Eastern Platinum trades at net cash value of $130 million. Yet the company has a producing PGM mine and $1/2 billion in book value assets.
Unlike the more “rational” mid cap to large-cap stocks (> $2 billion valuation), micro-cap (penny) stocks are like drug addicts desperate for their next fix. Easily agitated, often irrational, and behavior that defies common sense – punctuated by higher highs and lower lows.
Institutional investors can afford to take big losses on these small companies – and they typically waste no time doing so when it involves a change in fund managers, change in mandate, or the investment doesn’t live up to expectation. Often a fund or portfolio manager will clean up his books at the end of a quarter if it means his bonus (or his job) is likely to be affected.
Left in the path of destruction is the smaller retail investor who gets dragged down with large scale selling. Fortunately the retail investor also has the flexibility to make his own decisions and can take advantage of (what appear to be) oversold market conditions.
One would typically think the large institutional investors, analysts, and professional money managers are right more often than not. That may be the case with mid to large cap companies but it is not the case with the penny stocks. Few commit the proper time or resources to researching them and few are willing to take the risk of their client’s money to own or recommend them.
If risks surface, they will waste no time cutting ties and taking losses. For the astute retail investor, that can often spell opportunity – if you have the patience and risk tolerance. There are countless examples each year where small companies with strong underlying assets are completely ignored (or sold off), only to be taken over dramatically higher than the recent trading price. The 100% gain for Andina (takeover by Hochschild) only a week ago is a perfect example of this.
Eastern Platinum (TSX: T.ELR, Stock Forum; 13 cents – also listed on AIM in London and the JSE in Africa)
Shares outstanding: 928 million / Market cap at 13 cents: $120 million
Financials Ending Sept 30th:
> Cash, investments & receivables: $165 million
> Trade & other payables: $24 million (excludes future reclamation liability and deferred tax of $28 million)
> Net book value of property, plant, and equipment: $576 million
Q3 Revenue: $20 million / Production costs: $23 million / Admin costs: $2 million
The six platinum group metals (PGM's) are platinum, palladium, rhodium, osmium, iridium and ruthenium. They commonly occur together in nature and are among the scarcest of the metallic elements. Economically, the three most significant PGM's are platinum, palladium and rhodium.
ELR is a Canadian company doing business in volatile South Africa with a lousy share structure - but trading close to its net cash value.
This means that the market currently values its large (higher grade and shallow) PGM reserves at zero and also values their $1/2 billion in capitalized property, plant and equipment at zero!
The outlook for PGM’s is hazy because of the economic weakness in Europe but to see a company like this reduced to rubble, is nothing short of amazing. Because of the poor share structure, ELR has fallen victim to a market that destroys under performance and risk.
That being said, ELR trades as though it is either bankrupt or going bankrupt. Unless I am really missing something, this is ridiculous. They are currently losing money on every ounce they produce but in this past quarter they lost about $5 million on their $20 million in revenue.
Not only is this manageable for 2013 but these are not dumb people (nor are the principal shareholders that are prepared to stick around). Eastern Platinum has fallen victim to the weak commodity price for PGM’s and I am confident they know what needs to be done to ensure their long-term survival. No doubt over the next quarter or two this will mean some tough decisions with respect to production or mine planning, but it makes little sense to discount this company to cash value.
In fact, I personally believe that if ELR continues to trade in the low teens for too long, a much larger company will try to take them over. The infrastructure is all in place and extensive, the reserves at current production rates are good for another 15 to 20 years, and their deposit has shallow, economic grades.
Major Chinese corporations have been investing all across Africa. Eastern Platinum would provide them with long-term PGM reserves and a foothold in a region that produces 80% of the world’s PGM’s. They would be hard pressed to find such an attractive investment elsewhere and they have the deep pockets to wait for PGM prices to rebound.
While the risk/reward of the current price range appears VERY attractive, the unknown is the future price of PGM’s and the instability of South Africa (labour and power). Those become the primary risk that a speculator needs to absorb – and this needs to be offset with the existing valuation and the potential of a 2013 takeover.
The following .pdf presentation does a very good job of summarizing the company and below I have also pasted relevant notes from their website or public filings – no point reinventing the wheel here.
In less than four years Eastern Platinum acquired a portfolio of high-grade platinum and rhodium-rich deposits in South Africa's Bushveld Complex with resources containing over 85 million ounces of platinum group metals (PGM’s).
The company's four primary assets are:
The Crocodile River Mine;
The Kennedy's Vale project
The Spitzkop project adjacent to Kennedy's Vale
The Mareesburg project, close to Spitzkop and Kennedy's Vale
Simultaneous with a listing on the JSE in May 2007, Eastplats completed a $200 million capital raising and announced plans to develop the Spitzkop project and refurbish the existing Crocodile River Mine smelter. In December 2010, Eastplats completed a brokered equity financing raising CDN$347 million.
Disclosure: Danny Deadlock owns 125,000 shares of Eastern Platinum (TSX: T.ELR).