I am not the only one thinking this way as Shamim Mansoor, resource analyst at brokerage N+1 Singer, has an intrinsic valuation of £37.8m on the company, or 45.6p a share. That's more than double the current share price with Bezant's equity only valued at £14.5m.
Understand the options
Despite the seismic gap between the intrinsic value of the company's equity and the current share price, clearly if Gold Fields exercises its call option and acquires the Mankayan copper/gold project for $60.5m (£37m) as per the terms of the option agreement, then Bezant's share price would rocket. Having to date paid $9.5m in non-refundable option fees, and acquired a 21.7 per cent stake in Bezant earlier this year for $7.5m (equivalent of 25.97p a share), then Gold Fields has made some hefty investments to get this far. It also funded the 2013 licence commitments on the Mankayan project too.
True, Gold Fields has undergone some major restructuring in recent months and has been pulling back from several projects involving major capital expenditure. But this probably makes it even more likely it will try and take the cheaper option of bidding for Bezant especially as it is in a pole position to get the company's flagship Mankayan copper/gold project on favourable terms. And let's not forget that Gold Fields has made significant investments in the region in recent years, having invested $220m to acquire 40 per cent of the adjacent Far Southeast Project in the Philippines in 2012.
For instance, if Gold Fields was to bid 30p a share for Bezant rather than take the more expensive route of exercising the option on Mankayan, this would only cost the company £19.5m for the 64.9m shares it doesn't already own. Moreover, at the end of June Bezant was sitting on £3.8m of cash on its balance sheet. Since then Mr Mansoor at N+1 Singer believes the company has burned through £90,000 a month, so a year-end cash pile of about £3.3m looks sensible. This means that after factoring in the company's cash, the net cost of Gold Fields making an opportunistic 30p a share bid for Bezant would only be £16.2m.
And for this Gold Fields would 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. Put that way, there is a strong case for Gold Fields to salvage its investment by taking this route even if it doesn't plan to exploit the resource immediately.
An alternative
The second possible scenario is that Gold Fields does indeed exercise its option, in which case Bezant's board has said it will return half the cash to shareholders. In other words, for an investment of 17.5p a share now you could potentially be in line for a further cash return of 23p a share in the first quarter next year and still hold shares backed by 23p a share of cash after adjusting for tax liabilities on the disposal, Bezant's operating costs and capital expenditure.
In this scenario, the net cost of Gold Fields exercising the call option at the end of next month is £33m after factoring in the aforementioned 23p a share proposed cash return proposed by Bezant, which is worth £4.1m to Gold Fields given it already owns a 21.7 per cent stake. This £33m cost is double the outlay to Gold Fields of launching a bid at 30p a share - a 67 per cent premium to Bezant's current share price - this is why I feel Gold Fields is more likely to bid for Bezant rather than exercise its option.
The third option
Admittedly, any investment in Bezant carries risk as Gold Fields could simply let its call option expire at the end of January and write-off the $9.5m invested in option fees to date. Bezant would then have to go through the whole process again of finding a buyer for Mankayan. But in this scenario the board is highly likely to appoint an investment bank to seek offers for the company as a whole especially since Gerry Nealon, executive chairman of Bezant, has recently passed away and he was the driving force in negotiating the major option agreement with Gold Fields. Needless to say, if Gold Fields lets its option lapse then it would be a willing seller of its stake, thus making a takeover of Bezant far easier.
Clearly, the slump in commodity prices has put pressure on the capital expenditure plans of the major miners and Gold Fields is no exception. But I still feel there is a deal to be done here and one that the top 20 shareholders of Bezant, holding 79 per cent of the equity, would be comfortable with.
I acknowledge that the market price indicates that the possibility of a bid/exercise of the call option appears a long shot, otherwise the company's share price would be trading much closer to the 45p level, equating to the cash proceeds due to Bezant if Gold Fields exercises its option. But equally it's worth noting that in Bezant's final results, which were released a few weeks ago, the board stated that the company "maintains regular dialogue with Gold Fields' representatives in relation to operations at the Mankayan project and their adjacent Lepanto property where Gold Fields has to date acquired a 40 per cent ownership interest". So, although Gold Fields has not stated it will exercise the option, equally it has not said it will let it lapse either.
So having weighed up all three possible scenarios, I still believe there is a realistic chance of corporate activity of some sort by the end of next month and am maintaining a highly speculative buy recommendation on Bezant shares on a bid-offer spread of 16p to 17.5p.
Finally, due to unprecedented demand, my new book, Stock Picking for Profit, has sold out and is being reprinted for delivery the week commencing Monday, 6 January 2014. As a special promotion to IC readers, the first 100 pre-orders for the book placed online with YPD Books and quoting offer code ICOFFER will receive complimentary postage and packaging. The book can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213. The book is only being sold through YPDBooks and no other source. It is priced at £14.99, plus £2.75 postage and packaging. Telephone orders will continue to incur the £2.75 charge.
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