I have been asked by a reader to prepare a research note on Premier African Minerals Limited, and as he asked nicely I thought I would oblige.
This is a company with 1,886.21m shares in issue at a current share price of 0.4p, valuing the company at £7.54m. It suffers from the same issue that I raised on Solo Oil (https://riskybearinvesting.com/2016/10/17/research-note-solo-oil-aim-solo/) earlier this week in that it needs to be forced out of the sub penny share territory before investors can take it seriously and treat it more than just a ‘punt’
That is assuming of course that there is underlying value to be had moving forward. The company is currently haemorrhaging money, having made a loss of £3.24m in the six months to 30th September 2016 (£740k did relate to amortization and depreciation) . For a company worth so little, that’s a significant amount to lose in six months. The company is currently supported by equity placements with Darwin Strategic Limited, explaining the significant number of shares now in issue.
So, I won’t be investing in this company on the basis of cash flow alone for the time being. What is it then that would make the company worth investing in?
Company in Transformation?
The company has stated that it is in the process of transforming an exploration and development company into one of production and revenue and value generation. This is arguably a wise strategy as we have seen many small exploration companies on AIM disintegrate under the pressure of equity placements RRR, RGM, ORCP, ASPM, THOR to list but a few.
The companies principle assets are currently:-
- Zulu Lithium – exploration phase lithium development.
- RHA Tungsten Mine – producing Tungsten mine which is expected to yield 10,000mtu per month, providing revenues of $300k per month.
- TCT – a 52% interest in TCT Industrias Florestais Limitadaholding limestone deposits and forestry operations.
- Passive 2% share in Circum Minerals.
The company also has assets, including Tinde Fluorspar, Globe multi-element and graphite and Rare Earth Elements at Katete, Zimbabwe, and mining activities in Togo, West Africa
The company therefore has one producing asset, with no prospects of other assets generating a return any time soon. The RHA mine has to support the company moving forward, else further equity placements will take place. PREM have stated that revenue of $300k per month will be generated by February 2017, but does not provide an indication of profitability after debt repayment, cost of sales etc are taken into account. Without a figure it is difficult to speculate where the company will be financially this time next year.
I wouldn’t say the company is in transformation – that phrase implies that the company is moving away from exploration and early development assets into mature, revenue generating assets. In direct contradiction to this transformation strategy announced on 27th September in the half year results, the Company announced on the 18th October that it has made an investment in Casa Mining.
The company does not seem to appreciate that with its current assets it needs to keep spending on a tight leash, PREM announced on the 18th October that it had spent $300,000 through further equity placement (of about 5%) to make an investment in Casa Mining Limited. What causes me greater concern than this strategic U-turn is that:-
- Casa made a loss of $2.7m in the year to December 2015
- Casa has assets of only $683,000.00 as at December 2015
- Mr Michael Foster, a director of Premier, holds a 5.6% interest in Casa.
- The fact that it is claimed Casa has spent over $30m to date, yet is willing to part with a 4.5% stake for a meagre $300k is testament to a state of financial distress.
This to me screams that Casa is using PREM as a listed investment vehicle, with no regard for PREM’s shareholders. There is no near term commercial value to be had for investors of PREM through the Company making this investment, and even should Casa define a mineral resource that is JORC complaint, the next stage of development will be various feasibility studies which will likely require further financial input from PREM, again to likely be funded through further dilution.
Circum The Saviour?
The Company holds a 2% investment in Circum minerals, which owns the ‘Danakil project’, claiming it to be a unique and world-class potash project with one of the largest potash resources in the world. Circum further states
- The project features lowest quartile industry operating costs for both SOP and MOP.
- The project will be able to deliver substantial production to the Asian market at the lowest cost per tonne of any producer.
- The optimized after-tax NPV (at a 10% discount rate) amounted to US$2.1 billion and nominal IRR amounts to 26%.
- The mining licence agreement negotiation is well advanced and Circum expects this to be completed before year end.
- Morgan Stanley is running a process to help find a strategic partner for Circum and/or provide a liquidity alternative to shareholders.
The involvement of Morgan Stanley in seeking out financial partners is the only fact that gives me any serious thought to Circus, that was until I realised how prohibitive the cost of bringing the project to production would be
Initial CAPEX is a stated to be $2.6bn for the project, with $2bn cash required for development (http://circumminerals.com/sites/default/files/Circum%20Fact%20Sheet%20%28Dec.2015%29.pdf). Circum has not divulged its financial state to the wider world but it is safe to say that it does not have anything like that sort of money available, and a floatation will not realise anything like this sum. So it will be down to a strategic partner to take on the financial burden. I would say its likely that the entire project will be sold with a production royalty payable back to Circum of 2.5-5%. To put this into perspective, PREM’s share of the CAPEX is $40m, 5X its market cap.
There has been media references to the smaller ‘Dallol Project’ which was funded on a valuation of $200m, with $50m being raised to take the project forward. A similar methodology could be applied to Circum if the project is conducted in phases, which would see PREM’s share reduced, but still potentially worth a fair bit. The question is, how much…
The number of AIM companies that have claimed to have a world class resource but go bust before they can do anything with it is beyond counting. I question whether this project is actually worth anything to current investors as the share suffers from further dilution and, if it makes poor investment choices such as Casa, the company may not exist at all by the time Circum’s project is producing.
The Company frequently releases update RNS’s to the market, but the crux of the matter is:-
- The company has one producing asset but has not indicated the level of profitability that this asset will provide, and so a prospective investor doesn’t know if further dilution is just around the corner.
- The company is, at the Director’s behest, investing in an unlisted company which is years away from returning value – with potential conflict of interest between a director and PREM’s shareholders.
- The company has a 2% share in a project with a $2.6bn capex ($2bn cash, $0.6bn from production), which will be diluted as it is funded or put further financial pressure on the company to participate in the funding
In summary, I would not be happy investing in PREM at this time. The Company is one of no identity – the Directors should be focusing the company on a few assets with a view to developing a positive cash flow which in turn will enable them to reinvest and generate further value. Wild investments funded through dilution of equity is dangerous to investors.
An investor who wants to see a good return with low risk should have a look at Virgin Money http://bit.ly/2dAe8gH or Easyjet http://bit.ly/2dvYUts. I may hold positions in both, but theres a good reason for it.
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