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Bargain Shares: Exploiting a valuation disconnect

The net tangible asset value of an Aim-traded natural resources investment company is 40 per cent higher than its market capitalisation even though it owns liquid listed holdings and valuable net smelter royalties over a Botswana copper project.
Bargain Shares: Exploiting a valuation disconnect

The bear market in small-cap companies has been savage since the FTSE Aim All-Share index peaked in early September 2021. The index has shed 32 per cent of its value since then and is now no higher than it was in December 2018.

To mitigate risk, I have adopted a thematic approach to stock picking in the current inflationary environment, hence my focus on specific sectors including property and commodities. I have targeted deep-value shares, too, some of which I highlighted in my 2022 Bargain Shares Portfolio. This explains why the portfolio’s total return of 7 per cent has outperformed the 16.5 per cent decline in the FTSE Aim All-Share index since portfolio launch on 11 February 2022. That said, there have been reversals even in some of these sectors.

Metal Tiger (MTR:14.75p), an Aim-traded investment company focused on undervalued natural resources opportunities, is a case in point. Its share price has fallen 18 per cent since my last update (‘Bargain hunting in the market carnage’, 7 March 2022), driven down by declines in the value of some portfolio companies. That’s not to say their prospects have changed, more a case of the price investors are willing to pay for a slice of the action.

Simon Thompson's Bargain Shares Portfolios Performance (2016-2022)
PortfolioPortfolio total return to dateFTSE All-Share total return to dateFTSE Aim All-Share total return to date
Source: London Stock Exchange, FTSE Russell, Bargain Shares Portfolio total return calculated on offer-to-bid basis with dividends un-invested. Latest prices at close of business on 17 June 2022.


Botswana Copper Belt key to Metal Tiger’s value creation

  • Put option arrangements on stock lending collateral loans underpin loan repayments, while dividend income from Sandfire holding covers interest payments
  • Sale of 49 per cent interest in Kalahari Metals to realise up to £1.5mn cash while retaining exposure to Kalahari Copper Belt projects through holding in acquirer, Cobre

Critical to Metal Tiger's valuation is its interests in Botswana. The Aim-traded company holds 7.86mn shares worth £21.7mn in Australian Stock Exchange-listed company Sandfire Resources (ASX:SFR), a mid-tier A$2bn (£1.14bn) market capitulation mining and exploration group that is developing the T3 Copper-Silver and A4 projects located in the country’s Kalahari Copper Belt.

The Sandfire holding generated a dividend of £1.54mn in the 2021 financial year, a sum that more than covered the interest payments on £11mn-worth of collateral stock loans. I am not concerned about repayments of the loans as Metal Tiger has the right (but not the obligation) to sell 1.68mn Sandfire shares to the stock lender in mid-December 2022 at A$4.89, and sell a further 1.17mn shares at a weighted average price of A$4.40 between 18 May 2023 and 8 December 2023. In aggregate, the 2.86mn potential share sales could generate £7.7mn of proceeds, meaning that Metal Tiger would only have to sell 1.2mn of its other 5mn Sandfire shares to repay the remaining loans in full. Sandfire’s current stock price is A$4.80, marginally above the average put price of A$4.69 on the stock loans.

Moreover, Metal Tiger holds a net smelter royalty (NSR) over Sandfire’s A4 exploration project (conservative carrying value of £9.3mn), and a capped NSR over the T3 project (carrying value of £1.3mn). The board could sell these royalty receivables tomorrow if they wanted to, not that they are likely to do so given that analysts estimate that royalties from A4 alone could be worth $8.9mn a year to Metal Tiger (at an annual production rate of 3.2mn tonnes and a copper price of $9,300 per tonne, or slightly above the $9,100 spot price). What this means is that the value of the NSRs and the balance of the Sandfire holdings (if the put options are exercised and 1.2mn additional shares are sold in the market) back up 85 per cent of Metal Tiger’s own market capitalisation of £25mn even after all debt has been repaid.

In addition, Metal Tiger holds a 49 per cent interest in Kalahari Metals, a company that is developing four projects in the Kalahari Copper Belt close to Sandfire T3 and A4 deposits. Australia's Cobre Pty (AU:CBE) is buying half the stake for £750,000 in cash, with an option to buy the other half for the same price in the next 12 months. Cobre is also guaranteeing a $1.3mn (£1.06mn) loan Metal Tiger made to Kalahari Metals. Admittedly, the cash consideration is far less than I had hoped for, but the consideration partly reflects the fact that Metal Tiger holds a 21 per cent stake in Cobre (worth £0.5mn), so retains ongoing exposure to Kalahari Metals’ projects, and Cobre will be funding the projects.

The bottom line is that Metal Tigers’ net tangible asset value (after tax) of £35.1mn (20.7p a share) at 31 May 2022 is not only 40 per cent higher than its own market capitalisation, but is based on a conservative valuation of the A4 NSR, and attributes nil value to multiple other potential copper targets owned by Sandfire in Botswana that are also subject to uncapped NSR. The valuation disconnect is worth exploiting. Buy.

After this article was first published at 4.45pm on 20 June 2022, Metal Tiger subsequently sold 445,000 Sandfire shares at A$5.25 and used A$1.54mn of the A$2.33mn proceeds to make an early settlement of part of its stock loan. The company now retains 7.36mn shares in Sandfire.


■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at, or by telephoning YPDBooks on 01904 431 213 to place an order. The books are being sold through no other source and are priced at £16.95 each plus postage and packaging of £3.25 [UK].

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They include case studies of Simon Thompson’s market beating Bargain Share Portfolio companies outlining the investment characteristics that made them successful investments. Simon also highlights many other investment approaches and stock screens he uses to identify small-cap companies with investment potential. Details of the content can be viewed on