Glenwick and the dangers of Cash Shells. Will she return?

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.


Glenwick had its shares suspended this week from AIM for failing to do a reverse takeover within the deadlines permitted by AIM. The regulations state that an AIM investment company must do an acquisition within 12 months of listing, i.e. 5th September 2016. This means Glenwick now has 6 months, i.e. until 5th March 2017 to complete an acquisition or get booted off AIM, if that happened it would mean a costly readmission or perhaps the more likely scenario, never to see daylight again.

What’s the story with Glenwick?

Glenwick was a popular stock on social media, heavily promoted by various traders on twitter in particular.  This promotion contributed its first suspension on 23rd May 2016, this was after news was leaked to many of the same traders of a potential acquisition imminent in Turkey. At this point the market cap reached a lofty £3.75m on a share price of 0.168p (i’ll go on to explain why this was so grossly overvalued later). But how did this news get leaked and who leaked it? Was this news deliberately leaked to increase the market capitalisation, hence making the inevitable equity raise required to complete the acquisition easier?

screen-shot-2016-09-08-at-19-41-15
One of the many tweets on the day. ‘Twitter user’ (i’ll save their blushes)

Anyhow this leak, whether orchestrated or otherwise, it certainly backfired. The share returned from suspension on 22nd June after the acquisition failed and the share price quickly retraced, the price fell 64% to 0.06p on the first day with those suckered in to buying on the ‘leak’ being slaughtered. Since then the price has hovered around 0.06p as investors realised there was no chance of completing an acquisition before 5th September. The company was finally suspended at 0.065p, giving a market cap of £1.43m and locking in investors for up to 6 months.

Why are cash shells such a dangerous game? How should I value a cash shell?

In my view an AIM cash shell at fair value is worth £0.5m for having a listed vehicle + cash x 70%. The 30% discount on cash is due to some money being taken up on non value creating activities, i.e. plc costs and advisory fees for acquisitions. Right before the initial suspension on news of an acquisition in May, Glenwick had £1.1m of cash, so using my method this would give a valuation of £1.2m. This compared to a market capitalisation of £3.75m, a 300% premium to where I think it should have been trading.

A cash shell is one of the most speculative investments you can possibly make, you have no asset knowledge, you are simply putting all your faith in management to make a value enhancing deal for shareholders. If management have a history of value creation then you can add a premium to my fair value method above, maybe 20%-30% is acceptable. Glenwick though was trading at more than 300% of its fair value. How many managers have a history of creating this sort of value overnight? I don’t think I would even pay a 300% premium for a board comprising of Warren Buffet, Jim Mellon and Steve Jobs (RIP).

So will we see Glenwick Return? What deal will be done?

Glenwick appointed a couple of heavy hitters to the board shortly before suspension. Jaap Poll is an experienced oil and gas professional who has held CEO positions in small/medium exploration companies. Amanda Van Dyke was also appointed, Amanda is a well known Asset Manager in the city and no doubt has the connections which will come in useful.

(Slightly off topic but I have no idea how the corporate governance is working here, all the directors are non executives. Non executives are meant to be a check on the executives, but there are no executives? I’m also unsure how Amanda can act as a director at all, she works for Peterhouse who are one of the companies advisors in the capacity as broker. Surely Amanda is conflicted? I guess it is AIM though, so none of this really matters!)

Anyway, returning to the topic. I do believe we will see a Glenwick return, but time is running against them, the disposing counterparty to the deal will know that Glenwick is time constrained and thus they will have the upper hand. There is a big risk that the counterparty will simply push the deal towards the deadline to get the price they want, which could result in a poor value deal for Glenwick shareholders.

Summary
SELL – Target on return 0.055p

Obviously you can’t sell, as it’s suspended but to place a bet on where the price will come back at. At the price of suspension Glenwick was priced at a 20% premium to fair value, as mentioned I don’t expect a great deal here and at this end of the market I expect a small discount required to get capital raised on top. This explains my rationale but I hope for those locked in here that I am wrong. I doubly hope for those same investors that she comes back at all.

Well Done to Doriemus and Dave Lenigas! This equity raise is an example to many AIM & ISDX companies.

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 was pleasing to see the RNS from ISDX listed Doriemus Plc yesterday, which you can read here. It was one of the rare occasions I have seen a discounted open offer on AIM/ISDX, as opposed to the typical discounted placing that you often see. Open offers are much fairer to existing shareholders as they allow them the chance to get in on equity raises on the same terms as that of the equity raised from the new investors. This is highly commendable and something I would like to see much more on the junior markets.

The terms of Doriemus open offer give shareholders a chance to subscribe for 3 new shares for every 10 shares owned as at 5th September 2016. The subscription price is 0.035p a 22% discount to the mid-price on the 5th September of 0.045p. The share price in the two trading days since the RNS has held up and maintained at 0.045p as at 7th September.

The target for the fundraising is £865,200 i.e. which would be 100% open offer take up. What is somewhat unique about this Open Offer is that there is actually no equity being raised here from new shareholders, i.e. a placing, however if the £865,200 target is not met then Doreimus have stated in the RNS they reserve the right to seek placees for any deficit.

