Understanding the rules and intent of Director Share Dealings

I’ve been meaning to put aside a section of the blog for regulatory topics. There is a lot of misconception in the smaller cap investment community around certain FCA and Stock Market rules. Some of the rules around Statutory Director Dealings, Prompt Release of Inside Information and Notifications of Substantial Shareholder Interests can be complicated and hence are frequently misunderstood amongst retail investors.

I’ll start by covering Director Dealing, prompted by a twitter debate yesterday I had with a few people on this topic.

When Can Directors Buy and Sell Shares?

Directors, like any other shareholders must comply with Market Abuse Regulation (MAR) 1.3.2 on inside information. This regulatory mandates that Persons Discharging Management Responsibility (PDMRs) i.e. the company statutory directors in this context cannot deal when they are in possession of price sensitive information, i.e. information that when released to the public is likely to have a material impact on the share price of the stock in question. A period of time when Directors are prohibited from dealing is referred to as a ‘closed period’.

On top of this ‘catch all’ the EU Market Abuse Regulation (MAR), Section 19 goes a step further to explicitly state that PDMRs cannot deal in the period of 30 calendar days before the announcement of interim financial results or a year end results. This is referred to as the MAR closed period. Taking the AIM market for example, companies need to publish a half year financial report within 3 months of the half year period ending and the final results within 6 months of the end of the full year. It is worth noting that the full annual report does not need to be published on the same day, the closed period can end on publication of the final results statement, assuming no additional material information will be produced in the annual report which is not included in the Final Results statement.

Let’s take a look at how this affects AIM companies specifically now. The rules prior to the adoption of EU MAR from summer 2016 were actually 60 days, so the MAR actually relaxes the closed period requirement relating to release of financial information somewhat. AIM companies as part of AIM rule 21 are though also now required to have in place at all times a dealing policy which must also specify the company’s closed periods. This dealing policy though is not required to be published publically by the company and therefore it may not always be clear whether the company is in a closed period of not.

What director deals should be disclosed to the market? When should disclosure take place?

The EU MAR sets out all the requirements, but the core requirements are the PDMR’s Name, Position within company, Volume and Value of shares. Disclosure is only required for transactions in aggregate over EUR 5,000. This does not mean PDMRs are free to deal though during closed periods, it is just that no disclosure is required for dealing below EUR5,000 in aggregate.

The PDMR must disclose to the company within 3 business days of the transaction, and the company must disclose on the same terms. I.e. if the PDMR discloses to the company after 1 business day then the company has a further 2 business days to disclose.

Do these rules apply to other instruments, such as debt or options? Are there any other exceptions?

Debt and other financial instruments are within scope, as is the lending or pledging of existing shares. Section 19 (12) of the EU MAR does make two important exceptions, 1) if the director needs to make a sale due to financial distress and 2) ‘participation of employee share saving schemes and qualification or entitlement of shares’.

Point 2 from the MAR is not prescriptive, unlike the Model Code which was the UK precursor to these rules. There is some good commentary from lawyers Stephenson Harwood on topic though. The understanding from SH is as follows:

  • Grants of options/awards of shares will be prohibited in a MAR closed period
  • MAR sets out certain circumstances in which the issuer may permit options to be exercised during closed periods.  These include the situation where the option would lapse, if not otherwise exercised, during the MAR closed period, provided the option holder has given at least 4 months’ notice of the intention to exercise.

The view seems to suggest that Point 2 above concerns the joining of an employee share scheme rather than anything that could be considered ‘dealing’. In summary share option cannot be exercised nor transferred during a closed period.

Worked Example – URU Metals

The example I debated on twitter related to the exercise of share options by URU Metals CEO John Zorbas and the belief that an insider can exercise share options during a closed period. For information, the value of the transaction was £60,000 or 0.38% of the share capital of the company. Prior to the announcement Zorbas owned 3.6% of the company, so this takes his holding above 4%.

Firstly to establish is this considered a director dealing? Yes, this is the exercising of share options and as noted above is to be considered as dealing. The director cannot therefore deal during a closed period. However it is stated that:

The existing options expire on 23 May 2017.

This could mean the options could lapse if a closed period occurs, (i.e. the directors have inside information, remember this has to be price sensitive) between today, the 20th April and the next four weeks, i.e. 23rd May.  The only exception which would allow the exercising of these options during a closed period is if four months notice had been given by the director. The RNS though states:

Mr Zorbas has informed the board of his intention to exercise his existing options today. (19th April 2017)

I therefore conclude based on the content of the RNSs that the company is not in a closed period and the CEO is privy to no inside information not yet released to the market. John Zorbas is therefore able to exercise his options.

