summary of sultan

After the recently increased interest in SSC i now joined the bandwagon after on todays AGM the resolution 3 did not pass. In my eyes this decision could be a turning point for the company.
I will now explain, what led me to this conclusion.

I first encountered Sultan when i met the companies managing director Derek Lenartowicz in Munich, in the beginning of November on Germanys largest commodity show, where a lot of mining companies from Canada and Australia were present.
I liked Sultans projects, the low market cap but was not so happy with the share structure, the low Cash position and especially the financing deal with the Amercian company La Jolla. But the way it looks this problem now is something of the past.
So lets take a closer look at Sultan:

1.General

Shares outstanding: 928 Mio
Options: 49 Mio exercisable at 2 cents expiring on the 31.December 2010 so rather irrelevant
Cash position ~ 700.000 AUD
Marketcap 7.4 Mio AUD (shareprice of 0.8 cents)

Directors:

Derek Lenartowicz
Gained extensive experience in senior positions at Western Mining, and Dominion.
Milos Bosnjakovic
Jimmy Lee
Management holds about 25 % of the outstanding shares.

Outlook for Zinc:

Here is a very comprehensive zinc outlook for the next years from Credit Suisse dating from January 2010.

http://www.ironbarkgold.com.au/documents/credit_suisse-think_zinc.pdf

To shortcut this,the outlook is very bullish with a coming supplygap, (as always in the commodity sector nowadays China being the main price driver here) which should be positive terrain for companies being able to start producing in the next years.Sultan seems to be positioned perfectly for this scenario.

2.Projects:

2.1.Peelwood,NSW (100% Sultan owned)

A small, multi-mineral, close to surface project which is on the verge of production.
Overall resource of 895.000 T with ~ 4 % zinc and 0.8% of copper. Additionally there is some silver and lead there as well. Highest concentration is found in the part that is the closest to the surface, which will be helpful when considering payback time.Now according to the managing director the sale of the copper alone could be sufficient to �finance� the operating costs, meaning you would get the zinc for free. Most of the admitting process to become a mine is now completed and by the end of 2011 the mine could be producing. Capex is estimated to be in the 8-10 Mio vicinity,which is very low,but of course it is a small project. But Peelwood would be a start to generate cash-flow which is then intended to help fund the development of Sultans second asset:

2.2.MB Project,Montenegro-Europe (100% Sultan owned)

This is a much larger project (again multi-mineral) and could be a real company maker, grades are a little lower here, but with an estimation of 7.7-9.6 Mio Tonnes with ~ 2.5 % Zinc, ~ 0.2% copper, ~ 2.1 % lead and about 20g/t silver it definitely looks attractive. The project acquisition was a bargain for 120,000 Euro = 164,000 AUD and the place has been previously mined meaning a lot of necessary infrastructure is already in place,although probably it needs some modernization. As most of the received data was �old style� (meaning on paper) Sultan is currently in the process of changing this into digital information, which will help lead to a Jorc compliant resource. A rough estimate for capital costs are about 25-30 Mio AUD.

2.3.Peelwood Gold Project ?

Now Mr. Lenartowicz told me in Munich that both these assets have upside potential via exploration. Now it seems he already was proven right there, because one thing he didnt tell me in Munich is that Sultan has the chance , that there could be gold on the Peelwood property, as was published last week. So here could be a third project in the making, which obviously is very early stage,but the fact that Newmont seems to buy as much land in the area as they possibly can, is a very promising indicator in my eyes.
Now Sultan stated that the geology seems to be quite similar to the Mc Phillamy project,which is 50 km to the North-owned and operated by Newmont (75% majority partner) the biggest Gold producer worldwide. For more details of this project take a look at Alkane Resources (25% minority partner) presentation (pages 28 following):

http://www.alkane.com.au/presentations/pdf/20101123.pdf

A first indication of which direction this could be headed, if there really is gold at Peelwood in larger quantities, a marketcap of well under 10 Mio AUD seems ridiculously cheap.

3.Financing

As i wrote these were the facts (the projects and the low marketcap) that i liked about Sultan. Now here are some points which prevented me from investing until today:

Regardless of the promising projects the shareprice had quite a hard time during the last years/months and weeks with nearly reaching an all-time low at 0.4 cents.I guess we all know about the financial crisis and this probably is part of the explanation,but IMO there is more to this, especially since this summer, which can be found here:

On the 19th of July Sultan announced, that they secured a 4 Mio USD financing via a convertible note to La Jolla Cove Investments:

http://asx.com.au/asxpdf/20100719/pdf/31rd03lwpx46nq.pdf

Now the terms for this Convertible Note allowed the Americans to be issued shares at 80 % of the three lowest volume weighted average price in the 21 days prior to the issue. Expressed in total numbers this means altogether Lo Jolla received 57,945,906 shares of the company at an average price of 0.39 cents. (see AGM notice for details)
Now i dont know if you have been following the share price action these last weeks and months, but IMO we clearly had a BIG seller who was quite willing to throw his shares on the market-no matter what the price was. Given the fact that the Americans had all these really cheap shares it seems pretty obvious that the seller was identical with La Jolla Cove. Most of the recent trades the last weeks went through for 0.5/0.6 cents. A very nice margin for La Jolla.

If Sultan would have continued to issue shares to the Americans it is my believe that the shareprice would have had no chance at all to rise. Under these terms La Jolla was the only winner at the expense of all the other shareholders.
Now at the AGM most of the shareholders agreed with this view and thus resolution No 3 did not pass, so this will put an end to the relationship with these corporate raiders.
But nevertheless the company needs some funds and so i think we can expect some new deal in the near future. I guess any new deal will have (to have) terms and conditions that are more favorable for Sultan, no matter whoever the financier will be.
By the way Mr.Lenartowicz told me in Munich that he is trying to secure some kind of offtake agreement for the Peelwood metals as kind of financing.Of course nothing definitive has been decided yet,but this could be a way to avoid heavy dilution in the future.

4.Conclusion

IMO the business relation with the Americans probably �hung like a millstone� around the neck of the shareprice but with this issues being solved now Sultan has the chance to push the restart button.
The company has some promising projects ranging from �early stage� to �close to production.�
The low marketcap could become a huge lever if Sultan will be able to secure (more shareholder friendly) financing and proceed with the projects. This could already be seen the last two trading days, where SSC gained 75% which sounds much,but IMO is mostly due to the extreme undervaluation. Once Peelwood generates cashflow,further dilution to shareholders will hopefully be limited.(Probably with the exception of the capital costs for MB.
After taking a look at the chart below my first target area would be 1.5 cents which would be a double from todays level. But it should only be the start, if management is able to develop NSW,Montenegro and especially the possible gold project.

Appreciate any comments,critique or additions.As always DYOR !!!

Wantedman

Always looking for possible 10-baggers in the making: MHM-ADO-SSC-MOY