Who are Doriemus?

doriemus-logo-wall

Doriemus plc is an Oil and Gas exploration company that David Lenigas, one of the junior markets more colourful characters has recently returned to as Executive Chairman. David last left Doriemus after stating he was resigning all of his directorships on the AIM market. Doriemus is no longer traded on AIM though after it was forced to delist due to not fulfilling its investment policy to the satisfaction of the regulators. It now trades solely on the ISDX market and is capitalised around £3m, perhaps being best known for its onshore licences in the Weald, most notably the infamous Horse Hill ‘Gatwick Gusher’. Doriemus holds an effective 6.5% interest in the Horse Hill PEDL137 licence.

Any Reason to be cynical?

Unfortunately on AIM/ISDX I find myself always looking for the ‘catch’ and my immediate assumption was that Doriemus was struggling to find any interest from the investment community to take part in a placement. At this end of the market it is often ‘flippers’, i.e. the short term traders who look to take part in discounted placings and then immediately dump them on the  secondary market.

ISDX is not a terribly liquid market so not great for flippers. There are a limited number of brokers that trade on this market, you can though trade ISDX through Hargreaves Lansdown, one of the more popular retail brokers, but this requires telephone dealing which is a more expensive and cumbersome option. This lower liquidity means the market makers offer wide spreads, i.e. the difference between the buy price and the sell price. It can therefore be difficult to flip the stock without a high degree of risk.

I asked David Lenigas, Execuitve Chairman of Doriemus last night via Twitter why there was no placing or combined open offer and placing, the later would have the bonus of putting a floor under the amounts raised, he responded:

‘No. Thought about it [placing], but a full open offer gets what I needed done. No one can complain then… Absolutely no one’

David is also confident that the open offer will be well subscribed.

‘ I really don’t think there will be much not taken up. Plenty of extra takers around. And there is a lot going on’

Summary

I don’t have a view on Doriemus from a stock valuation point of view but well done to David Lenigas and Doiremus by setting an example for many other Junior companies with this Open Offer. In my view where significant discounts are needed to raise new equity then existing shareholders should always be able to participate on the same terms. I look forward to other companies following this example!

Gulf Keystone – Edging closure to restructure. Are the shares still a sell?

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.


I previously rated Gulf Keystone as a strong sell on the news of a debt for equity swap being announced in July. To be honest I have considered these shares a stonking sell all the way down from 100p, unfortunately I have nothing in writing to prove it, you’ll just have to trust me! Anyway on to my musings, there have been a string of further announcements in the past few weeks from Gulf Keystone and I thought it quickly worth reviewing what they mean for shareholders and whether this means my verdict has changed.

The most notable RNS was the open offer launch on 31st August, which saw the shares go ‘ex  open offer’. In lamens terms, this means that any shares bought after 30th August are no longer entitled to subscribe for shares under the open offer terms, i.e. the right to subscribe for 20 shares at 0.86p for every 9 shares owned.

There was also a revised Competent Person Report (CPR), a shareholder resolution regarding the proposed increase to authorised share capital and details of the scheme of arrangement for noteholders. The CPR was unchanged from the last reserves report issued in June 2016, aside from the hydrocarbons produced since and the RNSs regarding the shareholder resolution and noteholders scheme were also nothing more than formalities.

So what is the timeline from here? Is this Restructuring on track?

Gulf Keystone cleared the first hurdle on 5th August through the passing of shareholder resolution to increase its authorised share capital, this being to accommodate the new shares to be issued to get this restructuring away. No drama on the day despite various petitions being passed around on the bulletin boards, there was even word of emails being sent to Theresa May, I’m guessing she was tied up with Section 50. In the end only 26% of the total shareholder base turned out to vote, so it looks like insufficient traction and/or appetite from the largely retail shareholder base to block the move. Clearly any attempts from shareholders to block this would be ‘cutting off your nose to spite your face’, but it has happened before with other companies…

The next step is the open offer which closes on 15th September. Gulf Keystone desperately needs this cash to start a workover program to maintain production levels. Gulf Keystone’s largest shareholder, Capital has already agreed to subscribe for up to $20m of the $25m target, so this seems well within reach.

The final piece in the puzzle is the Debt Holders scheme of arrangement which should be finalised on 22nd September. This process requires 75% of the bondholders to agree to the terms of the restructuring. Nothing more than a formality, Gulf Keystone already have the support of the majority of its bondholders.

In summary the the restructuring is on track and it will almost certainly go through.

Are the shares still a sell then?

In my article on Gulf Keystone last month which was written before the shares went ex open offer the share price was then 5.12p, i.e. an effective price was 2.15p, assuming you fully subscribed to the offer. I went on to outline why I believed at that point you were still better off getting out now, and my logical target was around 1p for this company. I won’t repeat myself, have a quick read of the article for my arguments. SPOILER – I can’t see any other outcome other than a DNO takeover, or at a push a rival oil company, but I really can’t see a bidding war justifying 2.15p.

Nothing has changed since I wrote the above article and the market has started to agree with me. The share price has obviously collapsed since the shares went ‘ex open offer’, the price at point of writing is 2.39p. Amazingly though this is still actually a higher than effective price of 2.15p, which was when I published my original article. Fundamentally the shares are still 40-50% over what I believe will be the final offer price for Gulf Keystone.

If I owned the shares I would be selling my existing holdings. I would though be sure to still subscribe in full to the open offer at 0.86p, these open offer shares are in the money based on where I believe this will end up, i.e. an acceptance of DNO’s bid.

SELL, Target 1.2p (Generous)

Rare Earth Minerals plc – Is it worth 280% premium to its NAV?