Let’s just beat this to death though – lets look at mandatory closed periods regarding the publishing of the financial statements, I.E. MAR Closed periods; the company has a year end date of March 2017, it therefore must publish its final accounts by September 30th 2017, so assuming like last year URU publishes on the deadline, the closed period then would start from Sept 1st 2017. URU may decide to publish the final results earlier, but we can safely assume there is not a closed period at time of writing, i.e. April 2017.  The Half year report for the period for September 2016 was published within the deadline here in December 2016. This rules out a MAR closed period.

What are the general implications for Directors of MAR?

In general it can be very difficult for Directors to be able to buy or sell shares in the open market or exercise share options. This may be particularly true for rapidly growing companies, those who report quarterly or those where lengthy material commercial negotiations are taking place. The simple reason is that the company may be in a closed period for very long periods of time in all of those scenarios. This is why you will often only see director deals popping up straight after results are issued or after other material RNS.

What can shareholders read into Director buys and sells?

Director Buys can be both a buy and sell signal. Small director buys are frequently ways to spoof the market. It is worth considering the context, clearly a £10,000 purchase for a director earning £200,000 is minor but this does not necessarily mean it is a spoof, but if the company is cash strapped then it could be a spoof to support the share price into an equity raise.

Director Sells can be a sell signal, if a director with his/her knowledge of the company wishes to sell then you could read this as a vote of no confidence. Small sells though are often made to settle tax liabilities, particularly if the director is issued and exercises options at the same time. If the company reaches an all time high and the directors start to make material sales then the story could be different of course.

SUMMARY

Directors cannot deal in the shares, exercise options or other financial instruments in the companies where they are board members during a closed period.

Director buys and sells outside of this period are not automatic buy or sell signals to other shareholders and should be taken in the broader context of the situation with the specific company concerned.


Disclaimer – I have no conflicts of interests regarding any companies mentioned in the post. This means no positions long or short nor any other financial or non financial incentive for publishing the post. I will not initiate any positions in the next two trading days from the date of the post being published.
 
This post is purely my opinion and should not be taken as financial advice. I welcome any alternative comments and will consider adjusting posts based on information made available to me.
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URU Metals, proceed with caution

Disclaimer: Shareinvestors is not authorised by the Financial Conduct Authority to give investment advice. Terms such as ‘Buy’, ‘Sell’ and ‘Hold’ are not recommendations to buy, sell or hold securities, these statements and other statements made by the author have the meaning only to express the author’s personal views on the quality of a security. Independent financial advice from an authorised investment professional should always be sought before making investments. CAPITAL AT RISK. Full Disclaimer here.

It is pleasing to see investors making some serious money on AIM, the last 12 months on the junior market have been the most bullish I can recall for sometime. Today I take a closer look at a recent ten bagger, URU Metals. The company has raced ahead over 1000% in since November and a the placing yesterday at a premium has sent the shares sharply higher. Today I take a look at whether investors should take caution or continue to pile in? Notwithstanding that Momentum is also with this stock and we all know how important that is on AIM!

Quick Facts

Jim Mellon bought this to aim as Niger Uranium in 2008.  The company had a few assets in Africa before returning some funds to shareholders. A new management team was then bought in and the company was renamed as URU Metals in 2010. The company today has a portfolio of mining assets.

Facts as at 13th February 2017:

Current Share Price 3.92p
All Time High 15p,  April 2011 (URU era)
52 Week Low/High Low 0.25p on 12th Feb 2016
High 4.4p on 13th Feb 2017
Market Capitalisation £27m
Enterprise Value C£27m (No Debt)
Fully Diluted Market Capitalisation C£27m. Limited warrants/options in issue.
Asset Backing Limited. $2.9 Intangible (Previously written down from $4.6m)


Assets and Strategy

The core asset is the Zebediela Nickel Project, with company stating “a Preliminary Economic Assessment (“PEA”) completed in 2012 reported inferred and indicated resources (Non-JORC) totalling over 1.5 billion tonnes with an estimated Net Present Value of US$317 million and a post-tax IRR of 18.6% (assuming a post-tax discount rate of 10%, nickel price of US$8.50/lb, production of 20,000 tonnes of nickel per year over a 25 year mine life, a total capex cost of US$708 million, and an opex cost of US$3.35/lb Ni).”

