Importantly, this particular approach also mitigates risk. That's because if a company is selling off assets in line or above their book value, but the share price is trading on a deep discount to net asset value, then these asset sales highlight the hidden value in a company's accounts to a wider investment community. In turn, this should prompt a re-rating - especially if the cash proceeds are being returned to shareholders.
With this thought in mind, I am revisiting the investment case of Bezant Resources (BZT: 18.5p), an Aim-traded resource company I recommended buying shares in in March at 25.5p ('Double your money on a copper bottomed investment', 20 Mar 2013). Since then, we have banked a 8p a share special dividend, so our break-even point is around the current share price. That's not a great result given that the FTSE Aim index is up 7 per cent since then. However, there are reasons to believe that we could be rewarded for our patience in the coming months.
I am not the only one thinking along these lines as analyst Shamim Mansoor at broker N+1 Singer has an intrinsic valuation of £38m on the company, or 45.9p a share - more than double the current share price. Bezant's market value is currently around £15m. This target may seem far-fetched, but there are reasons to believe the huge gap between the intrinsic value and the current share price could narrow markedly.
Copper bottomed investment
That's because Gold Fields, the major gold miner which earlier this year acquired a 21.7 per cent stake in Bezant at 25.97p, has the right to acquire the company's flagship Mankayan copper/gold project in the Philippines for $60.5m (£39.5m).
Gold Fields previously had an option to buy the project in January, but had been adversely impacted by the recent industrial action in South Africa. 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 company paid a further $2.5m non-refundable upfront payment to Bezant; funded the 2013 licence commitments on the Mankayan project; and invested $7.5m in new equity in Bezant. The revised consideration of $60.5m (£37.9m) will be paid on the exercise of the option.
This means that Bezant is now flush with cash and by my reckoning was sitting on a net cash pile of £4.6m, or 5.5p a share, six months ago, which should easily see it through until the expiry of the Gold Fields' option. Importantly, it has no funding issues.
Moreover, assuming Gold Fields exercises its option, Bezant's board has stated that half the cash received will be returned to shareholders. Or, to put it another way, for an investment of 18p a share you could potentially be in line for a further cash return of 23p a share early next year and still end up holding shares backed by 17p a share of cash after adjusting for tax liabilities on the disposal, Bezant's operating costs and capital expenditure.
Please note that I have factored in the fact that the and sale of Mankayan is going to result in a profit which is taxable. Mankayan was originally purchased in 2007 in a cash and share deal, since when Bezant has spent $5m on exploration costs. The company had tax losses of £20m at the end of last year which can be offset against this profit, thereby reducing the tax liability. Assuming a tax liability of approximately £5m, the post-tax value of the revised consideration is around £34.5m, or 42p a share. However, since Gold Fields already has a 21 per cent stake in Bezant, then the net cost of exercising the call option is around £33.8m. This is net of the aforementioned 23p a share cash return proposed by Bezant, which is worth £4.1m to Gold Fields.
Another option
It is equally possible that Gold Fields could take the cheaper option and simply launch a bid for Bezant instead. Indeed, it is well-placed to do so given that it now holds 18m of the 82.4m shares in issue. Namely, at the current market price the balance of the shares it doesn't own are only being valued at £11.5m. So even if Gold Fields was to bid £23m for these outstanding shares to takeover the company, it would still be a cheaper option than paying £39.5m for the Mankayan project. It would also mean that Bezant's shareholders would still receive a cash windfall big enough to tempt them to part with their paper.
True, Gold Fields has undergone some major restructuring in recent months and has been pulling back from several projects involving major capital expenditure. However, making a bid for Bezant is small change for a group the size of Gold Fields especially as it is still in a pole position to get the company's flagship Mankayan copper/gold project on favourable terms. And it's not as if Gold Fields hasn't 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.
Moreover, for a modest investment Gold Fields will be buying JORC compliant Probable Ore Reserves of 189m 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 2.21m ounces of gold.
Admittedly, any investment in Bezant carries risk as Gold Fields could just let its call option expire at the end of January and Bezant would then have to go through the whole process again of finding a buyer for Mankayan. However, I feel if that were to happen the logical conclusion is for the company to put itself up for sale as Gold Fields would be a willing seller of its stake, thus making a takeover far easier.
My reasoning is also based on the fact that Gerry Nealon, executive chairman of Bezant, sadly passed away three weeks ago. Under his chairmanship, Bezant delineated the Mankayan project, one of the world's largest deposits of JORC Code standard copper-gold reserves and resources. He was also instrumental in negotiating the major option agreement with Gold Fields.
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 62m tonnes of copper. Results from a phase one exploration programme indicate an average 1.69 per cent copper content based on 68 samples taken from 17 trenches excavated.
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. These features are indicative of a low-cost mine.
To date, Bezant has spent over $1.2m on exploration costs on Eureka and analyst Shamim Mansoor at house broker N+1 Singer estimates that it will need to spend an additional $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.
A bet worth taking on
Clearly, the slump in commodity prices has put pressure on the capital expenditure plans of the major miners and Gold Fields is no exception. However, I still feel there is a deal to be done here and one that the top 20 shareholders, holding 79 per cent of the equity, would favour. Bezant's shares are definitely not for widows or orphans, but if you can stomach the risk they could have potential to offer significant gains by the first quarter of next year. Priced on a bid-offer spread of 18p to 18.5p, they rate a speculative buy.
Finally, since the start of last week, I have published 10 other articles on the following 13 companies or trading strategies:
■ Inland ('Property plays with foundations, 7 Oct 2013)
■ Terrace Hill ('Property plays with foundations, 7 Oct 2013)
■ Sanderson ('A smart tech share', 9 Oct 2013)
■ Pure Wafer ('Time to chip in', 10 Oct 2013)
■ US debt ceiling deadline looms ('Debt ceiling dilemma', 11 Oct 2013)
■ Air Partner ('Gaining altitude', 14 Oct 2013)
■ Polo Resources ('Targeting special situations', 14 Oct 2013)
■ Greenko ('Targeting special situations', 14 Oct 2013)
■ Randall & Quilter ('Bargain shares flying', 15 Oct 2013)
■ Oakley Capital Investments ('Bargain shares flying', 15 Oct 2013)
■ Marwyn Value Investors ('Exploiting an arbitrage opportunity', 16 Oct 2013).
■ Entertainment One ('Exploiting an arbitrage opportunity', 16 Oct 2013).
■ NetPlay TV ('Punting on new highs', 16 Oct 2013)
■ Global Energy Development ('Pay dirt beckons', 17 Oct 2013)