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.


Today I’m looking at Rare Earth Minerals plc (REM) which is an AIM investment company, i.e. it makes mostly non-controlling investments in other listed and unlisted companies. These types of companies are referred to as Investment Trusts on the main market. In this article I’ll review Rare Earth Minerals plc and give a verdict on its current valuation.

How do I value at Investment Company?

As with all investment companies trusts you should look at three factors, these are as follows:

  1. Do you believe in the investment Case?
  2. Is the past performance of the company and/or the management reasonable?
  3. Is the share price discount or premium to Net Asset Value (NAV) acceptable?

You need to answer all three questions with a resounding ‘Yes’ to invest in Rare Earth Minerals.

1) Do you believe in the Investment Case? 

This company invests in Lithium Exploration companies, Rare Earth Minerals is therefore partly a macro play on the Lithium price. As Lithium is not exchange traded is it is not straightforward to get an accurate spot price, however industry sources who are following negotiated contracts state that the price per Metric Tonne has increased by 300% between 2005 and 2016. The current estimated spot price of Lithium Carbonate is $8,000 per Mt.

Is the demand for Lithium likely to persist? The most common use for Lithium today is a component of rechargeable batteries, with the big lithium guzzlers being electric car makers such as Tesla, an industry still in its infancy and in my view with plenty of growth opportunity. Demand to me looks good for this shiny metal.

What about the supply? According to a 2008 US Geological Survey global reserves were estimated to be 13 Million tonnes. However, according its estimates we are currently producing at 0.6m a year. Do we have a crunch here? Surely on those projections we will have used up the global resources by 2040.

Screen Shot 2016-09-04 at 11.23.39
Source: US Geological Survey

 

I very much doubt it, recent exploration activities have resulted in a formation in the USA that could contain as much as 18 Million Mt of Lithium. As the price of lithium increases, exploration becomes more attractive and thus I am sure the reserves at 13 MT are vastly understated.

Some are of the view that demand growth will outstrip supply availability so on this basis you can be fairly bullish on the Macros. However,the market is currently an oligopolistic structure, i.e. just a few big players who account for most of global production. According to Macquarie some of these players are restricting capacity to keep prices high. The new players like Bacanora Minerals will challenge this and force the oligopoly to increase output to maintain share, this could put a cap the prices. I’d be surprised if the Lithium price falls significantly.

2) What is past performance like of the company and/or the management?

I’ve plotted REM’s NAV per Share vs. the price of Lithium Carbonate to the end of 2015. It certainly looks as though shareholder value is being created through REM’s investments.

REM Nav vs Lithium Price

I don’t have any view of the management but the expense to NAV ratio is very high, Rare Earth Mineral’s has a handful of investments and yet has administration expenses of £2.25m in 2015, this is 13% of NAV and before any financing costs. The average Expense ratio for investment companies investing in UK companies is 1.61%, so REM is 10 times the average. Why is this so high? REM is an early stage investment company so I am prepared to cut it some slack, but this still seems way too high.

What does the discount or premium to Net Asset Value (NAV) look like?

I estimate that the current premium NAV over the market capitalisation of REM is a whopping 287%! See below for how have I arrived at this figure.

REM NAV

It is typical for an Investment company to be trading at a slight discount to NAV, mainly to reflect the issue of liquidating large positions. Some investment companies do trade at a premium, 3i a private equity fund for example is currently trading at a premium of 20% over NAV. This is for two reasons, 3i has an excellent track record at delivering shareholder return, its investments are unlisted and hence usually recorded at cost, private equity by definition are in business to deliver a return on its unlisted investments. The premium therefore reflects the markets expectation that 3i will deliver 20% return on its current investments.

80% of REM’s portfolio is listed and 20% is unlisted, so the market is currently placing a humungous value return on the unlisted assets, i.e. those held at cost. The unlisted plays are Greenland, Yangibana and 30% JV interests in Mexilit and Megalit concecssions in Sonora Lithium area. Note the JVs is with Bacanora one of REM’s listed investments.

The house broker WH Ireland has calculated risked NPVs on these unlisted assets of £24m, so adjusting the Unlisted portion investments above:

REM NAV 2

Still a huge 152% premium over NAV!

Conclusion

I don’t think it is unwise to have some lithium exposure in your portfolio. However, the share price of Rare Earth Minerals PLC is at a gigantic premium to its NAV, even after considering the unlisted investments. I’m not saying REM is a bad company, although I do question why it has such high admin expenses. REM has though delivered some decent increases in NAV per share, however this increase is largely though increases in market capitalisation of its listed investments.

My advice would therefore be that if you are a lithium lover, you may as well buy shares in the secondary market, i.e. direct holdings in Bacanora, Mcarthur and European Metal Holdings and you could effectively replicate the same assets as REM at a much cheaper price.

SELL
Target 0.5p

African Potash – How long will £0.5m last? and who are AMS?

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.


African Potash raised £500,000 though the issue of 235m shares this morning 1st September, before expenses, at 0.2125p. The RNS fails to mention it but this is a whopping 39% discount to the closing price of yesterday and even larger than the discount I predicted here. This is definitely up there as one of the biggest discounts to market price on an equity raise I have seen on AIM. Investors demanding that much of a discount tells you everything you need to know. We have already seen 53m shares traded by lunchtime, 10 times the normal volume, this means that many of the new shares are likely to be have been already forward sold before they commence trading on 6th September.

