Gemfields (LON:GEM) – Pallinghurst offer will take back Faberge value creation from shareholders in brazen raid on Gemfields
Patagonia Gold (LON:PGD) – Completion of Cap Oeste Sur Este disposal
Tri-Star Resources* (LON:TSTR) – Financial restructuring and Oman antimony roaster update
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Currencies
US$1.1225/eur vs 1.1179/eur yesterday. Yen 111.12/$ vs 110.83/$. SAr 13.046/$ vs 13.078/$. $1.288/gbp vs $1.279/gbp.
0.741/aud vs 0.745/aud. CNY 6.805/$ vs 6.821/$.
Sterling slipping on election fears
European Commission President Jean-Claude Juncker stretched credulity when he told the European Parliament he had known nothing about Luxembourg's sweet tax deals with large companies; he'd served as finance minister and then prime minister as the small country struck the deals. (Bloomberg)
• It is inconceivable that Juncker did not know about the sweetheart tax deals which brought substantial tax revenues into Luxembourg at the expense of other European nations. The denial makes Junker look either dishonest or uninformed or both.
Commodity News
Precious metals:
Gold US$1,266/oz vs US$1,264/oz yesterday
Gold ETFs 59.8moz vs US$59.8moz yesterday
Platinum US$944/oz vs US$942/oz yesterday
Palladium US$817/oz vs US$807/oz yesterday
Silver US$17.29/oz vs US$17.31/oz yesterday
Base metals:
Copper US$ 5,681/t vs US$5,642/t yesterday – BHP lift force majeure at Escondida
Aluminium US$ 1,928/t vs US$1,913/t yesterday
Nickel US$ 8,845/t vs US$8,880/t yesterday
Zinc US$ 2,578/t vs US$2,577/t yesterday
Lead US$ 2,108/t vs US$2,079/t yesterday
Tin US$ 20,380/t vs US$20,300/t yesterday
Energy:
Oil US$51.4/bbl vs US$51.3/bbl yesterday
Natural Gas US$3.095/mmbtu vs US$3.144/mmbtu yesterday
Uranium US$19.75/lb vs US$19.75/lb yesterday– Sputnik news report that Rosatom, the Russian state nuclear corporation has contracted on $6.5bn of nuclear fuel contracts to US companies through its subsidiary JSC Techsnabexport. The group is now up to 95% of its agreed uranium delivery limits.
Bulk:
Iron ore 62% Fe spot (cfr Tianjin) US$54.9/t vs US$57.9/t – Iron ore prices continue to fall
Chinese steel rebar 25mm US$585.4/t vs US$587.2/t
Thermal coal (1st year forward cif ARA) US$66.7/t vs US$68.0/t yesterday
Premium hard coking coal Aus fob US$149.2/t vs US$149.6/t
Other:
Tungsten APT European US$220-225/mtu vs US$215-225/mtu
Quarterly hard coking coal US$285.0/t vs US$285.0/t
Company News
Gemfields (LON:GEM) 33.5p, mkt cap £184m – Pallinghurst offer will take back Faberge value creation from shareholders in brazen raid on Gemfields
• In a daring raid worthy of the Hatton Garden Gang, Pallinghurst are trying to seize the inherent value contained within Gemfields.
• Question is will Brian Gilbertson use his bus pass to get to the Gemfields vaults in this daylight robbery.
• The offer for the 53% of Gemfields which Pallinghurst does not own offers 1.91 Pallinghurst shares for each Gemfields shares. Pallinghurst shares trade on the JSE ‘Johannesburg Stock Exchange’. The offer on based on a Pallinghurst share price of ZAR345 on 17 May valued Gemfields’ shares at 38.5p on 17 May or £211.5m.
• Unfortunately for investors Pallinghurst shares have fallen on the JSE since then to ZAR310 today valuing Gemfields at around 10% less than when the offer first came out not accounting for movement in the rand.
