At the current share price the company has a market capitalisation of £3.5m, or little more than the £3m of cash on its balance sheet at the start of this year. In effect, investors are placing little value on the Mankayan project even though Goldfields had previously valued the project at $60.5m (£37m). True, gold and copper prices have fallen significantly in the past three years, down almost 40 per cent and 33 per cent respectively, which affects the economics of mining the operation and the current value any potential purchaser will place on the development. The company remains in discussions with parties who may be willing to engage in a sale/joint venture process for its Mankayan copper-gold project.
However, these negotiations have been impacted by publicity regarding potential adverse changes to the Mining Tax Laws in the Philippines. For the past couple of years, the country's government has been undertaking a Mining Review of its domestic mining industry and which will cover a number of areas including licence ownership, development pathways and financial and social obligations. In recent months, press in the Philippines have been speculating that the Mining Industry Coordinating Council (MICC), a civil service body, is proposing a revenue-sharing scheme for mining companies whereby the Philippines government will receive 55 per cent tax on a mining operation's adjusted net revenue or 10 per cent tax on its gross revenue, plus a percentage of windfall profit, whichever is higher.
For this to become law, MICC must first submit its proposal to the President of the Philippines who must then put an appropriate bill to Congress and then to the Senate for their approval. To date, the MICC has not confirmed that its proposal has been formally submitted to the Philippines President and there is no fixed time period by which the President would be required to pass the proposed bill via Congress and the Senate for approval.
In the meantime, Bezant has been working with other major operators in the Philippines mining sector to consult with the MICC and the government in order to outline how a revenue-sharing scheme would potentially adversely affect inward investment for the Philippines. The company's board note that as the Mining Review was initiated as part of a private sector-wide plan to liberalise the Philippines' domestic economy (the majority of the country's GDP stems from remissions from workers overseas), so the current MICC proposal "appears at odds with this objective." It's also worth noting that any changes to the mining tax laws in the Philippines have "yet to be confirmed and there can be no certainty as to the final form and timing of any such changes".
That said, it makes it nigh on impossible for the company to crystallise value from the Mankayan project until this situation is resolved one way or another as no purchaser in their right mind will enter a financial transaction without first knowing the level of tax it faces on future earnings. Moreover, there is little point Bezant agreeing to any sale of the project based on the terms indicated in the press speculation in the Philippines, especially as there is no certainty the government would actually agree to proposing a mining bill on that basis.
Catch 22
Unfortunately, it's a classic catch 22 for shareholders in Bezant. But with the company's equity being valued on a 65 per cent discount to book value, and a recent report from GHD, one of the world's leading professional services companies operating in the global energy and resource markets, highlighting significant potential new cost savings from mining the project, then I would advise holding onto the shares until there is further clarity on the situation.
Bezant is scheduled to report its full-year results in the coming weeks and could by then be in receipt of the revised financial model it has commissioned for the Mankayan project. Although there is undoubtedly great uncertainty, and a number of variables of which the outcome is impossible to calculate at this stage, I still believe that a bid for the company at four to five times the current share price would create value both for a purchaser while meeting the financial needs of all shareholders, including Goldfields. That company still retains a 21.7 per cent equity stake in Bezant, having subscribed for new equity at a price of just under 26p a share in January 2013.
So although Bezant shares are down 50 per cent on my original buy advice after factoring in a 8p a share special dividend last year ('Double your money on a copper bottom investment', 20 March 2013), I still feel there is potential to recoup the paper losses. Please note that I last updated the investment case when the price was 7p ('Bezant bottoming out', 8 April 2014) after which the share price recovered to 12p. However, since then news of the potential change in tax law has emerged which warrants a change in my recommendation to hold.
Please note that I have published 38 investment columns since the start of last month, including three today, all of which are available on my IC homepage...
■ Simon Thompson's book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.75 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking'
