A golden nugget

To put the extent of Polo's undervaluation into some perspective, at the end of June the company was sitting on short-term investments, cash and receivables of 6.4p a share, or a third of its current share price of 20.5p. Strip those liquid resources out from the company's book value of 36p a share, and assets worth 29.6p a share are in effect being valued at only 14.1p, or 52 per cent less than their carrying value in Polo's latest accounts. That is an extreme valuation considering that only three months ago a new investor, Michael Tang, acquired 11.77 per cent of Polo's share capital at 40p a share - double the current share price and 11 per cent above book value of 36p a share - through his vehicle, Mettiz Capital, an investment company with corporate and financial experience in natural resources, power generation, manufacturing and real estate. He is now the company's largest single shareholder with a 14.55 per cent stake, so he clearly sees the potential in Polo's investment portfolio.

As I noted a couple of months ago when I last reviewed the investment case, this is a very rare situation where we can buy into this undervalued company on far better terms than a large fund can. In fact, Polo's shares would have to double for Mr Tang's investment to turn a profit. Moreover, that is no forlorn hope as there is a realistic chance of some very positive newsflow in the next five weeks, or even sooner, to kick-start a well overdue, and much deserved re-rating.

Value out of Africa

That's because according to Polo's press release four weeks ago the company is "making good progress with a number of potential bidders" for farming out or even disposing of a major interest in one of its major holdings, Signet Petroleum, an African oil and gas explorer that has four prospective assets in Benin, Burundi, Namibia and Tanzania. Signet's main investment is an 80 per cent interest in Hydrotanz, a company that has a production-sharing agreement with the United Republic of Tanzania and the Tanzania Petroleum Development Corporation on the offshore North Mnazi Bay Block. This prospect is adjacent to BG and Ophir Energy's offshore Chaza 1 gas discovery well, which is targeting an eye-catching 12 trillion cubic feet of gas.

It's therefore worth noting that Polo has a 48 per cent stake in Signet worth £28.1m, or 10.4p a share, and First Energy Capital Corporation has been appointed by Signet to assess strategic alternatives for Mnazi Bay, including potential farm-out opportunities. It's also worth noting the progress being made here as Mr Tang sees "substantial upside for Polo as a major Signet shareholder". Expect a deal to be announced by the end of next month and one that can only highlight the hidden value in Polo's stake in Signet, not to mention a potentially large uplift on the carrying value of the investment.

In my opinion, Mr Tang's confidence is not misplaced as Polo is not a one-trick pony, either. There is decent upside potential in the company's largest investment, the Nimini Komahun Gold Project in Sierra Leone, in which Polo holds a 90 per cent stake worth £33.4m. A new Mineral Resource Estimate was published in late June which confirmed a significant increase in both the indicated and inferred mineral resource.

The last resource estimate showed an indicated gold resource at the site of 550,000 ounces and another 330,000 inferred ounces of gold, bringing the total potential resource to 880,000 ounces. On that basis, the £33.4m carrying value on Polo's investment values the project at only $51.8m, or the equivalent of $59 an ounce. That's a 30 per cent discount to the valuations attributed to sector peers, so it's hardly being overvalued. Furthermore, the gold price has been recovering some of the hefty falls earlier this year and, at $1376 an ounce, is at a level that would make Nimini commercially viable - especially when the gold is in the books at less than $60 an ounce.

Admittedly, we have to now await the release of the Preliminary Economic Assessment the technical inputs for which were completed last month. The date of publication of the PEA is in now dependent on the outcome of discussions with the Government of Sierra Leone regarding the terms applicable to the project, the first large-scale underground gold mine in Sierra Leone. I expect a positive outcome.

Polo Resource's investment portfolio at 30 June 2013

Sum-of-the-parts valuation

No matter which way I look at Polo, the shares are significantly undervalued. Combined, the holdings in Signet and Nimini are in the books for £61.5m, or 63 per cent of Polo's net asset value of £97m, and are worth more than its market value of £55m. That leaves cash and marketable investments worth £17.2m, or 6.4p a share, in the price for free as well as interests in four other companies worth a further £18.5m, or 6.9p a share.

It is only reasonable to assume that any positive news from Polo's interests in either Nimini or Signet, or further stake-building for that matter, would be the catalyst to spark a well overdue re-rating. It is also one that looks primed from a charting perspective as the share price appears to have found a bottom at the 18.5p to 19p level last month. In fact, there was positive divergence on the charts as the price made a lower low last month but the 14-day relative strength index (RSI) didn't. This can be a good sign that a rally is at hand. The price action since is only supportive of this view, with the price rallying above both the 20-day and 50-day moving averages.

So, with the technical set-up now positive, and a potentially lucrative deal on Signet in the offing in the near future, I have no hesitation in advising that you use this as a buying opportunity. I maintain my fair value estimate of 35p.

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