Another Africa deal with some big guns from the past!!
Stockhouse Ticker Trax is equity specific research (Canadian listed and market cap < $300 million) published every Monday to paid subscribers. Our free Friday column may feature companies previously featured to paid subscribers (with a minimum one month delay) or discuss topics of interest to the general investment community and relevant to overall portfolio management.
I would first like to wish everyone all the best over the holiday season
Canaco Resources (TSX: V.CAN, Stock Forum; 39 cents)
> Net cash approx. $90 million, or 45 cents per share
In June, we featured Canaco as a cash-rich bottom fishing opportunity at 33 cents. The company’s war chest of cash was worth 48 cents per share and it was a great opportunity to speculate on what the company might do with that cash in a market environment where cash was king and junior exploration companies were struggling to finance and stay alive.
Since the summer we have seen little change with the small stocks. The resource-heavy TSX Venture Composite Index (1180) is trading at the same level it was in June and July. This index represents the best of the exchange so for many inferior companies, they are down 20% to 50% since summer.
With Canaco we are sitting on a gain of approx. 20% and will follow them into 2013. This week they announced a (proposed) transaction with Shark Minerals - a private company with exploration projects in the Republic of the Sudan. Normally I would run in the opposite direction on that news as this country has a very poor reputation for politics and human rights.
However, the people behind Shark are the former senior executives from Red Back Mining ($7 billion takeover in 2010). I also suspect the highly-successful Lukas Lundin may be supporting Shark. This same team is currently running Sirocco (large-scale iodine mining in Chile).
If you visit the Sirocco website (www.siroccomining.com) you will see that Lukas Lundin is the Chairman. Mr. Lundin was also Chairman and founder of Red Back Mining in 1988. If this transaction goes through with Canaco, I would be very surprised if Mr. Lundin was not involved in one capacity or another.
I can find no relevant information on Shark so it is impossible to make a qualified opinion on its valuation. On the surface three things bother me with this deal - excluding the fact they are going into the Sudan.
i) They are issuing cheap shares to acquire Shark. With Canaco's $90 million in the bank worth 45 cents per share, they could have made a stronger effort to price the paper higher instead of at this low level - this results in excess shareholder dilution.
ii) Junior exploration companies are trading at horrible valuations. Shark better have something substantial if they are paying $28 million for unproven ounces in a high-risk region of Africa. On the surface this appears very high risk but until details on Shark Minerals are released, we don't know what they are acquiring.
iii) Once all the paper settles they will do a 3:1 rollback. Stocks often fall further after a rollback. Given the low valuations this may not occur - but it is a risk - especially if they are overpaying for Shark.
This transaction still requires shareholder and exchange approval, which is targeted for February 2013.
Details are in the December 17th press release but principal terms of the transaction are:
- Canaco shareholders will receive one East Africa Metals (new company) share for every three shares of Canaco held as of the effective date of the spinout transaction - this will be a secondary company holding $28 million and the original Tanzania assets
- Shark shareholders will receive 2.705 Canaco common shares for each Shark share held, to be adjusted for any option exercises prior to closing. This will be the Sudan assets and an estimated $60 million in cash.
- Immediately following the Shark acquisition, Canaco is expected to consolidate its common shares on a one-for-three basis.
I am giving this transaction benefit of doubt because of the new slate of (exceptional) people coming to the table. What also makes this worth holding is the following article from the National Post:
The former CEO of Red Back made the following comment in the National Post article:
"The exploration work in Sudan is at a very early stage, but Mr. Clark claimed he has not seen anything this exciting since Tasiast."
The Tasiast project in Mauritania was a huge gold discovery that lead to the $7 billion buyout of Red Back by Kinross in 2010. If this merger with Shark closes, institutional money may flow to the deal simply because of the Red Back group and the potential involvement of Lukas Lundin.
Short term it may see further selling pressure from those who want nothing to do with the Sudan. Normally I would be in that same camp but it is hard to ignore the Red Back success. I suspect that is also why they are issuing so much cheap paper.
Insight from the Dec 17th press release
Shark is a privately held, B.C. resource company engaged in the acquisition and exploration of mineral properties in East Africa. Shark was founded and is managed by the former executives of Red Back Mining Inc. Shark is currently focused on exploring the Galat Sufur project, a 20,020-square-kilometre land package in northern Sudan near the border with Egypt that forms part of the Arabian-Nubian shield.
Galat Sufur has had little, if any, modern exploration activity prior to Shark and is considered prospective with many artisanal miners active within the region. Shark has been exploring Galat Sufur for the past 12 months and has identified several drill targets and an initial drill program is under way.
In addition, Shark controls the 4,846-square-kilometre Ghazal project near the Eritrean border in northeastern Sudan. This project is prospective for VMS-style mineralization.
Upon completion of the Shark acquisition, Canaco will have approximately 317.1 million common shares issued and outstanding, of which former Shark and current Canaco shareholders will own approximately 37 per cent and 63 per cent, respectively. Immediately following the completion of the Shark acquisition, Canaco is expected to consolidate its common shares on the basis of one post-consolidation common share for every three pre-consolidation common shares.
