options?

What a mess! I don’t think either party comes out of this well.

To me there are four possible avenues from hereon:
i) Continuation of legal actions (and subsequent appeals);
ii) Strange Investments to purchase Globe Drill
iii) Renegotiate agreement b/w Strange Investments/Globe Drill
iv) Splitting of Globe Drill from Coretrack

i) Continuation of legal action. From the asx announcement it seems that both parties are at fault to some extent – CKK made modifications but Strange Investments did not provide notice to remedy. Also, it would seem given the emphasis on “delivered to” in the announcement suggests that ownership of the rig is in question under the circumstances of a breach/alleged breach (depending on your perspective). If the legal actions continue drilling contracts (either for CKK or Strada Energy) can be forgotten.

ii) Strange Investments to buy Globe Drill. Globe Drill is a 100% owned subsidiary of CKK, but whilst CKK is listed Globe Drill isn’t. Also given the legal actions being taken and the rather poor IP agreement (for all parties), no one else is likely to be interested in Globe Drill as a going concern. The problem here is that perhaps WS does not have the funds to do this (and I’m happy to be corrected if this is not the case), as if he did why sell Globe Drill in the first place. By putting up the book value of Globe Drill’s assets, perhaps CKK is open to this.

iii) For me, the current events have shown the fault lines in the IP agreement between Globe Drill and Strange Investments. When all parties were working together it didn’t matter so much, but now its a big problem for CKK/Globe Drill and Strange Investments. CKK’s board can’t: spend money on the drill (to address the problems identified at O’Callaghans/Telfer); raise additional funds to keep the drill as a going concern; negotiate contracts etc. given the nature of the agreement and questions about ownership. Also as mentioned by others the board would not be fulfilling its duties properly if it dry hired the rig to a shell company without guarantees. Similarly, Strange Investments can’t move forward with the IP with other parties given that it’s in legal dispute, and doesn’t have a rig to support its contracts – given that ownership seems to be in legal question. So, the only way for the parties to move forward together is through a renegotiated IP agreement – one that clarifies ownership and rights of both parties. That will be the only way CKK/Globe Drill would be able to raise and spend additional funds for the GT3000.

iv) Splitting Globe Drill and Coretrack. There are a couple of problems with this: a) Globe Drill is not listed so how will shareholders monetise their investment; b) in the near-term Globe Drill will need to raise additional funds and that may be more difficult as a non-listed entity. But more importantly, the problematic IP agreement will still be in place, leaving those shareholders who went with Globe Drill exposed.

To me, at present, it is difficult to reconcile the argument proposed by some that WS is acting in the best interests of CKK shareholders with the actions of terminating the IP agreement and wanting delivery of the rig. Also, with securing the overseas contract through his shell company rather than CKK/Globe Drill directly – in the latter case there would not need to have been a guarantee b/w Strange Investments and CKK. And Strange Investments would have got 10% of gross profits, and the technology on its way to be proven. Further, if WS wasn’t happy with the board surely he could have collected the 5% of shareholders required for an EGM (that would have protected shareholders whereas IP license termination does nothing of the sort). And the assets of Globe Drill (the majority of the book value of CKK) are owned by all CKK shareholders, and that makes a split difficult to achieve.

So to me, the key questions are whether WS has the capacity (an/or investors) to buy Globe Drill from CKK, or whether he is willing to renegotiate the IP agreement with Globe Drill. If not, all I can see happening is CKK selling off the Globe Drill assets that are not linked to the IP agreement and legal action continuing. It doesn’t matter who is on CKK’s board, board members would not be exercising their duties to their shareholders by spending money on a technology where ownership is in question and an IP agreement that severely limits their ability to address problems with the technology (either major or minor). So, effectively the ball is in WS’ court with regard to GT3000.

But its not all doom and gloom. CKK has a technology that has worked at its design depth, and is low capital cost with potentially high margins (based on the last presentation - and yes I know trust is at very low point at present!)– the CLRS. Coretrack needs to secure its first commercial contract for the CLRS. It doesn’t take much effort with a spreadsheet to crunch the numbers that show taking the CLRS forward creates significant value for CKK, with a lot less capital required than the drill. At 2c/share its a great buy in my view.

I’m not sure that CKK pursuing other opportunities is in the best interests of its current shareholders – focus on the CLRS and if possible resolving the drill rig/ IP/ relationship with Strange Investments.

Personally, I’d like to see the mess between CKK and Strange Investments resolved and CKK moving forward with the CLRS and the drill. I invested in CKK because the two different techs diversified the risks of either one not being successful. I didn’t bank on the rig sitting idle due to a legal dispute – that’s not in anyone’s interest, not CKK shareholders and not Strange Investments.

Regards,
jazz