A further 70.5m of options were issued for the new investors to subscribe to further £150,000 of confetti at the same issue price. Unsurprisingly the share price has collapsed this morning to 0.25p, so these are unlikely to be exercised unless the price picks up and gets back over 0.3p.

The final equity issuance concerns £36k worth of shares that have been issued to African Management Services Limited for ‘administrative’ services. I’ll cover this further below.

We also saw in the RNS a one year extension to the bridge loan from the FD’s wife, Katrina Clayton. African Potash already has the award for the most expensive loan in AIM history, but do we now also have a contender for the longest bridge loan in AIM history? The ‘bridging’ loan is extended at the same coupon rate as previously, but with a 5% arrangement fee, this equates to £37.5k upfront and Katrina will continue to be paid £125k a year in interest. Katrina can also convert £50,000 parcels of the loan into equity at the 0.2125p issue price, a mechanism for her to start recouping back the loan if there is any strength in share price.

So how long should the money raised from the placing last?

It irritates me that African Potash have not included the current cash balance in the RNS, this is the most critical metric that the shareholders need right now. The fact the company hasn’t stated what the cash balance is suggests to me that the company is running on fumes. In fact, the last time we saw a cash balance from African Potash was 9 months ago, in December 2015 and at this point it was £0.4m. It has received £1.5m of funding since, including the money raised today. I estimate that African Potash is burning £1.4m a year on general trading/admin expenses, so we can expect that by 31st December 2016 a balance back around the £0.5m mark, assuming no revenues.

Could we have revenue? Don’t get your hopes up, the only tangible indicator of revenues since inception was the Zambia deal announced last week and covered here. This deal at best would lead to £75k of revenues in 2016…at best! I therefore believe we can assume another placing will be required. The timing for that will be at the latest March 2017 and that assumes it will be possible by then….

So will African Potash be able to secure further funding?

The fact that only £500,000 could be raised from ‘investors’ this time around is a big red flag. You could argue that perhaps African Potash only needs £500,000 to fund the business until it starts to receive revenues, of course in my view that is a naive argument. You could also argue that having loans can lower the cost of capital, also naive. That may be the case in well run businesses! In this case with such an expensive loan and a lack of earnings visibility it certainly doesn’t create any shareholder value at all having this loan. With the interest payments double the Zambia revenues announced I can’t see why the directors wouldn’t look to pay off the debt as priority number 1… if they could. This again leads me to once conclusion, I believe there was minimal interest in the equity raise and thus poor Katrina was given a choice, to either a) extend the loan or b) bring African Potash into default and with this option the chances of her getting her money back would be £nil rather than £remote.

Adding weight to the dire funding situation, the below table summarises the 3 equity raises since Chris Cleverly took the reigns as CEO:

afpo placing

As you can see African Potash have secured less funding each time they go to their broker. Even more ‘telling’ is that between January and September the discount needed to get the placing away has increased by 30%!

In summary, I cannot see a further placing being possible without material revenues between now and the next fund raise, which gives African Potash potentially 6 months before it may be forced to throw in the towel. On top of that, any stock market correction between now and then, i.e. change from the current ‘risk on’ environment and African Potash is quite simply f**cked. (excuse my language)

So what about the AMS Shares? Who are AMS and what services do they provide?

I was drawn to the AMS part of the RNS as it wreaked of related party transaction – I was correct. The Annual Return showing the current directors is here and the last accounts of AMS, year ended May 2015 are here.

Based on the information in the two documents, the directors of the company are Phillipe Henry Edmonds and Andrew Groves. Does the name Phil Edmonds ring a bell? Yes he’s an ex cricketer for England, taking part in 51 test matches in his heyday. He’s also accused of paying bribes to officials in Africa, see the Guardian story here and the more recent coverage by Forbes here. Phil’s fellow director and business partner Andrew Groves also had the honour to be a former director of African Potash – hence the related party.

The services which AMS are providing are apparently relating to admin and accounting services. I’m not sure Phil and Andrew are qualified bean counters, so are there also other services being provided here? I am all for ‘innocent until proven guilty’ in the case of Messrs Edmonds and Groves, but I think we should know whether Chris Cleverly and African Potash continue to have a business relationship with African Management Services? Or is this is an historic liability? So more concerns here for me, albeit probably unimportant compared to the potential death spiral unfolding…

Summary

SELL – Target 0p

I don’t think any further words are needed.

Disclaimer – I have no positions in this stock and to my knowledge nor do any close family, friends nor associates. 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.

August 2016 – Running P&L and Portfolio Analysis

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.


In the interests of absolute transparency I record all my trades and produce a P&L of all of my share tips.

I will also continue to state my positions at the end of all company specific articles too.

A) August 2016 ROLLING P&L

Here is the P&L as at 31st August 2016, which assumes you had taken a long/short position on my recommendation on the date of the article with £1,000 capital at risk. I do not always take exposures in all of the stocks I tip due to risk management purposes, i.e. not placing too much capital in one area. I may also have higher or lower exposure to individual stocks so this is not my actual gain/loss.

 

Picture1

In summary FTSE100 delivered 0.91%, versus portfolio return of 6.88% over the same period.

B) PORTFOLIO ANALYSIS

Not updated this month.

Concepta PLC – Worth a punt? The Jury is out.

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.


