Bezant Resources, De Beers, Gemfields, Ian Harebottle, luxury goods, natural resource stocks, Pallinghurst Resources, Richland Resources, tanzanite, Tiffany & Co, tsavorite, Waterford Crystal
Continued from here:
Let’s throw in a final negative – hmm, again, I’m not sure it’s a negative, maybe we should tick it as a neutral?!:
d) I was surprised to see a recent announcement confirming Bernard Olivier‘s been appointed CEO of Bezant Resources (BZT:LN) (which has granted an intriguing option on its Mankayan project to Gold Fields (GFI:SJ)). He wants to be CEO of two companies simultaneously?! Jesus, my ambition is to be CEO too…but just for one day, and then gracefully retire on a quite modest package..!
Then again, I note he was already Technical Director of Bezant, an Executive Director position. And Bezant doesn’t have a CEO!? So, I’d have to assume Olivier has been (virtually) running 2 companies for the past couple of years, quite successfully. Also, Richland Resources (RLD:LN) is technically a holding company, its main operations are managed in its TanzaniteOne Mining Ltd. sub. Perhaps we can give a pass, but it’s an unusual situation, and it behooves the Richland board to justify it to their shareholders. Now, let’s look at the positives:
i) Richland’s a unique company, in a unique niche of the gemstone industry. Mostly by design, it’s become the mini-De Beers of the tanzanite industry.
It cuts and polishes its own stones, and appoints its own sight holders. It has created a unique retail/tourist offering in Tanzania with The Tanzanite Experience (with possible opportunities to franchise it internationally in the future). Don’t forget the Waterford Crystal Visitor Centre is one of the Top 10 most popular tourist attractions in Ireland! More importantly, it also created The Tanzanite Foundation which promotes and develops tanzanite through its marketing efforts, grading system, education and exposure, and collaboration with leading designers and jewelry manufacturers.
Much like De Beers, Richland’s in a position to significantly influence perception, pricing and development of the global tanzanite market. This is a long term positive. In fact, in light of tanzanite’s rarity, Richland’s shareholders could possibly be better served (at some point in the future) by a restriction in production, rather than a continued increase. We may discover some day that Richland is a luxury goods stock hiding within a junior miner.
ii) Richland’s expanding its portfolio. In Jan-2011, it released the maiden JORC compliant resources statement for its 75% owned tsavorite project. Tsavorite is a brilliant green gemstone, also first named and marketed by Tiffany & Co (TIF:US). It’s harder than tanzanite (at 7-7.5 on the Mohs Scale), with a correspondingly higher price (2-4 times that of tanzanite).
This resource may potentially be the world’s largest single-source of tsavorite. On an Indicated resource basis only, it’s estimated to contain 1.4 to 3.5 million carats. Richland’s now performing bulk sampling. With the project only 20 km from existing operations, this has the potential to be a low risk/low cost operation.
In Jun-2011, they announced an option on an established sapphire project in Australia. I’ve already cited this as a negative..! But of course it could also be greeted by the market as a positive catalyst if a deal is finalized. Yes, the upfront exercise cost is (in theory) inexpensive, but if completed my opinion would depend on the level of disclosure regarding capex/working capital required, plus the quality of any resources/reserves statement (if any).
Finally, they recently announced a new JV structure with a group of local miners who own 18.75 ha located only 2.5 km from Richland’s mine. Richland will take on all mining & exploration costs and, after a 40% cost recovery, will split profits 60:40 in its favour. This deal seems pretty generous, but the annual economics will improve over time. Also, it may serve as a model for further consolidation locally (with less upfront cost), presumably will improve overall mine cash costs, and may even prevent some unauthorized undermining.
iii) I previously mentioned Gemfields (GEM:LN), a peer company to Richland. In fact, it’s a little more than that – it has a 10.1% stake in Richland!. This is a legacy of a failed, and acrimonious, takeover attempt in 2008/09 at GBP 45p per share. Rather bizarrely, during the takeover battle, there was a re-nomination effort for Ian Harebottle (ex-CEO of Richland, who departed in Feb-08) to Richland’s board. Shortly after, he was actually appointed CEO of Gemfields, who also brought on board Adrian Banks, ex-MD of TanzaniteOne Trading.
