Dryblower catches a whiff of deals brewingMonday, 17 June 2013
WHAT happens when the cash runs out? From Dryblower’s experience, it triggers an urge to merge. Nowhere is that urge more apparent than among the small copper hopefuls close to Sandfire Resources’ Doolgunna operations in Western Australia.
Until recently, the potential players in the Doolgunna merger waltz had not had much to say to each other. It seems that personality differences kept getting in the way, plus a desire by all involved to be king of their own castles.
Unfortunately, there is only room for one king in a story and this time it is Karl Simich, chief executive of Sandfire and a man likely to be amused by Dryblower crowning him King Karl.
The pretenders to the east and west of Karl’s kingdom are led by two companies that may have a chance of becoming copper producers like Sandfire if not for a triple-crown of problems; the low copper price, investor and banker indifference towards small explorers and empty treasuries.
Other observers of the games being played in the Doolgunna region, which is unquestionably one of Australia’s toughest locations for starting a business, have commented in the past about the potential for mergers, if only in the name of survival through the current financial winter.
What triggered Dryblower’s visit to the scene was last Tuesday’s voluntary trading halt in the shares of a potential merger partner, Horseshoe Metals. That halt was upgraded to a voluntary suspension on Friday.
Horseshoe is not alone in requesting a trading suspension. The bottom end of the ASX list is chock-a-block with small miners who have shuffled off into the protection of a trading suspension category pending some good news.
But in the case of Horseshoe there is an interesting geographic (and geological) factor at work because its prime asset, the historic Horseshoe Lights copper mine, is just 75km west of Doolgunna.
So what, some critics may say. In the current investment climate it may as well be on the moon.
There’s no arguing with that sentiment. With the copper price in the basement at $US3.20 a pound or thereabouts, and with the ore in the Horseshoe project grading 1% copper and 0.1 grams of gold a tonne, it would be an economically challenging task to haul the material to the Doolgunna processing plant and then face a question about whether the ore would be compatible with Sandfire’s.
However, there is another player in Doolgunna copper game.
Ventnor Resources is also sitting on an old copper mine, Thaduna/Green Dragon, which is about 40km to the east. While Rudyard Kipling famously wrote that “east is east, and west is west, and never the twain shall meet” that might not be the case in the Doolgunna waltz.
Apart from the geological connection of copper and the geographic location of Doolgunna, Ventnor shares another common thread with Horseshoe – it is also suspended from trading on the ASX.
In Ventnor’s case, the trading suspension dates back to April 8, a time when the company was clearing away the paperwork nightmare that precedes all mining commitments, such as Native Title clearance and the issuing of a Mining Lease.
The other issue in the case of both Horseshoe and Ventnor is money; or to be precise, two forms of money.
Firstly, there is money in the form of copper itself. Its price has dried up over the past three months, falling from a mid-February high of around $3.70/lb to a precarious level of not far above $3/lb.
Secondly, there is the problem of cash in the bank.
In its latest quarterly cash report, Horseshoe said it had $A555,000 and Ventnor said it had $439,000, meaning that between them there is less than $1 million.
Meanwhile at Doolgunna, King Karl is running a business with $110 million in the bank as at March 31, that churns out profitable copper and gold, has just boosted reserves thanks to a recalculation triggered by deep drilling, and is embarking on an expensive exploration program aimed at boosting reserves – because a relatively short mine life is an issue for Sandfire.
Perhaps Sandfire has enough time to boost reserves inside its own tenement’s boundaries, and perhaps the ore at Thaduna/Green Dragon and Horseshoe Light may not suit the Doolgunna processing plant.
But the exploration ground held by Horseshoe and Ventnor could be appealing to King Karl as he contemplates what to do with that spare $110 million.
He could, of course, return some to shareholders, as is the modern trend. Or he could make a low-ball offer to acquire Horseshoe and Ventnor, if only to extend Sandfire’s exploration footprint and possibly secure future raw material for his processing centre.
At market capitalisations (pre-suspension) of $5.8 million in the case of Horseshoe and $26.2 million in the case of Ventnor, King Karl could buy both companies with about 29% of his cash reserves and still have plenty left to reward his current shareholders.
A deal in the making? Possibly, if egos permit . . . and if it pleases the king.
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HOR Price at posting:
7.0¢ Sentiment: Hold Disclosure: Held
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