Concepta is a Reverse Takeover of Concepta Diagnostics of the former Frontier Resource cash shell. It was tipped in the Sunday mail this weekend and the shares of responded accordingly, gaining 25% today on 12x average volume. This gives the company a current market capitalisation of £17.5m. I look below at whether it still a good speculative play after this rise:

What is the concept then (pun intended)?
The company states:

We were founded in 2013, by a team of leading professionals with the sole mission to develop innovative products that can provide crucial guidance to women and couples with unexplained infertility and to help them conceive.

In this vein, we have successfully developed a proprietary platform and fertility product for home self-testing or for the doctor’s office.

There is also plenty of useful information in . To summarise though, Concepta’s product is the MyLotus Meter is effectively a tool which will allow females to check their levels of Luteinising Hormone (LH), this being the hormone associated with triggering ovulation. Low levels of LH are estimated to be the cause of around about 30% of unexplained fertility issues in women.

The MyLotus Meter will allow for a simple urine test with disposable MyLotus Test Strips, and give immediate results showing the relevant level of LH and hopefully determining whether this is a cause of any fertility problem. These results can then be recorded in an ios/Android compatible MyLotus app along with qualitative information, this can build up a wealth of information for relevance to either pinpoint the optimum time to conceive and/or to provide additional information to medical professionals.

Screen Shot 2016-08-30 at 17.12.27.png
A screenshot of the app

It is expected the initial customers will be b2b, i.e. private hospitals but perhaps eventually also b2c, i.e. end consumers who are frustrated with the speed that they are able to conceive. According to Concepta it is usual in the target markets (EU and China) to not be able to pursue other medical options for the first year of attempting to conceive. In the age of ‘connected health’ and further pushes to consolidate all our health data I can see a big market here.

In terms of the potential, you might make the comparison to Withings, a small startup which recently was acquired by Nokia for £130m. Withings focuses on Connected Health, developing products for the monitoring of blood pressure, heart rate, active calories and sleep quality. You could argue that  Withings operates is a more crowded space than Concepta.

 

What stage is Concepta at?
Concepta is pretty much at the point of commercialisation, it has received regulatory approvals in China and the MyLotus app has been translated in to Mandarin. We could therefore expect some revenues this year, although likely small.

The cash position looks good too, the company had raised £5m from two placings prior to the RTO. The RTO was made largely through shares and hence the cash balance is still fairly healthy at £3.5m, as at August 2016. It is inevitable though that further placings will be required, particularly once it develops full scale manufacturing and needs to invest in Marketing the product. However, as always this isn’t necessarily a concern as long as the funding is used to add value to the business.

What is the news flow?
The next likely news will be the finalisation of the assembly agreement with the manufacturer in China and the subsequent launch of MyLotus in the China market. We can expect this according to Concept by Q3/Q4 2016 and thus first order from distributors could be expected by the year end. 

Early in 2017 regulatory approval likely in the UK/EU and higher scale commercial production in China, subject to a successful marketing strategy presumably.

Who’s are the key directors and shareholders?
Finance Yorkshire Seedcorn Fund (FYSCF) and Mercia Investments have between them almost 30% of the company. Mercia is an AIM listed investment company and the Yorkshire Seedcorn fund is a government sponsored investment fund. I had never heard of Mercia before today and to be honest their track record doesn’t look brilliant, the share price is around 16% down on it’s IPO price two years ago. However, even Neil ‘god’ Woodford has been struggling with his ‘early stage’ investment trust, Woodford Patient Capital Trust, so i’ll give Mercia the benefit of the doubt!

The other positive is the involvement of Adam Reynolds, who does have a fairly good track record in the early stage healthcare sector. Adam is chairman of Concepta and is also invested with 1% of the share capital.

How big is the market?
The company believes that the potential size of the market it has identified is £600m in revenue in China and the EU. If we take that information at face value I imagine then >£1bn wouldn’t be out of the question if Concepta expanded further into other markets. Based on Concepta’s stated market size then earnings of £300m wouldn’t seem totally unreasonable by the end of the decade if all goes to plan, although there is little information available to form a reliable estimate on. However with a £17.5m market capitalisation there does seem plenty of upside. One question though, does the £600m market size assume zero competitors? .

Do Concepta really have a Unique Selling Point?
Clearblue is an obvious competitor to Concepta. Clearblue has had its Advanced fertility kit on the market since 2013. This product tracks estrogen and the same luteinising hormone that MyLotus tracks, you can pick one of the Clearblue products up from Amazon for £75.

Concepta claims in it’s investor presentation that this product is unique, it may be technically unique but I don’t quite see how its product is sufficiently unique. Concepta’s main patent application looks at the use of the LH Surge to estimate fertilisation date, but the ClearBlue product also estimates the window of Fertility. Concepta’s MyLotus ‘connected health’ concept could command a premium but I am unclear whether the mylotus tool syncs wirelessly back to the MyLotus app or is any manual intervention is required?

According to the Daily Mail article the pricing of the MyLotus Product is expected to be between £250-£300, a significant premium to the Clearblue product, but it is not yet clear to me whether the product is sufficiently unique to command this. It is always difficult for smaller companies like MyLotus to compete with the big boys on marketing too and garner the same economies of scale in the supply chain.

It is also worth noting that the Patents are currently pending and no timescale is given as to when they are likely to be granted.