Harebottle replaced Sean Gilbertson as CEO. Gilbertson’s the son of Brian Gilbertson, who was ex-CEO of BHP Billiton (BLT:LN) and now heads Pallinghurst Resources (PGL:SJ), Gemfields’ 63% controlling shareholder. Gemfields has also been broadening its portfolio recently, adding rubies and amethysts, and has plenty of firepower now with cash on hand comfortably exceeding Richland’s market cap. What more can I say? Gemfields is the v definition of an informed activist shareholder!
iv) Now a little detour into technical analysis: For the past 6 years, the share price has been relentlessly declining, and now trades 97% lower than its ’06 high. This obscures the fact the price has been basing/flatlining for the past 3 years, and has actually traded in an absurdly tight GBP 7.75 p to GBP 9.5-10.5p range since last summer. This has all the makings of a significant breakout and, considering the technicals and fundamentals, I’d bet that would be on the upside. If we do see a break above this range, I’d venture we see a sharp initial move to GBP 14.5p, or even GBP 16.5p.
I’m also heartened to see Richland doesn’t feature in the Top 100 over on Aim Soiree..! Another good sign! (Also encouraged to see Petroneft (PTR:LN) now in 99th place – maybe if it falls off the list, we’ll actually have a good buying opportunity in due course). OK, let’s tackle valuation:
Richland Resources (xlsx file)
Richland Resources (xls file)
P/E Ratio: First, I’ve annualized Richland’s H1 2011 figures. Normally, I focus on a company’s Last Twelve Months’ (LTM), but as we’re in 2012 and Q3 Revenues were up 24% YoY, I think this is entirely reasonable. At the current GBP 9.625p price, Richland’s worth $17.97 million. This puts it on a current P/E of 5.7. Seems entirely undeserved. I’m opting for a Fair Value P/E of 15, which equates to a GBP 25.3p share price.
Shocked? Well, I’d be more shocked at the 5.7 P/E! A 15 P/E seems reasonable in light of the current high level of revenue/earnings growth, the medium term 9.4% carat production growth rate and the still depressed tanzanite price. In theory (!?), producing/profitable miners should be priced on a decent/premium P/E multiple, as earnings usually represent only a small (realized) slice of their total reserves/resources value. It’s a little more complicated than that, but P/E multiples should correlate with the expected life of a company’s reserves/resources.
P/S Ratio: Let’s try a more corporate approach. The current operating profit margin is 21.6%. Obviously, historic OP % has been terribly volatile but, for the reasons mentioned above, let’s accept the current margin as somewhat sustainable. This seems a good consensus – the market appears to be in an upswing, but this approach ignores that margins could easily hit 30%+ again – of course, it also ignores some poor/negative historic margins…
Current OP % deserves, say, a 1.75 P/S, which is conservative against my own mental scale. However, Richland has Net Cash of $0.4 million on hand, and a v low annual interest bill of $142 K. This financial strength/capacity prompts me to bump up the Fair Value P/S to 2.0, corresponding to a GBP 22.3p share price.
Asset Value: As I’ve mentioned before, Asset Value is a key valuation driver for a natural resource stock. By this, I don’t mean B/S Equity – you need to calculate a Fair Value for Reserves/Resources in the ground, plus/minus certain B/S items. I also don’t mean use any mine/project NPVs that the company may provide either… Bit of a tall order, eh?!
As I’ve been writing recently (see Kenmare), I’ve (painfully) arrived at some rules of thumb for resource stocks over the years. In short, using 10% of the price above ground (i.e. the spot price) is a useful guide to valuing what is below ground. This might seem ultra-aggressive (damn the media who focus on the above ground end-price of a resource – yeah sure, dig up every last speck of that resource tomorrow, for free, and sell it..!) It reflects a suitable discount for the political and mining risks involved, the costs (and lost yield) of extraction, the uncertain future price direction/volatility and, of course, the long timeline involved.
Remember, mining companies think v differently about acquisitions – they don’t pay v much attention to current revenues or earnings! My rules of thumb just skim the surface of their approach, but if you’re in the mood for calculating DCF/IRR analyses for multiple companies, and/or monitoring deal metrics, I think you’ll see over time that they are a reasonable approximation.
Also, if the spot price is dramatically different from medium or long-term prices, think about opting for the medium term price, or some combination of both. I also haircut Probable Reserves (vs. Proved Reserves), and only include some Resources on occasion. You can generally wipe your arse with most miner’s statements on Inferred/Contingent/Mineralized/etc. Resources…
The big problem with Richland is that they’ve no Proved/Probable Reserves..! However, this is not uncommon for tanzanite, or the wider gemstone industry (inc. diamonds). The specific geology of gemstone deposits often appears to make it problematic for companies to upgrade Resources to Reserves. I’m not thrilled about this. But considering the industry, and the fact Richland has mined 2+ million cts pa on average in the past 4-5 years (with no decay in yield), I’m prepared to live with it.
