Jayant Bhandari

Cash-shells Part-2

Investor disgust—not cash—is junior mining’s problem

I recently wrote about the upcoming merger between NovaCopper (NCQ) and Sunward (SWD). SWD is a cash-shell, which was trading at a huge discount to its cash value.

There is a common belief in the junior mining industry that it is short of cash. I find this amusing, for there is immense liquidity sloshing around the world. People buy bonds at negative yields.

The real problem with the junior mining industry is that investors have lost faith in those who run these companies. As a result, even companies with lots of cash are trading at huge discounts to their cash values.

Let me list some of these companies here. I am a shareholder of almost all of them, but their failure to create value—and I expect a 20% return a year—has left me craving to sell what I own.

Corona Gold (CRG)

FD SO: 21 million

MCap: $7 million

Net cash: $9 million

Equity investment: $7 million

Total cash-value: $16 million

Share price: $0.35

Cash-value per share: $0.76

Upside based on cash: 117%

Kobex Capital (KXM)

FD SO: 48 million

MCap: $23 million

Net cash: $28.6 million

Equity investment: $4.86 million

Total cash-value: $33 million

Share price: $0.485

Cash-value per share: $0.69

Upside based on cash: 42%

Boss Power (BPU)

FD SO: 42 million

MCap: $8 million

Net cash: $13 million

Share price: $0.19

Cash per share: $0.31

Upside based on cash: 63%

Ryan Gold (RYG)

FD SO: 117 million

MCap: $16 million

Net cash: $21 million

Share price: $0.135

Cash per share: $0.18

Upside based on cash: 33%

Batero Gold (BAT)

FD SO: 88 million

MCap: $7 million

Net cash: $12 million

Share price: $0.075

Cash per share: $0.135

Upside based on cash: 80%

Sulliden Mining Capital (SMC)

FD SO: 37 million

MCap: $9 million

Net cash: $22 million

Share price: $0.25

Cash per share: $0.59

Upside based on cash: 136%

Probe Metals (PRB):

FD SO: 37.5 million

MCap: $13 million

Net cash: $19 million

Share price: $0.355

Cash per share: $0.51

Upside based on cash: 43%

→ Probe Metals is a new company, so we must wait a bit longer to see what they can achieve.

Brilliant Resources (BLT)

FD SO: 150 million

MCap: $33 million

Net cash: $36 million

Equity investment: $10 million

Total cash-value: $46 million

Share price: $0.22

Cash-value per share: $0.31

Upside based on cash: 41%

→ They are returning $0.145 per share to the shareholders.

→ Special meeting to approve the transaction is on 15 June 2015.

Phoscan Chemical (FOS)

FD SO: 157 million

MCap: $44 million

Net cash: $55 million

Share price: $0.28

Cash per share: $0.35

Upside based on cash: 25%

Despite that the junior market has fallen, cash-shells should have done quite well. Their valuation should have been inversely correlated with the falling market, for the cheap market offers them opportunities to buy projects cheaply.

Why have they failed?

There are many reasons and some of the above companies have genuine ones, but having a few million dollars in cash makes for good lifestyles for the management. Even good managements become risk-averse.

Doing hostile takeover of a junior company is very difficult, and cost prohibitive. But, doing a hostile takeover of a cash-shell is virtually impossible.

Anyone thinking about going hostile on a cash-shell must offer cash-value of the company. But if they did this, it would make no sense to risk legal fees in trying a hostile takeover. Managements of cash-shells are protected by an interesting Catch-22 situation that they exist in.

The only way is for shareholders to pressurize these companies either to return the cash back to their shareholders (as Brilliant Mining and Sunward Resources are gracefully doing, for which I have a lot of respect for them) or to move their companies forward aggressively

Finally, I have spent another two months in India. Trying to explain the utter mess that India is and the utter irrationality of Indians has for a long time been my real calling. Linked here is an interview I recently did on the subject with my favorite generative company, Minaurum Gold (MGG).

I will soon be speaking at the Asia Mining Congress (Singapore) and at Mines & Money (Mauritius).

Here is a link to an interview I recently did with Mines &Money.

Warm regards,

Jayant Bhandari

www.jayantbhandari.com

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