Yesterday we held our Annual General Meeting, and our thanks to all those shareholders who were able to attend.
All resolutions were passed, and consequently the share starts trading today in the new, consolidated, form.
We had not thought to comment on this purely technical change. But one person at the AGM asked a question that raised a concern we do not normally come across, and that undoubtedly had its origin in the reading of some chat room or other. We tend to deal with those who email or telephone us, thoughtful and analytical shareholders, and professional advisers. Their outlook is rational; their points reasoned.
But there is a whole other world out there: beyond the realm of reason. There is a shadowy world of hopes and fears, of campfire clashes and drunken brawls, ‘where ignorant armies clash by night’ in chat rooms which at times attract the same clientele as the Space Bar in Star Wars or the sinister roadside inns beyond the borders of the Shire. At this time of year, when as the nights lengthen our pagan forefathers believed the supernatural world came closest to and sometimes mixed with our world, and trolls came down from their icy caves, superstitions can appear like truths, and though we no longer inspect the steaming entrails of sheep to tell the future, we are sometimes scarcely more rational.
The private investor will come across such views. He will be interested to know how we respond.
So we were asked: was it not true that share consolidation would, inevitably, or at least usually, lead to a decline in price of a share? We pointed out that our analysis of other consolidations before we made the decision to consolidate had showed this not to be the case. We said that when we had challenged people to give examples of this happening we had been given examples which on analysis proved no such thing. What was true was that there were two typical cases in which a company might consolidate. First, when a period of poor performance had led to a very low price and perhaps far too many issued shares. In that case, ceteris paribus, with nothing else changing, one might expect the poor performance to continue post-consolidation, for the consolidation changed nothing fundamental about the company, and indeed that appeared often was the case. Secondly, when a company was making determined efforts to turn itself round, perhaps with the injection of new business or a change in direction, or with new personnel coming in. Very often then a consolidation would be part of the rebranding and relaunch. In such cases, sometimes following a suspension, one might expect a good price performance, and again that appeared generally to be the case.
So performance broadly followed fundamentals, exactly as a rational man might expect. Why would anything else happen?
An Australian study, attached, came to the same conclusion after analysing 41 consolidations. Indeed, it identified a mildly positive effect.
In other words, even the weaker form of the proposition, which is that because people expect price weakness post-consolidation it becomes a self-fulfilling prophecy, which at least has a semblance of reason behind it, turns out not to be true.
There are reasons both for the persistence of the myth, and for the better performance.
First, imagine a chart where the left-hand or X axis goes from 0p to 30p. The bottom or Y axis from left to right is a time series of 2015. Earlier in the year the price of company A was 30p. that is why the X axis has to go to 30. It fell in 3 months to 10p. You look at the chart: it really looks like a steep fall: easy to see that is 66% down. Then it drifted gently for a month. Then it fell from 8p to 3p. Then over the next 4 months it fell from 3p to 1.5p. Now a strange thing: you look at that slope from 3p to 1p and your eye tells you it is almost flat: it looks a gentle slope,
hardly like a decline at all. Yet the percentage decline is again 66%. If the X axis were from 0 to 4 you would see it quite clearly, but the earlier step decline from a high level tricks the eye. This year there are many charts like this.
Now take it a step further. Imagine a 1:30 consolidation. Suddenly the price is back at 30p. From this level a continuance of the decline, even at a gentler rate than the previous 4 months, looks like a fall off a precipice, just like the fall at the beginning of the year. Yet all that has happened is that a pattern of decline has persisted. As would be the better than 50% probability, in the absence of substantive change in the business.
One can show some people any number of studies showing that the effect they imagine does not exist. And they will walk away muttering ‘but....’, entirely unconvinced. My strong suspicion is that among the reasons is a preference for relying on their own eyes (and an unadjusted chart) in preference to being lectured with numerical analysis. This is an old wives’ tale that in defiance of all reason has got legs.
Secondly, the better performance. A rational management has probably taken the decision to consolidate after some thought. In our case we said: some people have raised this difficulty of seeing the price display clearly on the AIM screen and on Bloomberg because of the places to the right of the decimal point, and asked for the change (if they get written account statements they may face the same problem). We see the rational point that lack of pricing transparency must discourage trading which thrives on transparent pricing. Some say the spread is huge because the market-makers at this price level become less price-aware and almost give up, and this price spread discourages buying and selling because it is more difficult to make money: again, a rational point because wide spreads must reduce liquidity, and active trading requires liquidity. Again, a rational point.
Some say the large number of shares and the tiny price make it hard to deal or to take the company seriously, which is a sentimental point, but invokes factors known to influence investor behaviour and so must be taken seriously.
We note that humans generally are bad at calculation with very small and very large numbers, and with a very low price more mathematical errors creep in, which is an inconvenience and irritation for investors.
We also have the firm intention to change the business, which has already begun, so the signal sent by consolidation is not an isolated signal but part of an overall plan of rebranding and repositioning.
Given these factors, we decided on a 0.5p, plus or minus, target range post-consolidation and so 25:1 which would give 241m shares trading, a number which is still enough for active trading.
We suggest that a number of consolidating companies will have gone through a not-dissimilar process of ratiocination to ours, and that the numerous small conveniences often created by the process will have sufficient of a net positive effect to explain the slight upward bias in results in some studies.
On to business
But in the end, such effects, nugatory or not, must be transient. The real question with any company must be: “Where’s the beef?”
In the case of Red Rock we have explained repeatedly and at length the significant underlying value we have in our Jupiter Mines holding. We have worked to turn round SRT (formerly RSL) so that it now produces value as well as liquidity for us. We have redeployed some money into low-risk low-cost onshore oil development in the U.S. in order to develop a reliable revenue stream, and have put down a marker in onshore oil exploration in W Africa near the border with Nigeria. We have sold and from 2016 are entitled to a stream of income and payments totalling $4.5m from gold assets in Colombia.
Meantime we have valuable assets where we are in a holding pattern: whether asserting our claim to an initial 1.2m oz in Kenya (potentially much more), or awaiting highly prospective licenses in Ivory Coast, or elsewhere.
We have cut our cost base radically, repaid our financial liabilities and restructured radically our balance sheet. We continue to cut costs, and will be renting out space so that we eliminate office overhead.
Our whole aim is to achieve a point where we can say we are cash flow neutral, and then become cash flow positive. At that point we can grow off a sound base in the much altered market. If, as may happen, some unforeseen introduction or opportunity creates a chance to add substantial shareholder value before that steady transformation is complete, then that is upside. Such chances may appear now that most risk has been eliminated by our actions in 2015.
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We look at the Company, and then we look at the market value. There is a mismatch in our view, though we are aware many other companies might say the same. If we are right, then any unjustified and transient price weakness as a result of the purely mechanical exercise of consolidation is merely an opportunity. If we are wrong, there will be plenty to tell us so.I wish you all, on behalf of all of us, a very Happy Christmas and an even more prosperous New Year! Andrew Bell
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Red Rock Resources PlcIvybridge House, 1 Adam Street, London WC2N 6LE Tel: +44(0)207 7747 9990 / E: [email protected] Office: 55 Gower Street, London WC1E 6HQ Incorporated in England and Wales Co. No. 5225394www.rrrplc.comFollow us on Twitter:RRR_RedRock
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