- First half pre-tax loss of £4.9mn mainly due to losses on three holdings
- Part disposal of Sandfire shares wipes out borrowings
- Net cash, retained Sandfire shares and smelter royalties worth more than market value
- 44 per cent discount to NAV
Strata Investments (ASX:SRT -18c) has released its first set of results since the investment company de-listed its shares from London’s junior market in March 2023.
Formerly known as Metal Tiger, the directors have been cleaning up the company’s balance sheet, exiting 10 passive investments and partially exiting a further nine investments, realising £6.5mn of cash proceeds in the process and crystalising a small loss of £24,000. However, the reversal in the share prices of three Australian Stock Exchange-listed resource companies was the main reason for the first half pre-tax loss of £4.9mn.
The holdings are Cobre Pty (ASX:CBE), a company that acquired Metal Tiger’s interest in Kalahari Metals, Southern Gold (ASX:SAU) and Armada Metals (ASX:AMM). Combined they were marked down in value by £2.9mn and accounted for £4mn of Strata’s net asset value (NAV) of £27.7mn (16.35p, or 31.1c) at 30 June 2023. The three holdings have since lost a further third of their value despite promising news flow.
For instance, Cobre has announced the discovery of a significant copper anomaly at its Kitlanya West Project in Botswana, and its Ngami Copper Project (NCP) has confirmed its potential as an in-situ leaching copper mining opportunity. The company intends to release an Inferred Resource and Exploration Target Category modelling results in the coming weeks, which will provide further insight into the project’s scale and potential avenues for expansion.
Positive news on smelter royalties
The good news is that Strata’s largest holding, Australian Stock Exchange-listed Sandfire Resources (ASX:SFR), has more than made good that paper loss, hence why the company’s latest net tangible asset value has risen from A$52.8mn to A$53.8mn (£27.9mn, or 31.75c a share) since the half-year end. Sandfire is a mid-tier A$3bn (£1.5bn) market capitalisation mining and exploration group that is developing the T3 Copper-Silver and A4 projects in Botswana’s Kalahari Copper Belt.
Strata held 4.8mn shares worth £15mn at the end of June 2023 and has since sold 3.5mn shares for A$22.1mn (£11.3mn) which have been used to pay-off A$12.2mn of collateral loans. It leaves the company with net cash of A$9.9mn (£5mn) and 1.36mn retained Sandfire shares worth A$8.9mn (£4.6mn) which back up 62 per cent of Strata’s market capitalisation of $30.4mn (£15.5mn).
Moreover, in the past few weeks, Sandfire has secured an extension to the Mining Licence for the Motheo Copper Mine (including the A4 Deposit), marking a major step forward in the Motheo expansion project which includes the A4 Deposit over which Strata has a two per cent uncapped Net Smelter Return (NSR). Strata also has a $2mn capped NSR over the T3 Open Pit which it expects to receive proceeds from by the year-end.
Development and mining of the A4 Deposit is expected to commence in the next quarter of Sandfire’s 2023-24 financial year, so expanding the mining footprint that currently encompasses the T3 Open Pit. It will see processing capacity increase from an initial rate of 3.2mn tonnes per annum to 5.2mn tonnes within months, ramping up thereafter. Sandfire’s managing director and chief executive, Brendan Harris confirmed the importance of the extension, noting that “it is a critical step for our newest mine and we look forward to seeing the higher grade A4 Pit contribute to the expanded Motheo mining complex.” Harris expects it to produce more than 50,000 tonnes of contained copper in the 2025 financial year. That's around $422mn of revenue at the current market price.
Cash and Sandfire interests exceed market capitalisation
This is hugely important to Strata. That’s because the company’s uncapped NSR has a book value of A$21.2mn (12.5c) and accounts for 39 per cent of NAV at 31 July 2023. It is likely to be worth far more as output from the A4 Deposit ramps up, a point that Strata’s share price simply fails to reflect. In fact, the combined value of the two NSRs, net cash and the holding of listed Sandfire shares are worth A$42mn, or 38 per cent more than Strata’s market capitalisation of A$30.4mn alone.
So, although Strata’s shares have yet to re-rate as I had anticipated (‘A change of listing could make this stock a bargain’, 6 March 2023), I feel that resource-hungry investors in Australia are likely to cotton onto the value on offer when Sandfire ramps up output at the expanded Motheo mining complex. Strata’s 44 per cent share price discount to NAV and the improved risk profile following the de-leveraging of the company's balance sheet has made the shares a buy.
■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com at £16.95 each plus P&P of £3.75, or £25 plus P&P of £5.75 for both books.
