Moreover, each company has returned capital to shareholders in the past few months which has not only highlighted the undervaluation of the shares in these companies, given the substantial asset backing and deep discounts to book value, but it has also provided the catalyst for share price reratings once other like minded investors conclude the share price discounts to book value are too wide in light of the imminent cash returns.
I also made a pretty compelling investment case for BP Marsh & Partners (BPM) last autumn, an Aim-traded company that is now in talks to sell-off its stake in Hyperion Insurance prior to its IPO on the London Stock Market. Given the stake in Hyperion was worth more than the value of BP Marsh itself when I highlighted the upside potential, this meant we were in effect getting all the investment company’s other interests in the price for free. That was clearly anomalous and news that BP Marsh is in discussions to offload its Hyperion stake has not surprisingly sent its share price rocketing. Adopting a sum-of-the-parts investment technique also paid dividends with cash rich Russian focused investment company Aurora Russia (AURR) which announced the sale of its largest investment for as much as the whole company was being valued at. Again, this left all the investment company’s other interests in the price for free and means we have made a 25 per cent net return on last month's investment (and with more gains to come) in a matter of weeks.
A golden nugget of an investment
Bearing this in mind, I was drawn to this week's news from small cap resource company Bezant Resources (BZT: 25.5p) which has just announced the return of £5.2m, or 8p a share, to all shareholders apart from Gold Fields, the major gold miner which has just acquired a 21 per cent stake in the company at the equivalent of 25.97p a share. Gold Fields had previously paid Bezant a non-refundable upfront option fee of $7m (£4.6m) in October 2011 to give it the right to acquire the company's flagship Mankayan copper/gold project in the Philippines for $63m by 31 January 2013. But given Gold Fields has been adversely impacted by the recent industrial action in South Africa and factoring in licensing delays being experienced by miners in the Philippines, Gold Fields decided to extend the option until 31 January 2014. As part of the extension, the mining giant has agreed to pay a further US$2.5m non-refundable upfront payment to Bezant; fund the 2013 licence commitments on the Mankayan project; and invest $7.5m in new equity in Bezant. The revised consideration of $60.5m will be paid on the exercise of the option.
As a result, Bezant's cash balances have risen sharply since the company reported its full-year results at the end of November. At the time net cash stood at £4.3m, but factoring in the aforementioned $10m (£6.7m) payment, by my reckoning the company is now sitting on net cash of close to £11m, or 13.2p a share. Hence, it is able to pay out 8p a share, or a total of £5.2m to all shareholders apart from Gold Fields. So, in effect, even after the capital return, Bezant is still sitting on net cash of £5.8m, or 7p a share.
Moreover, assuming Gold Fields exercises its option within the next 10 months, the board of Bezant has stated that half the $60.5m (£40.3m) cash received will be returned to shareholders. To put that into some perspective, this equates to a further cash return of around £20.1m, or 24p a share which is roughly Bezant's share price at the moment. And if that doesn't sound lucrative enough then it's worth pointing out that Bezant would still be sitting on 16p a share of cash from the sale after tax liabilities of around $10m, or 8p a share, and the payment of the 24p a share cash return. Let's not forget either the 8p a share imminent cash return and the 7p a share additional cash on its balance sheet.
The investment case becomes even more compelling once you consider that Gold Fields' has already made significant investments in the region, having invested $220m to acquire 40 per cent of the adjacent Far Southeast Project in the Philippines last year. It also has an option over a further 20 per cent interest, so is clearly committed to the region as the $17m total investment (including equity) to date in Bezant would indicate. In my view, this makes it highly likely that Gold Fields will close the deal and exercise its option by the end of January. For its total investment of $63m it will get JORC compliant Probable Ore Reserves of 189 million tonnes grading at 0.46 per cent copper and 0.49 grammes/tonne gold and total recoverable metal reserves of 811,000 tonnes of copper and 2.21 million ounces of gold.