 

 

Are there other risks here?
From the information in the public realm there I can see no indications of the expected profit per unit, manufacturing costs/CAPEX/Marketing spend etc. So there is quite a lot of visibility missing on the future cashflows, which is fairly fundamental and for a company about to start commercial production this concerns me. So the key risk is whether this company can turn a profit, particularly if the market place becomes crowded.

The supply chain is always a risk for early stage companies. Concepta does have a provisional agreement with Shenzhen H&T Intelligent Control Ltd (SHBL) for the MyLotus Meter, Concepta states that it is in advanced negotiations on the final terms of this Assembly Agreement with SHBL, which is expected to be concluded in the near future. The disposable urine testing strips for use with the MyLotus Meter are likely to be manufactured inhouse in Yorkshire. I’m assuming this is a condition of its funding from the Yorkshire Seedcorn Trust.

Once we the assembly agreement is finalised we need to know how quickly can manufacturing be ramped up if orders exceed demand?  Also the terms if demand is slower than expected?

Technology stability is also a risk for young companies. Withings released it’s Aura sleep monitoring product far too early and it is was catastrophic, in the end it was forced to apologise to all customers and offer free accessories to compensate. How throughly has the MyLotus Meeter product been tested, I can’t see any information on what testing has been conducted so far and whether there were any issues?

Verdict

NEUTRAL.

At this moment in time I can’t see the the product differentiates itself sufficiently justify the selling price quoted by the Daily Mail, i.e. at a 300% premium to the ClearBlue product. There is also far too little visibility on the profit per units, even some rough guidance would be helpful and corresponding NPVs.

I am not saying it is a SELL, I will pose some of the above questions to the Investor Relations Team and revist this. I suspect the IR team won’t be able to tell me much so i’ll likely sit on the sidelines, at least until we get an assembly agreement finalises and some clearer expectations on unit costs.

African Potash Zambia Agreement – Pre Placing Ramp?

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.


The moment I finished writing my earlier article on the sordid details around the Beryl Holdings agreement, to my delight an RNS (Here) popped up on my phone from African Potash. My initial hopes of a clarification from the company to Tom’s allegations were immediately met with dismay as I realised it looked like a textbook pre placing Ramp.

The company has two working days before it needs to repay a £690,000 loan from the FD’s wife. By my calculations African Potash had bought forward cash of £400k as at 1st January 2016 and has received a further £1m through placing and exercise of warrants. Its last reported cashburn was £700k for the 6 months to 31st December 2015. Given the company has received no material revenues, is it therefore reasonable to assume it will be completely out of cash when it repays the loan on Wednesday next week?

It will need to do a placing and for me this will need to be in the region of £1m assuming current cash burn continues and revenues remain evasive. Bearing in mind the current Market Cap is £2.71m (Post RNS) this is going to be heavily dilutive and has to be at a discount to current Market Price, my belief would be a placing of around 0.25p. It could even be lower, bearing in mind the current controversy and decreasing liquidity on the shares. Therefore the RNS is well timed and could be a pre placing ramp that are all so common on AIM.

Let’s pick apart the latest RNS then:

African Potash, the AIM listed company focused on the vertical integration of fertiliser operations in Africa and Sub-Saharan potash assets, is pleased to announce that it has received a purchase order (the “Purchase Order”) for 1,500 Metric Tonnes (“Mt”) of urea from the Zambia Co-Operative Federation (‘ZCF’), a government body which counts over two million smallholder farmers as members

A purchase order? Does this guarantee the deal will be completed?

The Government of Zambia is investing approximately ZMK2.1 billion (~US$210 million) into the E-Voucher Scheme to create, enable and manage an integrated ecosystem of technical and financial support to promote agricultural development, empower the smallholder farmer and ultimately achieve food security. The E- Voucher Scheme will enable the purchase of inputs (fertiliser, seed, pesticides, equipment) by smallholder farmers. Under the E-Voucher Scheme, the Government of Zambia provides farmers with a voucher with a value that is used to buy agricultural inputs from specified, government approved outlets without cash changing hands

Irrelevant PR guff in my view, but let’s continue…

Under the arrangement, fertiliser is owned by Gavilon, part of the Marubeni Corporation (“Gavilon”), until payment is received from ZCF under the E-Voucher Scheme. African Potash would then expect to receive a margin payment from Gavilon of approximately US$65 per Mt of fertiliser sold. African Potash is not required to meet the cost of the fertiliser supply from its margin payment

Gavilon are a large reputable commodity trader, part of the Marubeni group, a major corporation in Japan. Gavilon have been operating in this region since 2009 and have an office and warehouse facility in South Africa, so they look like a much more experienced player than African Potash. So with the fertiliser also being owned by Gavilon what exactly do African Potash bring to the table? Why don’t the ZCF just deal directly with Gavilon? The Margin payment of US$65 is 38% of the current spot Urea price per MT of $179. This seems like one hell of a commission when it is appears that African Potash don’t contribute much to the deal. This to me doesn’t stack up. Lots of questions here – Do I have the wrong Urea price? Is this a premium product? Is 38% a fair margin for a broker? Do Gavilon make any money on the deal?

I really don’t understand the business model here but let’s take the RNS at face value, assuming payment is received from ZCF then I think we can expect revenues here at some point. At US$65 for 1,500 MT this would be a total ‘profit’ of $97,500 or £75,000. This is just 2.5% of African Potash’s Market Cap, so it is pretty marginal, but a start I guess. The RNS states that the cost of fertiliser supply is not required to be included from the margin, but whether the £75,000 is pure ‘earnings’ remains to be seen.