So let’s look at what they do have: (btw I’m going to completely ignore the tsavorite resource for valuation purposes). Their Competent Person’s Report (CPR) confirms a Recoverable Resource of 63 to 83 million carats, or an average of 73 million carats. On the other hand, they’ve regularly stated that their mine has an estimated life of up to 20 years, at an average 2.2 million carats per year. This is significantly lower than the Recoverable Reserve, so let’s assume the 20 year life will be reached. This gives us an average Resource of 58.5 million carats. Let’s haircut this by 50%, to reflect the fact we’re dealing with Resources, not Reserves (this is a fudge, but like I said, it’s the best we can do here – and Resources that are throwing off 2+ million cts a year are a lot more reassuring anyway).
Medium term revenue per carat is just over $15. This would suggest a suitably discounted $1.50 per carat value in the ground. But let’s haircut this also, and opt for a lower Fair Value of $1 per carat, actually close to 10% of the company’s current revenue per carat. Hopefully we’ve hacked/slashed enough now, so we just need to include some other B/S items: Inventory‘s at $6.3 million, and should be easy to realize. Adjusted Cash is $4.7 mio – reasonable to include $3 mio of Receivables due within 6 weeks from their Jun-2011 sales. Finally, we’ll include $1.4 mio of Debt, and what have we got?:
(58.5 mio carats * 50% * $1.00) Resources + $6.255 mio Inventory + $4.746 mio Adj Cash – $1.371 mio Debt = $38.9 million = GBP 20.8p Fair Value per share
Incidentally, and rather bizarrely, this is exactly equal to the company’s Equity of $38.9 mio. Wow! With an overlap on the various approaches above, averaging a final valuation is the most obvious thing to do:
(GBP 25.30p P/E Val + GBP 22.25p P/S Val + GBP 20.82p Asset Val) / 3 = GBP 22.8p Fair Value per share, for an Upside Potential of 137%
If you prefer some pie-in-the-sky, just look back to peak figures and estimate a potential valuation if that kind of performance can ever be revisited… Vs. the relevant Peak metrics, Richland currently trades at a 1.8 P/E, a 0.4 P/S, and a Dividend Yield of 66%!
Considering everything, Richland presents a relatively low risk investment opportunity in real assets. It appears to be significantly undervalued based (mostly) on current metrics, and could potentially offer exponential upside based on its prior share price history and a possible return to peak revenues/earnings. I now have a 1.7% portfolio stake.
- Mkt Price: GBP 9.625p
- Mkt Cap: GBP 11.4 mio
- P/E: 5.7
- P/S: 0.9
- Tgt P/E: 13.5
- Tgt P/S: 2.0
- Fair Value: GBP 22.8p
- Upside Potential: 137%
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Trimmed my Richland Resources (RLD:LN) stake back from 2.7% to 1.8% – basically restoring it back to its original size.
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IAN NONHEBEL said:
tanzania is corrupt do you not worry about the security of this investment and perhaps increase risk on this basis to from low to v high
Despite a similar upside, note I’ve limited my position size for this stock vs. the size of some of some of my other/safer stocks.
Tanzania is corrupt? Sure! And the developed world’s just as corrupt! It’s just done in a more sophisticated way…political donations, PACs, lobbying, cushy jobs for politicians when they leave office, etc…
New tanzanite resource statement from Richland Resources – new total resource of 105 million carats, and life of mine now estimated at 30 years (at 2.7 mio cts per year). This would increase my Asset Value to:
(93 mio carats * 50% * $1.00) Resources + $6.255 mio Inventory + $4.746 mio Adj Cash – $1.371 mio Debt = $56.1 million = GBP 30.1p Fair Value per share
This leads to:
(GBP 25.30p P/E Val + GBP 22.25p P/S Val + GBP 30.10p Asset Val) / 3 = GBP 25.9p Fair Value per share, for an Upside Potential of 130% (from current GBP 11.25p market price)
If today’s move confirms a decisive break of the recent range, it demonstrates an unusual feature of technical analysis – often, price action can actually precede/flag up fresh news/fundamentals..!?
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Have I seen the name on a message board or two?
Management has changed over the years. I liked the dividends – pretty unprecedented! – but yes, I agree they bloody well overdid it… I think they’ll restate a dividend policy, but lesson learned I’d say.