The problem is the Nickel price is well beneath that level today at sub $5/lb. I therefore realistically can’t see an appetite for investors committing $708m for an unrisked return of US$317m. The project is likely to need sustained Nickel prices above $8 for a period of time before investors commit, even then Investors are likely to apply at least a 50-75% discount to compensate for risk. This takes the NPV down to at least US$150 million and this is also likely to be before you add in the costs of financing and the PLC costs. The other risk for the investors is that the project resource is not JORC approved, i.e. an independant verification is yet to take place.

That said Zebediela is perhaps not dead in the water just yet. The company announced here it would kick off a new work programme in 2017 with a particular focus on magnetite (Iron Ore) potential. URU suggests 27 million tonnes of magnetite should be accessible but no doubt this could improve further, which clearly may improve the project economics. I’m not an expert on Iron Ore so to assess a potential value of this resource I look to an Aussie magnetite miner on ASX called magnetite miners. This company has a 3.9 billion JORC compliant resource of Magnetite, far in excess of the provisional figures quoted by URU and yet is just valued at AUS$20m. So whilst it may contribute to the coffers, is the magnetite really a game changer?

It will be interesting to see how the Zebediela project develops further though, clearly it is a major Nickel deposit (12th largest in the world) and it could be that the work this year reveals a more attractive business case. An earlier NPV estimate was $1bn so there may be levers to pull to close the gap back to this level. Although assuming a Pre Financing Risked NPV of $150m (£75m) compared to a £27m market capitalisation I would suggest the company is fully priced based on this asset alone.

The company does though also have an Oil shale/Uranium asset in Sweden called Narke which has ‘exploration target of 1.47 billion tonnes containing 303,000 tonnes U3O8 and 525 million barrels of oil equivalent’ according to the company. This is triple the amount of resource boasted by Berkeley Energia, a potential resource of 0.5 billion of oil is also interesting. That said it is very early days and no significant recent exploration drilling has taken place as yet and the Shale oil in particular may come up against all of the usual regulatory challenges. It is also not clear to me what the work programme is for 2017 on this asset and it doesn’t seem to be the focus of URU. I also note the assets have been impaired in the recent financial statements, which suggests directors are not placing much value on these assets.

CEO John Zorbas has also made it clear ‘The preferred route would be a sale’ according to an article published in the Daily Mail. I have a feeling though further exploration work to at least get an independent JORC/CPR will be required on both Zebediela and Narke to get anywhere close to the Risked NPVs. It could be that other investors can see further value in the assets, but it is still a ‘buyers market’ for mining assets at present and for that I am especially apprehensive about placing excessive values on either asset.

It’s perhaps no surprise then to broaden its options URU is also though now considering making a further acquisition, in the Lithium ‘space’ (I hate that word), which I will discuss later. If you are a Lithium bull with a long term horizon this stock may have appeal but there are also a few other questions investors should consider before jumping in though:

1) Are investors aware of the Corporate Governance?

There are lots of related parties in the structure here, I have attempted to piece together all of the information and I believe the structure to look like this:

screen-shot-2017-02-14-at-14-08-15
Figure 1 – Relationship Map, Source: Companies

NWT Uranium Corporation (NWT) is the largest shareholder but actually owns just 16.1% of the equity. It does though have two executive directors on the board, furthermore the board advisor also happens to be the NWT CEO. Fairly incestuous then and something for investors to be mindful of. The director influence means that NWT can call all the shots, the fact that both URU and NWT are run out of the same office shows that there is really no pretense about this either. This arrangement seems to have been put in place through a ‘relationship agreement’, as outlined in this RNS in 2010. At the time though this agreement seemed to allow for the placing of a Non Executive Director to the URU board, which is actually fairly common practise for a major shareholders. However, as mentioned above we have now ended up with NWT having most of the executive influence. It could be though that I have misread how this relationship agreement was supposed to work.

On the flipside, the directors do have substantial skin in the game both directly and indirectly, which has obvious benefits. The guys involved all boast impressive CVs and clearly have experience to get things moving. The holdings are also not so large that it would be impossible for other shareholders to call for an EGM either and vote through resolutions against NWT if ever there were the need, clearly it would be difficult though.

Why the Premium Placing?

I am always very cautious of small equity raises at a premium and/or small director purchases. These activities can often be used as ‘promotes’ ahead of larger equity raises. I use CloudTag as a recent example of this which had a series of smaller equity raises at a premium before signing up to a much larger and highly dilutive convertible instrument. I’m not for a moment suggesting this is about to happen here, but it is worth us looking into in more detail.

