NEW YORK – There are not too many twenty-baggers to go around in any sort of market, but one of them is preparing to list on the American Stock Exchange to better align itself with its major stockholders.
London listed Southern African Resources [AIM:SFU] is undergoing a rebranding that will, without being mutually exclusive, broaden and narrow its investment appeal as it becomes “African Platinum”. The name will contract to Afplats which positions the company in a familiar, but entrenched peer group consisting of Amplats [JSX:AMS], Implats [IMPUY], Lonplats [LSE:LMI] and former Australian platinum glory stock, Zimplats [AU:ZIM].
It was at Zimplats, now a subsidiary of Implats, that Roy Pitchford won market recognition as the best of two things in the mining business – someone who can execute a complex project in a hostile environment and rainmake.
He was comfortable but hardly challenged after Implats took control. So it was easy for zinc-silver magnate Tom Kaplan (think Apex Silver) to lure Pitchford away with an offer to build another company that the American had invested in. Kaplan was in a position to know who was needed after turning a fortune on an early investment in Zimplats.
Pitchford, speaking to Resource Investor from the UK after an intensive roadshow, continues to live in Zimbabwe whilst his daughter finishes school, and will then relocate to either Johannesburg or London.
Meanwhile he’s keeping a sharp eye on Zimbabwe’s risk shattered mineral assets. He remains convinced that Zimplats’s shallow and low cost mines will, in the long term, be the vehicle that makes Impala Platinum the equal of Anglo American Platinum. Speculators take note.
From under the noses of the majors
Pitchford is part of a remarkable ensemble at the top of Southern African Resources. The Zimbabwean connection is expatriate Andrew Groves who, together with business partner and former England cricket star Phil Edmonds, has another ten-bagger under his belt in White Nile [AIM:WNL].
Southern African Resources has little of the explosive risk roiling White Nile, but it is yet another example of the moxie of Groves and Edmonds, the latter not notably successful in the mining world after years of endeavour. Kaplan’s investment imprimatur has certainly helped change all that, especially his conduit to senior North American money, but it was the Leeuwkop (lion head) project that wrote Groves and Edmonds into the annals of mining investment.
They managed to sneak the decamillion ounce platinum group metals deposit out from under the noses of the majors in South Africa.
Located on the western limb of the Bushveld Igneous Complex, it was once a part of the Barplats group, since absorbed into Implats. There was an industry presumption that Barplats/Implats owned Leeuwkop, but they had relinquished it which left the mineral rights in the hands of the Bakwena Tribe.
Groves and Edmonds have an established routine of sniffing out large scale mineral rights in Africa, acquiring them, injecting them into tradable vehicles, and applying talented management to run them. Leeuwkop fell into their sweet spot, though not without painstaking research, and they approached the Bakwena Tribe to negotiate a deal.
It stunned the platinum industry which was embarrassed by its complacency in allowing outsiders with supposedly indifferent track records to not only turn up the deposit, but secure it.
It was widely presumed at the time that Pitchford had negotiated Leeuwkop into SAR on behalf of Implats. Not so, confirms Pitchford, and he now presides over a 50 million ounce 4E (the three platinum group metals and gold) inferred resource base at that project alone.
What’s the opportunity?
Make no mistake, it’s tough to be enthusiastic about the investment opportunities in a stock that went from £0.02 to £0.438 in little over a year. On top of that it has been leaking value since early in the fourth quarter of last year.
It doesn’t exactly cry value for a pre-feasibility stage platinum project. There is the added risk of race quotas, heavily capitalised competitors determined not to open too many doors, a slew of North American and UK funded juniors edging into the platinum market with bold claims, whilst SAR has a big financing on the cards early next year.
Let’s start with the basics. Management is top notch in a market that craves experience and a track record. The team has the confidence of powerful money managers, channelled by Kapan, such that three fifths of the share register is now owned out of the United States.
Hence, the planned listing on Amex and which Pitchford expects to become the primary domicile. The experience with Canadian interlistings on Amex shows a strong stock price appreciation and rising volumes.
There are also preliminary considerations for a secondary presence on the Johannesburg Stock Exchange. That is to satisfy the liquidity and valuation needs of the Bakwena Tribe’s stake in the project.
South African mining projects are subject to stringent race quotas, euphemistically referred to as “black economic empowerment”, which can cast a pall over investments there. Investors can find themselves diluted to smithereens in massively complex transactions where the counterparty has vapour for a balance sheet. And those investors often end up carrying most of the risk which is exacerbated by BEE partners itching to liquidate their “investments”, but thereby jeopardizing the empowered status of a project.
In this case much of the risk is mitigated by the BEE partner being a tribal trust. Also, the tribe was cut in heavily (50/50 joint venture) and early as is the style of Groves and Edmonds. Make no mistake the BEE partner is essentially enjoying a free carry until the development decision which saves it about $20 million. Thereafter it will have to pay its way, but at least the fully empowered equity stake (26%) has been tied down satisfactorily.
The SA government is also enforcing respect for traditional authority in the tribe following attempts by better educated young turks to represent the nation in negotiations with SAR.
Further confidence can be taken from Leeuwkop being a known entity insofar as it is a contiguous with a currently producing orebody (Lonmin). It will use proven methods to mine and mill its ore, and recovery of a metal rich concentrate will come from circuits already in use at nearby mines, whilst refining capacity is available.
The ore is 60% platinum, 30% palladium, about 10% rhodium, and a small blend of gold and base metals for additional credits that pay down some production costs.
“It’s a standard western limb project,” says Pitchford, who also notes the rich infrastructure which makes up for the depth at which SAR will mine when compared with its rivals pecking the eastern limb.
A pre-feasibility study will be completed in June. The bankable feasibility study should be completed by early next year. The study process is fully funded with $30 million in the bank and no debt.
A development decision will trigger a fund raising that will demand about $250 million from SAR. Pitchford expects $90 million of that to be equity funded; the remainder from debt in a traditional project financing arrangement. The capex is likely to rise quite a bit unless the rand weakens back to a scoping study exchange rate of R7 per dollar.
The initial plan is for a 300,000 ounce 4E per year mine which would rise to 1 million ounces a year after a third phase of development.
Reaching that target would make Leeuwkop about the fifth single largest producing structure in the complex.
Leeuwkop is the flagship project, but it is by no means the only one, and SAR is targeting a 200 million ounce PGM resource base in the long term. Half of that would be situated on the western limb, the remainder in states neighbouring South Africa.
Value
The share structure is not great with over half a billion shares out and with the future financing expected to take the total to just under three quarters of a billion.
Yet even if you brutalize the project economics; don’t put much stock in a trans-Atlantic rerating; ignore the other projects as well as any growth in the Leeuwkop resource base; and dilute the value accorded per share – then a $1 per share gain from current levels ($0.46) easily passes the smell test. It could be several times that if truth be told, but let’s not get ahead of ourselves.
Furthermore, it’s not as though it’s a speculative project – Leeuwkop has rich rock that can be mined at a good margin despite the strong rand. Any weakening in the currency is going to add considerable leverage.
As always, invest with care and do you own due diligence before you climb on the bandwagon. That said, look at how NovaGold [NG] has built its value. More on that stock in the coming days.
Source: Resource Investor
Photo credit: anthonystoro via VisualHunt / CC BY
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