South American potential
The Mankayan project is Bezant's largest investment by far, but the company has some other interesting assets including the wholly-owned Eureka Project in Argentina which was acquired by Bezant for a cost of $2.6m. This copper-gold project encompasses 11 copper and gold tenements across an area of 5,500 hectares. Based on a non-JORC compliant resource estimate and using previous exploration activity carried out by mining groups Minera Penoles, Codelco and Mantos Blancos, the Eureka project has around 52,000 ounces of gold and around 62 million tonnes of copper with a grade of 1 per cent. The copper oxide mineralisation occurs in loosely consolidated conglomerates and is the focus of the project's economic potential. The near surface mineralisation is amenable to heap leaching, while the carbonate content of the conglomerate is reported to be low, thereby reducing potential acid consumption.
To date, Bezant has spent $1.2m on exploration costs on Eureka and mining analyst Shamim Mansoor at house broker N+1 Singer estimates that it will need to spend a further $2.5m (£1.6m) of its cash pile for defining a JORC complaint resource estimate. The work will involve drilling to 5,000 metres to determine the nature of the anomalies and metallurgical test work (treatment, concentration and leaching tests). Mr Mansoor values Eureka at cost of $3.6m (£2.4m), or 2.9p a share at current exchange rates.
Sum-of-the parts valuation
Investors buying Bezant shares at 25.5p now are guaranteed a 8p a share cash return next month. Subject to shareholder approval at an EGM on 9 April, the payment will be made on 30 April. As a result this reduces the net buy in price to 17.5p a share which would then be backed by proforma net cash of £5.8m, or 7p a share, on Bezant’s balance sheet as detailed above. This proforma cash easily covers the £4.1m operating costs and capital expenditure of Bezant between the end of its June 2012 financial year and January next year. This is based on operating expenses of £137,000 per month over 18 months and £1.66m of costs incurred on Eureka. So by my reckoning, Bezant will be sitting on net cash of £1.7m at the end of this year, or 2p a share.
In the best case scenario, Gold Fields then exercises its option by January 2014 on the Mankayan project and Bezant receives $60.5m, or $50m post tax liabilities, which equates to 40p a share. Of this 24p a share will be paid to Bezant shareholders and 16p a share will be retained by the company to take its cash pile to 18p a share.
In other words, for a net 17.5p a share investment now, there is a real possibility of receiving 24p a share of cash next January and retaining shares which will be cash backed to the tune of 18p a share. And remember that Bezant will still be holding the Eureka project which would have a book value (including exploration costs incurred to the end of January 2014) of $6.1m, or almost 5p a share. So even if Bezant was valued at 50 per cent below adjusted book value after all the cash returns are made by early next year, then its shares would still be trading around 11p, which would represent a fairly harsh discount to its 18p cash pile.
Or put it another way, for an investment of 17.5p a share now (adjusted for the 8p a share imminent cash return) you have the chance to receive a further cash return of 24p a share and still end up holdings shares worth 11p. That is a 100 per cent potential return in only 10 months and makes Bezant shares a compelling value buying opportunity priced on a bid offer spread of 24.5p to 25.5p.
MORE FROM SIMON THOMPSON ONLINE...
Since the start of this year I have written 50 online articles, all of which are available on my homepage. These include 10 articles on the following companies since the start of last week:
Thalassa (Potential for seismic gains, 19 March 2013)
Greenko (Buy signal flashing green, 18 March 2013)
Communisis, Polo Resources, Randall & Quilter, Terrace Hill, Fairpoint (Bumper small cap gains, 18 March 2013)
Sanderson ('Jumping the gun: take three', 14 March 2013)
Spark Ventures ('Spark a re-rating', 13 March 2013)
Netplay TV ('Another roll of the dice', 12 March 2013)
Global Energy Development ('Patiently waiting', 12 March 2013)
US equity market trade ('Profit from St Patrick's day', 11 March 2013)