• Sadly Pallinghurst have stated that they intend to delist Gemfields from the AIM market of the LSE meaning that investors will be stuck with stock on the JSE which we suspect they won’t want to hold.
• Closer inspection of Gemfields’ accounts highlights some interesting numbers in relation to the valuable Faberge brand and business.
• Gemfields has spent around US$58m, a tidy fortune, on developing the Faberge business but did not do so well in gaining shareholder recognition for its value due to Faberge’s consumption of available cash flow.
• Management have previously defended Gemfields’ expenditure on Faberge but while cash went in not much ever seemed to come back to shareholders.
• Faberge is valued on a ‘value-in-use’ basis at US$227m which way exceeds the carrying value of $80m by a whopping US$147m or 184% according to last year’s annual report, something most shareholders would have missed as it sits on page 108 and 109 of the annual report.
• Faberge sales orders agreed rose by 41% on a 53% increase in sales transactions to end December vs the comparable half year ending December 2015 according to the interims
• The cost of running the gemstone and Faberge inventory appears relatively stable at US$106.7m in February vs US$107.2m last June.
• While sales fell to US$6.8m from US$7.2m a year earlier this number excluded US$1.9m of orders that were delivered and realised post December 2016.
• Faberge has also moved into high-end watchmaking which looks like a hugely lucrative sector judging by the advertising it appears to justify. Faberge watches are winning prestigious awards and we suspect sales are likely to gain pace in this area.
• Faberge was valued at £89m in the December 2012 prospectus for its acquisition by Gemfields so it has gained in value on a ‘value-in-use’ basis presumably due to the substantial investment put into the business by Gemfields in recent years.
• Faberge stated in its prospectus in December 2012 that it had opened five new retail outlets from 2009 to end 2012 and was targeting two new stores per year over the next ten years. An ambitious rollout for such a high-end retailer and a cash drain on any business with each store costing ~US$1mpa .
• Faberge was to provide Gemfields with entry to the global luxury market, which was estimated to be worth US$244 billion in 20111 and is forecast to grow to US$305 billion by 2014. The hard luxury market, which includes luxury jewellery, watches, pens and lighters, represented approximately 22% (US$54 billion) of the total luxury goods market in 2011.
Conclusion: We think shareholders should stand up for their rights and see off the Pallinghurst marauders. The Pallinghurst Pirates have hoisted the jolly roger, look like they are about to sack the cabin boy, sorry Ian, and are making off for Gemfields’ treasure island unless investors make them walk the proverbial plank.
Patagonia Gold (LON:PGD) 1.65p, Mkt Cap £26.2m – Completion of Cap Oeste Sur Este disposal
• Patagonia Gold reports that it has now completed its previously announced disposal of the Cap Oeste Sur Este project, located in the Santa Cruz Province of Argentina, to a subsidiary of Pan American Silver for a total consideration of US$15m.
• The consideration for Cap Oeste Sur Este is payable in stages with $7.5m on completion with the remainder deferred. Patagonia Gold also retains a 1.5% NSR.
• Patagonia Gold says that it “will use the initial consideration of US$7.5 million for general working capital purposes and to reduce its net debt position.” The 31st December 2016 balance sheet shows net debt of US$25.4m representing 62% of net debt plus equity.
• Patagonia Gold continues to operate the main Cap Oeste project and expects to commission a new agglomeration plant intended to improve recovery rates, in early July.
• The project has a JORC compliant indicated resource of 49,000 tonnes at an average grade of 27.8 g/t gold and 1466 g/t silver representing 44,000oz of contained gold and 2.3m oz of silver. An additional 20,000 tonnes of resource at an average grade of 12.5g/t gold and 721 g/t silver is classed as inferred.
Conclusion: The sale of the Cap Oeste Sur Este project represents a sensible rationalisation of assets given the likely synergies with Pan American Silver’s Manantial Espejo operation and has the added benefit of easing some pressure on Patagonia Gold’s balance sheet.
