Unlisted Options: (77m exercise price of 2c expiring 11/12/15)
Enterprise Value: $4.4m
Net asset value : $7.9m
Net asset per share: 2.4c fully diluted or 3.2c if options expire.
Overview
Since listing the company has been an absolute disaster with management nearly completely destroying shareholder value. However after selling their Maldon Gold operations to another miner, A1 consolidated Gold (AYC) they received a large amount of shares and options. At current prices they are trading at only 45% of their net asset value creating a possible asset play/arbitrage opportunity. The current low price is likely due to holders exiting in the recent volatility as well as selling pressure from all the stakeholders sitting on substantial losses. In the recent update the company stated they were exploring opportunities to maximise shareholder value since the current market capitalisation does not reflect this.
Management
Chairman Ian Gandel holds minimal shares personally however he is a director of Abbotsleigh which holds 41.1%. In addition Abbotsleigh has 70m unlisted options exercisable at 2c which if fully exercised would potentially give Abbotsleigh 53% of the company. To get these options exercised there will likely be a run up to get the options in the money before expiry. Ian Gandel has agreed to reduce his salary 50% from from $75k PA to effectively $37.5k for cost saving. When Octagonal failed to underwrite the shortfall of a capital raising in late 2014 Ian Gandal stepped in and provided a $1m loan from related company Gandal metals at a interest rate of 4.58%. Repayable by the 1st of December 2015 in either cash or A1 gold shares (based on a five day VWAP). In the recent update they were loaned an additional $300k from Gandal metals also repayable by the 1st of December 2015 to review strategy and investment opportunities. By appointing a corporate advisor to assist with identifying new investment opportunities in resource and non-resource sectors. Which makes sense considering they only had 205k left and expected outflows of 170k for the quarter before the appointment. Gandal Metals has historically provided management service requirements to Octagonal and has also agreed to reduce its fees by 50%. So while shareholder value has been destroyed in recent years possibly through poor management, you can’t fault the chairman’s commitment to keeping the company afloat.
The managing director Anthony Gray also has a large holding of 1.8m shares and 900k options, agreeing to a pay cut from 235k to $170k. Gray is also providing the company with office space and shed facilities in Kalgoorlie free of charge. Director Robert Tolliday has also had his fees cut 50% to 20k. Overall management have a lot riding on the company.
A1 Consolidated Gold
A1 Consolidated gold is an Australian gold producer with a 150,000 tonnes PA gold processing facility and Combined gold resources in excess of 330,000 ounces. AYC seems to have good prospects and is backed by Billionaire Andrew “Twiggy” Forrest whose private investment company Squadron Resources funded a $2m convertible note which if converted would equate to a shareholding of close to 14%. The chief executive Dennis Clark also owns 10% of the company and has reasonable experience. Analysts at Patterson estimate that “based on production and all in sustaining costs of $849 per ounce, there is the potential for a margin of between $600 and $700 per ounce which over a 2 ½ year mine life should generate annualised earnings before interest, tax, depreciation and amortisation of approximately $25 million. However with significant exploration upside which would materially extend the mine life.” They have a 12-month price target of 7c, much higher than the current price of 4.3c. Mr Anthony Gray was also appointed to the A1 Board as non exec director to protect Octagonals interests.
Octagonal have 170m shares in AYC and 57m options. Worth a collective $8.7m currently. Giving ORS potentially 53% ownership of AYC with all options exercised. The company was planning on distributing 50% of these securities after the sale of Maldon to shareholders however after discussion with AYC they canceled this and escrowed 75% of the securities for 6 months. In addition ORS agreed to consult them in regards to any sale or placement of the remaining 25% of securities so that any sale or placement is managed so as to not impact significantly the company’s share price. This was completed on the 25th of June so shares are voluntarily escrowed until the 25th of December.
Projects
In addition they have a number of exploration projects. In Western Australia they have Hogan’s project where they are exploring below transported cover for gold, copper gold, nickel sulphide deposits. Close to St Ives Gold field +13m oz AU and Kambalda Nickel District +1.4Mt Ni. They have two main prospects Burns and Quimby. On the Quimby Prospect in May 2011 Octogonal discovered significant gold and copper in regolith anomalisms. A 1km2 area of gold anomalism and 2km2 copper anomaly. During 2014 they drilled a Diamond hole and found 4.5g/t AU and 2.6% Cu from 256m deep. More diamond holes are to be drilled commencing in early 2016 costing an estimated $240k. On the Quimby Prospect they have a potentially large gold deposit with air drilling to be completed towards the end of 2015.
In addition they have two Nickel Sulphide prospects (Lisa’s Dune and Yalca Hill). Their exploration work has confirmed the presence of favorable host rocks for nickel sulphide deposits with ortho- to mesocumulate ultramafic rocks intersected and containing sulphides interstitial to olivine. They are still relatively unexplored and remain a priority for the company. I don’t know to much about mining but these prospects present additional value and potential upside. Further information is available on their website.
Overall
At the current price of 1.1c ORS presents the case for substantial upside. There is a lot going on behind the scenes with billionaire Twiggy involved and management effectively bankrolling the company. In cases like these it’s hard to figure out what will happen but in my opinion leading up to the 1st of December ORS will pay back its loan to Gandal metals with A1 shares then distribute 50% of securities after they come out of escrow to shareholders. With the remaining securities held or a placement done to a fund/Twiggy. Additionally ORS currently presents an attractive takeover target and Ian Gandal/Twiggy or someone else may take it over. ORS may then acquire another resource or backdoor list a tech company. I have an initial target price of 2c expecting a run up to get the options in the money before expiry. Then it will depend on the value of AYC and what the company decides to do. Risks in this investment includes bankruptcy where you would expect a decent payout due to the AYC shares, however in these small mining companies anything could happen. As well as changes in value of the AYC securities. Further short term catalysts would be if ORS had some good air drilling results due later this year from the Quimby Prospect and results on the other prospects. As well as potential acquisitions. Overall I'm happy to hold at currrent prices.
Disclosure: Not advice
ORS Price at posting:
1.1¢ Sentiment: Buy Disclosure: Held
