coverage

http://www.iii.co.uk/articles/articledisplay.jsp?section=ShareDealing&article_id=10104732

stock to watch

Part of the stockmarket's intrigue is that, just when you may think business has got mired in sultry summertime, news pops out that radically transforms prospects for a smaller company that quite looked as if withering on the vine.

Such may apply to AIM-listed European Nickel (ENK), a small cap miner where it has been announced that Hunter Dickinson, a substantial Canadian miner, is to fund two share placings at big premiums to market price - as a key step to getting bank finance for the company's main nickel laterite project 'Caldag' in Turkey. This project has dragged on a few years now and shareholders will incur dilution of about 30%; but overall, Hunter Dickinson's involvement and judgment as to the shares' latent value look positive factors.

Hunter Dickinson is to invest just over ?40 million equivalent via 10.5 million shares at 32p initially, then another 83.33 million at 44p - after all this has both been approved by shareholders in six weeks' time and about ?200 million equivalent in bank financing is hopefully completed in the fourth quarter of this year.

The way this placing has been priced, implicitly Hunter Dickinson concurs with the company and its advisers that ENK equity will be valued significantly higher once bank funding is in place so the project can evolve. The existing AIM shares have risen over 30% to about 24p on the news although this is still well below Hunter Dickinson's entry level.

For an alternative investment view on European Nickel, watch this episode of iBall TV from our archive.

It shows how the market continues to factor in a high level of risk regarding small cap mining projects although this area of the market is also about weighing probability - which now looks to have moved significantly in ENK's favour.

From Hunter Dickinson's website - www.hdgold.com - you can see this company has a fine track record of acquiring and developing mineral assets, so Caldag ought to have met its tests and Hunter Dickinson's involvement as a strategic partner should be beneficial. ENK's chief executive says: "Their expertise will complement our management team and technological know-how to assist the successful delivery of the Caldag project."

Latest estimates show Caldag's reserves of 33.2 million tonnes and 20,000 tonnes of nickel production a year is targeted over a 14-year mine life.

Low-cost 'heap leach' technology imply a net cash operating cost of US$3.59 per pound of nickel and an estimated capital cost of $6.12 - to derive a net present value for the project of $490 million at a 10% discount rate, with an internal rate of return of 32.4% at a nickel price of $7 per pound. Well, miners do tend to trot out impressive statistics at key moments like capital raisings, but at least you have the comfort that the principal assuming the largest risk and agreeing price of equity issue is a blue chip miner - having had detailed access to the books and site.

It packs a better punch than a broker note.

ENK has needed to spur confidence surrounding Caldag, to secure its equity funding element then conclude bank finance. Despite its shares recovering from about 30p to 45p last April, the chart has been in an overall downtrend - most likely while investors have lost patience with the time involved to unlock value at Caldag. In late May, the company was advised that conflicts between Turkish mining and forestry law meant a number of permits to mining companies were ruled unconstitutional by the Turkish courts, and a forestry project permit at Caldag was withdrawn; however this appears to be being reversed. The story has needed a genuine boost, which Hunter Dickinson provides.

Project wise, it has meant ENK going down other avenues such as a merger with Rusina, a joint venture partner in the Philippines.

An option for a Chinese company to take a stake in Caldag expired with ENK saying in its interim results a month ago: "we believe better terms for an equity investment by a third party can be obtained" which foreshadowed this latest announcement. Banking discussions were said to be "significantly progressed".

The interim financials showed how ENK shares remain speculative. Reporting in US dollars, ENK made a $5.3 million operating loss in the six months to end-March 2010, this involving $3.8 million administrative expenses; there was also $1.3 million interest payable bringing the six months' loss near $7 million. The balance sheet had only $5.9 million total liabilities within $137.6 million net assets although cash remained low at $1.2 million.

A situation like this has needed an industry operator to seize the opportunity with a deeper sense of intrinsic value to unlock, as the stockmarket is indeed prone to lose interest given the weak financial statements and varying progress both with the project and financing. It does however all add up to a significant shift in ENK's risk/reward profile that is now attracting buyers in the market.

It is also quite akin to Dana Petroleum (DNX) - a stock I have previously written about - where you have a share languishing and the market unwilling to recognise value, although Dana does have strong established cash flow. The spice with smaller exploration and development companies, be they in minerals or oil and gas, is scope for industry to put a much bigger valuation difference from the market, as we see by Hunter & Dickinson. They cannot have bought in at a weighted average price over 40p without seeing firm prospect of return on equity from this level.

You can learn more information via enickel.co.uk.