Upon completion of the Shark acquisition, which is expected to occur in February, 2013, the following individuals will be appointed to serve as officers of Canaco: Rick Clark as chairman, Simon Jackson as president and chief executive officer, Alessandro Bitelli as chief financial officer, and Hugh Stuart as vice-president, exploration. In light of Canaco's new focus and changes to the board of directors and management team, Canaco will change its name to Orca Minerals Inc.
Orca is expected to be a well-financed resource company with over $60-million in cash, focused on exploration opportunities in Sudan and East Africa with an experienced board of directors and management team.
A special committee established to review the transaction received an oral opinion from Canaccord Genuity Corp. that the transaction is fair, from a financial point of view, to the shareholders of Canaco. Canaco's board of directors has determined the transaction is in the best interest of Canaco and its shareholders and has unanimously approved the transaction. The Shark acquisition has also been unanimously approved by the board of directors of Shark.
Directors and officers of Canaco as well as its significant shareholder, SinoTech (Hong Kong) Corp. Ltd., have entered into voting support agreements under which they have agreed to vote their Canaco shares in favour of the Shark acquisition and the spinout transaction, which represent, in total, approximately 22 per cent of Canaco's outstanding shares
Key people behind Shark Minerals (background quoted from the Sirocco website)
1) Lukas H. Lundin (no direct involvement with Shark that I can see at this time – although it may exist.) It would make sense that he supports the Red Back team in their next big project.
Mr. Lundin has led several companies through highly profitable business acquisitions and mergers such as Lundin Mining's $3.3 billion merger with EuroZinc Mining, the $2 billion sale of Tanganyika Oil Company Ltd. and the multi-billion dollar sale of Red Back Mining Inc.
2) Richard P. Clark
Mr. Clark is a lawyer who practiced mining and securities law. For the past 10 years, he has been a senior executive with the Lundin Group of Companies. In 2004, he became president and CEO of Red Back Mining Inc. and under his leadership Red Back grew into an intermediate gold producer with a 2010 production of 500,000 oz per annum. Mr. Clark successfully guided Red Back through all facets of growth including discovery, feasibility, financing and production coupled with successful corporate acquisitions culminating in the acquisition of Red Back by Kinross Gold Corporation in late 2010. Mr. Clark has been a director of Sirocco since January 1994 and was appointed CEO in October 2011.
3) Simon Jackson
Mr. Jackson is a Chartered Accountant with over 20 years experience in the mining sector. He has been a member of the senior management team with the Lundin Group since 2004 and was VP - Corporate Development of Red Back Mining Inc. Mr. Jackson specializes in M&A, public equity markets management and corporate finance. His career has included corporate transactions in Canada, Australia, Africa and Indonesia.
4) Alessandro Bitelli
Mr. Bitelli has over 25 years of experience in the resource industry and in public accounting, having worked both in North America and Europe. Currently a member of the senior management team at the Lundin Group of Companies, his most recent position was as Chief Financial Officer of Red Back Mining.
5) Hugh Stuart
Mr. Stuart is a professional geologist with over 23 years of international experience in mineral exploration. He holds a B.Sc. (Hons) in Geology from the University of Manchester and an M.Sc. in Mineral Exploration and Mining Geology from the University of Leicester. Whilst Exploration Manager at the Geita Gold Project in Tanzania, Mr. Stuart's team discovered the + seven-million ounce Nyankanga deposit. Between 2003 and 2010 he was Exploration Manager and later Vice President Exploration for Red Back Mining during which time the company's gold resources grew from 2.3Moz to in excess of 18Moz. he has considerable experience of working in the Arabian shield having worked in Sudan, Yemen and Egypt in the past. Mr. Stuart joined Sirocco in October 2011.
Further third-party insight
Shareholders will be asked to vote on this Shark transaction. I am not a fan of the cheap paper being issued on what appears to be an expensive valuation. However, the track record of the Lundin Group and the Red Back management team cannot be disputed.
To have this entire group onboard with Canaco is a giant benefit to existing Canaco shareholders – the majority who feel we are drifting aimlessly in a life raft with a treasure chest of cash.
On those merits alone, I am assuming they see something substantial in the Sudan and I will personally vote my shares in favor of this transaction (also assuming the independent valuation by a third-party sees nothing abnormal).
Disclosure: Danny Deadlock owns 50,000 shares of Canaco Resources (TSX: V.CAN).
In addition to this weekend column and the bottom fishing research sent to paid Ticker Trax subscribers on Monday, I also provide free MicroCap alerts throughout the week. These are based upon News or Abnormal Price/Volume Activity on the several hundred stocks we track from our own research, brokerage analysts, or third-party newsletter writers.
Read more at http://www.stockhouse.com/opinion/ticker-trax/dec/21/original-red-back-team-could-replicate-its-sudan-s.aspx#Y2JAcJ5vBE4Liz3Q.99