The recent equity raises for URU are shown below:

picture1
Figure 2 – Source: URU Metals, LSE

The most recent placing was at a huge 80% premium to the previous days closing price. This share issue was taken up 20% by NWT with the remainder to other unknown persons/entities. There appears to be no reason for such a large premium and on the face of it makes no commercial sense, especially given the placing is very small, i.e. just 11.8m shares representing just 2% of the existing share capital. To put this into context, an average of 52m shares a day had been traded in the month prior to the announcement, so it would have been fairly easy to pick up these shares in the open market at a much lower level.

It could be that the new investors are inside on a much bigger deal which will realise substantial value for URU, this is a potential explanation for the pricing and the most obvious reason would be disposal of one or both of the Zebediela or Narke assets. However, the directors would be obliged under the FCA and AIM rules to put this information out to market, the only exception would be if it was to jeopardise any commercial sensitivity around the deal.

Why is URU looking into Lithium Assets? Shouldn’t it focus on the existing asset base?

The company announced here in January 2017 that the company was pursuing new acquisitions, later it was suggested here that with the appointment of board advisor Henry Kloepper that the focus would be on Lithium. The existing asset base appears to have potential so why look to invest in Lithium assets? I shudder every time I hear the word lithium, it really is the promote asset of choice for junior AIM resource stocks in the same way that Onshore Oil and Gas assets were a few years back. Lithium captures the imagination with its increased demand from the industrial sector, particularly for its use in batteries. I can’t though recall any AIM miners achieving anything close to lithium production so far or doing any meaningful disposals of the said assets. If the existing Nickel/Uranium assets of URU are so good then shouldn’t the board focus on developing and monetising this existing base, to at least get them to a CPR/JORC compliant level? It could be though that the capital required to get to this level could be too much for a company of URU size, although I believe in the long term this is likely to realise the most value for shareholders. Other companies have managed it too, such as Sirius Minerals.

If you are lithium bull then let’s explore the lithium connection a bit further though, I refer you back up to the Relationship Map in figure 1, Henry Kloepper is advisor to the board to help URU look at lithium assets. As well as his hats of a) board advisor to URU and b) CEO to NWT, URU biggest shareholder he is c) also CEO of  Frontier Lithium, who since 2013 has been developing the Pakeagama Lake exploration prospect. This resource contains ‘8.2 million tonnes of what is the highest grade lithium deposit in North America’ according to the company. According to Frontier’s RNS page they have had 4 sub CAD$1m fund raises in just over one year. So does Frontier need further funding and is it intended for URU to raise further funds to take a stake either directly or indirectly in the Pakeagama Lake project? I could be well off the track here but something for investors to ponder.

Clearly if the asset whether Pakeagama or otherwise is of a significant magnitude and depending on the structure then this is likely to also constitute a Reverse Takeover (RTO) under AIM rules. This could see the shares suspended for a period of time.

How many NOMADS?

Another thing that struck me about URU, it has been through quite a few NOMADs. There is no suggestion that any of the NOMAD’s have resigned and in fairness the most recent NOMAD northland has been in office for a couple of years now. Frequent changes in NOMAD can be a sign of ‘opinion shopping’ though. This doesn’t cause me major concern at the moment but something investors should consider if it happens again in future.

Screen Shot 2017-02-14 at 11.23.01.png

SUMMARY

Neutral

It is clearly an interesting time for the company and the stock has captured the imagination of private investors after a period of very little activity. It’s not one for me though, even ignoring the related parties transactions which I tend to discount any stock for.

I just don’t see enough value in the assets and/or a clear investment case just yet to justify further increases in the share price, at least before seeing a revised economic study of the core Nickel assets and understanding which Lithium Asset(s) the company has its eye on. I’d also like to see further progress on the oil/uranium asset with a clear work programme. Last but by no means least I would also rather not take the risk to get locked into a potential RTO involving lithium assets too!

That said I definitely wouldn’t be going short, but I believe new investors should proceed with caution. If you a) have the risk appetite for a speculative miners, b) you believe I have undersold the assets and c) are comfortable with a few of the questions raised then perhaps you will have a different view here. Momentum is also with this stock and we all know how important that is on AIM!

Good luck to all holders!


Disclaimer – I have no LONG nor SHORT positions in any of the stocks mentioned. ShareInvestors.co.uk requires me not to deal in this stock in the next two trading days from the date of the post being published.

This post is purely my opinion and should not be taken as financial advice. I welcome any alternative comments and will consider adjusting posts based on information made available to me.