Deliveries have now commenced under the initial Purchase Order for 1,500Mt of Urea, with ZCF being responsible for logistics and transport. The Agreement provides African Potash with an opportunity to supply fertiliser to ZCF for a minimum period of three years and further trades are anticipated in the coming months.

Deliveries commenced, but when do African Potash expect to receive payment? The agreement provides an ‘opportunity’ to supply, so no guaranteed revenue stream then?

The Verdict

Unfortunately for African Potash, it has lost the trust of investors. Until it can confirm money is received in the bank then I doubt anyone will be getting excited about this news. As with all deals announced by African Potash, they just don’t seem to all stack up.

The shares are up 10% on the news, at one point trading as high as 25%. No surprise that this strength was sold into.

My belief is a mega discounted placing is still on the cards here. We will find out in a few days.

SELL

Disclaimer – I have no positions in this stock and to my knowledge nor do any close family, friends nor associates. 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.

African Potash – The Beryl Agreement – More questions

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.


I see Tom Winifrith has published an expose on African Potash regarding its December 2015 agreement with Beryl Holdings regarding the acquisition of African Fertilisers (Mauritus) Limited.

I have a lot of respect for Tom, he is one of the few people who has the balls to highlight some of the questionable practices that take place at the bottom end of the AIM market. I have already covered African Potash in detail in an existing article, the article raised a lot of questions on African Potash here, so I thought I’d look into the latest questionable deal on a list which is lengthening.

The Original Contract per RNS
Let’s start with what was originally published in the December 1st RNS. According to this RNS the deal was structured as a £1 up front consideration, with a deferred element based on the success of the new Mauritian subsidiary. Beryl has the existing knowledge, logistics, contacts of trading fertiliser and African Potash are paying to get access to this ‘know how’. The Deferred element is subject to meeting a minimum EBITDA of $4m in either the 1st or 2nd year, this would result in consideration of £8m ($10.4m) for the seller, Beryl Holdings.

This RNS is not particularly well written (standard African Potash), but the substance of the deal is that it represents a payment of 2.5x Earnings (todays fx) from African Potash to acquire a fertiliser trading operation, subject to a minimum hurdle of $4m earnings of the NEWCO. So at first glance, a very good and also low risk deal. Feels almost too good to be true? Yes, my only side note would be that there appears to be no ‘non-compete’ clauses included, so as far as I can see there nothing to stop Beryl continuing to trade fertiliser during the 2 years (less likely) or after the deferred consideration is triggered (more likely).

The RNS does then become murkier, what does this mean?

afpo 3

Does this mean that consideration will be payable based on the formula ‘EBITDA/EBITDA Minimum ($4m) x £8m’? But earlier in the RNS it was stated there is a minimum EBITDA, which surely implies no consideration is payable until EBITDA>EBITDAMinimum?

afpo 4

So then why further down the RNS does it say that consideration will not be made only if no EBITDA? I thought no consideration at all should be paid if EBITDA is <$4m? At best this is badly defined, at worst this RNS is misleading. Which one is it African Potash?

What has come to light on this agreement since the original 1st December RNS?
Tom Winifrith has published the legally binding heads of terms of the Beryl agreement on his website and it includes the following clause, which is not referenced above in the original RNS:

‘Beryl has a number of associated and subsidiary companies involved in agriculture, commodities and mining in Africa and will select with AFPO’s agreement another one of its associated or related companies suitable for a London Stock Exchange IPO, RTO or similar transaction or pre IPO Investment and AFPO will either introduce third party funding or invest itself GBP£600,000 for equity or quasi equity to enable this transaction or other necessary costs to be met’

To me there is a liability here, it appears that African Potash must itself or find a third party to inject £600,000 of funding into a Beryl Holdings related company. The clause is sufficiently vague to be any company that Beryl choses. The only caveat is that African Potash must agree, but what does that mean and what are the consequences of not agreeing? Tom has only received the heads of terms, they state that a long form agreement will be put into place subsequently to these terms being agreed. So is this clarified in the Long Form Agreement?

Having now read the full heads of terms myself I can see a few other inconsistencies between the Heads of Terms and the RNS, but in summary it looks like the deal might not be so good as implied. One could argue that this is in fact consideration for the acquisition, it is also clearly material, so why was it not included in the 1st December RNS?

What is the status of the contact today? Has the £600,000 been invested?

This is not clear. Assuming African Potash has released RNSs in compliance with AIM rules then no shares have been issued to Beryl Holdings as consideration. This is not unexpected as African Potash does not appear to have generated any material revenues on any of its deals so far.

In fact I can’t even see any evidence of the company African Fertlisers (Mauritus) Limited ever being incorporated on the Mauritian Companies Register. A bit concerning? Or is the Mauritian register out of date? Perhaps….

mauritian

Regarding Tom’s revelation, the £600,000 requirement from the contract would be a material investment and would require an RNS when the investment was made even if it was omitted from the original agreement RNS with Beryl. So far African Potash nor any counterparties to an investment have disclosed any investment on the LSE other than the Blenheim Natural Resources investment. Regarding this investment, having looked through the current shareholders and the TR1s disclosed I can’t see any evidence of ownership or other relations between Blenheim Natural Resources and Beryl Holdings so I think we can rule that one out. By the way, I still think the Blenheim Natural Resources investment stinks as covered here, but for different reasons.

