Wednesday, 24 July 2013

Africo Resources - Trading under Cash

Africo Resource TSX:ARL $0.46

The thesis for an investment in Africo Resources is simple. The company's current market capitalization of $32.8 million is less than its current cash and short term investments. Since the short term investments are all short time deposits with Canadian chartered banks, I'll treat them like cash. In fact, the current assets minus all the liabilities of the company yields a positive value of $63.1 million. That implies a value just based on cash of $0.88 per share.

The company also has a mining project in the Democratic Republic of Congo. I claim no insight to whether the project is any good, and I don't think the quality of the project is material to the case for buying the company. If you happen to be interested, an updated NI 43-101 was filed in May, and can be found here:

The company has taken the position it won't be able to develop the project independently with its current share price, and has reduced its expenditures. In Q1 it had a cash draw down of $610 thousand, so you could wait a long time for the valuation gap to close before the cash burn impacted the value of the company's current assets.

The company is majority owned by a subsidiary of Eurasian Natural Resources (LSE: ENRC) which is a partially privatized Kazakh miner. This ownership and control position is the likely cause for the significant undervaluation. The logical endgame is to merge Africo Resources into ENRC (which has adjacent mining claims) at the value of the cash. I would expect any take private attempt lower than the value of the cash to face minority shareholder resistance and regulatory scrutiny, so there is some protection against the majority owner confiscating the value.
Disclosure: No current position, may buy shares without prior warning or update.
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