going on in junior mining – I am mildly concerned that AVB was forced to take the drastic step of scrapping the banking syndicate and going 100% equity. Obviously this approach is not scaleable either as you would not want to wholly equity fund PB with a capex bill of $150-200m US. So this is a great unknown for mind. What I hope we do is get a large and well-funded JV partner in for PB. That or conditions thaw enough to get debt of approx. $75-100m away.
- What is good about this ‘credit crunch’ as that mining exploration and development is on hold – we are setting ourselves up for a massive supply-driven price spike in the not too distant future – so maybe this takes care of the credit crunch.
- If ever there was an incentive for a company to jack up the share price to well over 10c, this scenario is it. It is very bullish of management not to underwrite this so I am expecting plenty of solid newsflow on exploration, PB and building this mine.
Summary:
Amazing deal - $79m is 2/3rd of AVBs market cap – incredible really. I am pleased that mgt bit the bullet and brought in Plan B as it means we will have a copper mine by Q1 2016; an incredible achievement in this market. Once again, those of us who liked this because it is low on the cost curve and low capex we can pat ourselves on the back because we have met rule 1, our capital will largely survive this incredible commodities smack down. Hopefully survivorship bias will mean we make some super profits once the copper price normalises.
We are not out of the woods yet – there are one or two issues. But my hope is if there is a short-fall, then a mostly built mine means it is snaffled at minimal dilution. Also, capex may surprise to the upside here so net, net we muddle through unscathed.
So for us longer-termers (IMO, DYOR), you ‘bottom draw’ this one for the next 5-7 years & wait for the dividend cheques or take-over offer. That and you consider taking up your placement if the shares trade at or above 8 cents! If we have 100% take-up, my musings are irrelevant.
Luck to all. I am providing this with the hope that it is taken that the spirit it is intended, i.e. a balanced and pragmatic analysis that is cautiously bullish.
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