But perhaps it has paid the £600,000 and not disclosed it as an RNS? On review of the unaudited interim cashflow African Potash has spent around £720,000 in the 6 months to the end of December 2015 and the balance sheet at that point shows no investments and $509,000 (£391k) of cash. African Potash raised a further £825,000 in a placing on 12 January 2016 and another £190,000 through warrant exercises with Bergen. So Total Cash would have been around £1.4m, and with the interest charges, PLC costs, trading costs and upcoming loan repayment to the FD’s wife then I think African Potash would have had to increase its funding to get a £600k ‘investment’ away.

So on balance I think it is unlikely that this £600,000 has been spent (‘INVESTED’) so far, but we will only know for sure or whether a liability has been included once the auditor gets its hands on the books and the final results for 30th June 2016 are published, past form dictates this will probably on 30th December 2016, i.e. right at the deadline when no one is watching. I’ll set a reminder though don’t worry Chris Cleverly!

So as a shareholder should I be worried about Tom’s revelation? Is it Fraud?

Should I be worried? Absolutely, I have already summarised the stinky smells that surround African Potash. This just adds to a long list of questionable deals that for me make this uninvestable at any price.

Is it Fraud? Potentially. I disagree with Tom that this a ‘Slam dunk’ case but it does raise a lot of questions. I think it hinges on the ‘with African Potash agreement’ clause. However, the best thing is for the company to put out an immediate statement clarifying the facts around this case.

It goes without saying this company in my view is an outstanding SELL.

Sirius Minerals – Up 400% in 6 months – Still a BUY?

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.


I have been following Sirius Minerals for a while, I never though quite got around to doing my research. This clearly has cost me, but is it too late to jump on the bandwagon or should those lucky investors who got in earlier be looking to bank profits?

Sirius have a fully consented Polyhalite (POLY4) mine, which is a used as a fertiliser, this touted as a superior product to that of the only British Potash mine which closed this week with a loss of jobs. Sirius’ project is ready to go with the contractors ready put spade in ground, subject to financing. The base case project NPV is $15bn, slipping to $10bn with a 20% reduction in POLY4 price and 20% increase in CAPEX. This compares to £960m market capitalisation, or $1.25bn. This then on paper presents considerable upside.

The NPVs quoted above is Sirius’ project NPV though, not the company NPV. The debt financing and plc costs I have calculated to reduce NPV by around $750m-$1bn. So plenty of headroom and I have assumed a return for the note holders of 10% a year.

The fundamentals for the product look good here, there is a global need to maintain good soil quality and increase crop yields. The traditional potash price though has collapsed though since 2009 falling by 50% mainly due to increased supply. However, POLY4 is a premium product, it contains more nutrients and requires less processing and it relatively rare. I can’t see much risk on the demand for Poly4, however oversupply of  traditional potash may also put pressure the Poly4 price but as mentioned above there the economics look good even with a 20% reduction in price. It is also worth noting that the company already has take or pay offtake agreements in place for 80% of the expected initial production of 10 Mt.

Sirius also appears to be very transparent, including lots of information which make it easy for investors to make a fair assessment of the company.

Looking at the broker opinions, Shore Capital has recently upgraded it’s share price to 75p, with further gains expected as the project becomes de-risked. Shore capital is not the house broker so you can actually take the target reasonably seriously. The stock is not well covered though, Shore Capital is the only broker covering Sirius (with the exception of the house brokers).

So should I jump in?
It does sound as though there is plenty of upside but what are the risks?

As mentioned above the project is ready to go but needs financing. The project looks very appealing but with less than a month to execution stage I am concerned that no financing is in place yet. Sirius’ auditor have also noted the going concern issue around the financing through their ’emphasis of matter’ on the interims, probably more ‘arse covering’ than any major concern but it does highlight the risk here. The questions I have are. Why has the financing taken so long? What has been the interest from the finance houses? What are the expected finance costs, Sirius Minerals must have an idea of the spread?

It is fairly unusual for a junior exploration company to take a major resource discovery all the way through to production. They are normally snapped up by bigger players, who have the expertise and can finance projects of this scale. Why have none of the big commodity players moved in for this project? One possible answer is that many of the big players are currently focusing on reducing Net Debt, so a project of this scale may not be attractive despite the positive IRR. Was there a data room at any stage though? Even to bring in a JV partner? If there was why was there no interest?

Another issue to consider is that this is a major EPC project and there is always a risk of significant overruns. HSE issues or engineering challenges being possible contributing factors.

The project requires an upfront investment of $2.9bn and free cashflow is unlikely before 2022. Therefore it will be a long time before you will see dividends, there is also a risk that some investors will lose interest and capital growth may take some time too.

Verdict
SPECULATIVE BUY – Target 50p

I won’t be placing an order for Sirius stock as I am already overweight on junior stocks but I will look to take a position in the future. The stock has had a good run and there does look like being further upside from here, if everything goes to plan.

The elephants in the room for me though are why we have not seen any hint of M&A activity and why the financing has taken so long to get going.  Those who have been following Sirius Minerals longer may be able to help me answer these questions so please feel free to post in the comments section.

Disclaimer – I have no positions in this stock and to my knowledge nor do any close family, friends nor associates. 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.