Following my research I believe there's a very strong case that APAC will make a takeover bid for TAM given the following....
CAPITAL RAISING: APAC Resources (a Hong Kong listed resource investment company) has been building a 40.6% holding in TAM over the past year. APAC is currently finalising an unusually large capital raising (1 for 2 @ HK$1.10) for HK$447m (around A$85m) closing 15th April.CHANGE OF BOARD CONTROL: In November 2018 APAC without explanation switched our independent chairman to a non-independent - Arthur Dew who is also the chairman of APAC. In addition Brett Smith was appointed as a non-independent director (also a director of APAC and neighbouring Prodigy Gold PRX). IMO this is a very significant change in that it effectively allows APAC to negotiate directly with NST regarding the CTP, and in doing so it may well be in possession of privileged knowledge regarding the CTP's future.
IMO there are 5 compelling reasons for APAC to acquire the remaining 59.4% of TAM....
· STRATEGIC LEASE CONSOLIDATION: Allows APAC to consolidate its TAM/PRX acreage and geological knowledge into a large strategic position in this highly rated Tanami area, particularly given both companies share extensive lease boarders to the East, North and West. Major gold producers including NST, NCM and Newmont clearly rate this immediate area highly for potentially large Tier 1 discoveries.
· TAX LOSS UTILISATION: Purchasing 100% of TAM allows APAC to more efficiently utilise the $170m - $180m of accumulated tax losses. This is a substantial asset and by consolidating ownership it allows APAC quicker access and much more flexibility as to their use. Under this faster timeframe, their value is maximised and probably worth around $38m (at 22% of dollar value).
· EXPANDS COMMODITY TRADING BUSINESS: APAC has a publicly stated business strategy to become a "global resource conglomerate...in all aspects of the mining supply chain". I expect they could negotiate with NST to off-take a 25% share of Physical Gold in a similar way they have done with iron ore through their Mt Gibson holding. From a practical perspective, this would be difficult without full ownership of TAM.
· RESOURCE EXPANSION: APAC has stated it considers it's CTP tenement holdings to be "exceptional". I think NST would agree, as they too have suggested that there is excellent potential for resource expansion at depth at Groundrush & Hurricane-Repulse and geological similarities with Newmont's deep Callie mine. I expect NST's CTP strategy is to expand the existing resource substantially over the medium term through ongoing underground extensional drilling (similar to their Kundana EKJV operation). This strategy may also require a plant capacity in excess of 200/- ozpa.
· EXCEPTIONAL CASH GENERATION: At say 150/- ozpa TAM's 25% would provide close to $30m in cash flow pa with minimal costs, giving a current PE of 1.6x...Very cheap! However, if TAM's $28m cash, $4.5m in NST shares and $38m of tax losses ($70.5m) are deducted (or say withdrawn by APAC) the remaining ''Resource PE'' is less than zero at current prices and an amazingly cheap 2.4x at a share price of 12c.
CTP DEVELOPMENT: There is a reasonable chance that NST will provide mining plans for the CTP in their mid-year resource update, given they will have to start design and plant construction in the coming financial year to achieve FY2021 guidance...IMO this is the reason for the February announcement of ''discussions'' taking place. I expect NST's confirmation of mining could more than triple TAM's share price. After years of uncertainty, it instantly elevates TAM to a "cashed-up producer status" together with lots of upside from CTP's open at depth deposits.
BASE CASE VALUATION: Cash, NST shares and tax losses are easy to value at $70.5m. Valuing TAM's likely 25% resource share of 700,000 ounces (25% of the 2.8m) at a conservative $100 per ounce (given its well drilled, mining ready and open) is $70m and total assets of 140.5m or 12c per share. Coincidentally, APAC's rights issue of approx A$85m would allow them to pay up to 12c per share on the outstanding 698m shares. I expect this valuation will increase significantly with NST's decision to mine (and perhaps a resource upgrade) through PE expansion.
SUMMARY: Make your own judgement, but I believe there's a very good chance of an APAC takeover in the coming weeks. However, bid or not, I would certainly be waiting for a mining decision and a potential resource upgrade from NST before thinking about selling. From my observation NST has a history of under promising and over delivering and certainly not trashing over $60m on dud projects! TAM has a nice chart having broken out of a 3 year downward sloping wedge in December and has potential to retrace back to over 10c in the short term. From all the stocks that I research, I believe TAM has by far the greatest near term upside potential even if a takeover does not eventuate...In fact I believe a takeover is certainly not the best outcome from a 12-18 month outlook! DYOR.