Tri-Star Resources* (LON:TSTR) 0.155p, Mkt Cap £13.1m – Financial restructuring and Oman antimony roaster update
(Tri-Star holds 40% of SPMP)
• Tri-Star has released details of a financial restructuring involving its major shareholder, Odey Asset Management and associated entities, converting its £7.8m debt plus accrued interest making a total of £12.2m into equity.
• The transaction, which is subject to shareholder approval at a meeting to be held on 20th June, would leave Odey holding 54.27% of the enlarged company and introduce a significant and supportive shareholder as TriStar moves towards commissioning of its 40% owned antimony roaster and gold recovery plant in Oman.
• The restructuring involves a £9.1m (gross) fundraising through the issue of approximately 7,453m new shares at a price of 0.121855 pence per share.
• “Approximately £7.8m of the Placing proceeds will be applied to redeem the balance of the Loan Notes and the balance of £1.3m will be used to meet expenses of the Transaction and for general working capital purposes”. Odey will be subscribing for £0.7m of the additional £1.3m with the remaining £0.6m placed “with existing and new shareholders of the Company.”
• The company points out that with a cash balance of approximately £192,000 at 31st May it “currently has insufficient cash reserves to fund” a request by Odey for the redemption of its Loan Notes and that without this “restructuring, the Board believes that there is a material risk that there is a material risk that the Company would fail to retain the support of the Odey Entities and also fail to attract the further capital that will be needed to meet the Company’s share of joint venture company SPMP’s future additional funding requirements.”
• TriStar also warns that “If the proposals are not approved by Shareholders … the Directors would immediately have to seek alternative sources of potential funding which may or may not be obtainable on similar commercial terms or secured on a timely basis, or at all. If such alternative sources of potential funding are not found to be available, the Directors believe it is highly likely that the Company would be forced into administration.”
• We note that Odey has been a long term supporter of TriStar having funded some £8m to date. Their conversion of their loans into equity provides a stable platform for the completion of the antimony roaster project in Oman, removes the financial risk implicit in a request for redemption of the loans and further underlines their continuing confidence in the project.
• At the operational level, continuing metallurgical test-work has confirmed “good recoveries of antimony and gold from the test process and good quality of end product” and triggered enhancements to the process flowsheet. These, together with the integration of gold recovery of up to 50,000 oz per year have moved “commissioning and first antimony metal into Q1 2018”. The slippage of a matter of weeks from late Q4 2017 seems a reasonable sacrifice to capture process improvements in an improved facility.
• Commenting on the condition of the global antimony market, TriStar notes that “Since the start of 2017, the antimony market has risen significantly, driven by concerns over the availability of antimony from China, the world’s largest producer. Such concerns were recently heightened following environmental inspections on numerous antimony blast furnace facilities in a twelve-month inspection programme … which has already resulted in approximately 50 per cent of certain plant capacity in China being shut or suspended for non-compliance.” There must be some doubt as to how much of this capacity can be brought up to acceptable environmental standards and we suspect that some may now face permanent closure.
• Antimony: a source tells us that 70-80% of Chinese Antimony processing is now shut, according to the largest foreign antimony concentrate supplier into China
• 50% of capacity has already been publically reported as closed for non-compliance of environmental standards with the largest, Hsikwangshan Twinkling Star, ordered to close and given a month to transform or upgrade its facility. Roasters in Guangxi province are reported to have been out of production since late January and are unlikely to resume till later this year if at all. Imports of antimony concentrates into China have also collapsed causing prices of raw materials to fall.
• We forecast antinomy prices could hit 12,000-13,000 by September and probably higher after that if many roasters are unable to clean up and reopen
Conclusion: The financial restructuring of TriStar brings in an important and committed key shareholder and provides greater stability to the company’s finances at a time when large scale environmental closures of antimony plants in China is, perhaps, precipitating a strategic shift in the antimony market. Initial production of antimony metal from the SPMP plant in Oman is less than a year away and could come to the market at a key moment in the restructuring of the world’s antimony industry.
*SP Angel acts as Nomad and Broker to Tri-Star Resources