The JV struck me as generous, particularly on a stand-alone basis, but I like the way you put it. I think we’re agreed, Richland will benefit from more than just the profit split, so should be a good deal/model in the future.
I like the whole Asia/China angle, but didn’t want to hype it until we see more tangible confirmation. I like this quote: ‘We could sell three times our current production,’ Olivier reveals. ‘Blue is a colour with particular resonance with the Chinese’. Maybe a little hyperbolic, but if it focuses more of their sales/marketing efforts towards Asia, I’m happy.
I prefer to be conservative on resource estimates and valuations. Re my $38.9 mio Asset Valuation, remember to convert to GBP – this will get you to GBP 20.8p rather than GBP 32.9p. You may have done that though for your other calculations? Looks like in either case, we have a lot of overlap on valuations.
Thks again for your all your comments – if you think of anything new as we move ahead, don’t hesitate to comment or email me – I’d like to hear.
Have posted on the Interactive Investors board.
Thanks for pointing out my error in not picking up the 38.9m was $ not £. My mistake. My crude estimated EPS of 1.77p was however in the correct currency, so this problem hasn’t affected my expected return calculations. However I esimated the 1.77p EPS for 2011 (simple extrapolation of half year results) when the exchange rate was a little different. Extrapolating the half year EPS for the whole year gives 2.724c and using a current exchange rate of 1.577 gives a slightly lower estimated EPSttm figure of 1.73p. However, using 1.77p instead of 1.73p as the estimate of current EPS doesn’t materially alter the ball park figures and conclusions. For example using 1.73p would change the estimate under growth scenario B with 20% required return (from 21.87p) to 21.38p.
I agree with you that what is interesting is that through using different methods we still came up with similar figures. Today I have also read that a new analyst at XCAP has given a 1 year price target for the share of 19p which is similar.
The previous dividends were nice but it cost us in the end. However I look forward to some dividends in the future (with a more sensible payout ratio this time round).
Forgot to add that if say earnings for 2011 were 1.77p then with a more reasonable P/E ratio of 15 this would give a value of 26.55p/share.
Agree with much of your article although while paying a dividend was a good sign, previous management got carried away and the dividend payouts soared. I don’t agree think you can call previous management “professional” when they ended up paying out far more in dividends than the company was earning over a three year period. This almost sank the company and required a significant private placing (which diluted the shareholdings of the rest of us). In addition the company was unable to buy up cheap high quality tanzanites at the time. I think Bernard Olivier’s comments that they want to return to paying dividends but not until the financial status and cash flow has improved shows a more balanced and sensible pro shareholder approach. However like you I see the fact that directors have been buying and hold a significant number of shares as a very good sign and presumably they are confident the SML will be renewed (which theoretically should be a formality).
As you write the SML renewal is the biggie. However while Tanzania has been less risky than other African countries there has been a bit of discussion regarding the new mining act, and the odd politician and local small scale miner have been antagonisitic to the company in the Tanzanian press. However the company does appear to have been prepared to pay full taxes all along which has been good. I will be much happier when the SML renewal is confirmed and I think this is one of the reasons the share price has remained low despite steadily increasing fundamentals over the last couple of years. I would expect the share to spike once the SML is renewed.
Bernard Olivier is based in Australia which would be convenient for the sapphire mining. In addition strategically it would be good not to have all ones eggs in one country. Like Gemfields, Richland sees a benefit in trying to consolidate as a multi-gem mining company.
Interesting to read your comment on Bernard Olivier becoming CEO of Bezant Resources as well but as you rightly noted he has been on their board for some time. Hopefully he can continue to run the two companies.
Wrt the recently announced joint venture, if Richland gets 40% cost recovery for mining and exploration costs they are effectively paying 60% of costs and getting 60% of profits which seems reasonable without having to pay any additional license fees. Why do you feel this is pretty generous? If adjacent to RLD mining area this will provide a buffer against undertunneling and will increase the company’s share of the overall tanzanite production presumably increasing its pricing power and economic moat.
The recent change to cutting and polishing stones in house raises the question as to whether this beneficiation will add to profits over time.
One advantage for Richland is that they have been significantly and sensibly increasing their marketing and sales in SE Asia and especially China which gives them more of a buffer against global financial problems.
I also think that price per carat is also key and whether we can get back to previous high levels and turnovers of over $40m/year remains to be seen. Thus effectively working with $10/ct seems more reasonable (which you have effectively done discounting $15 to $10). You have already reduced the estimated recoverable resource from 63-83m cts to 58.5m based on 2.2m carats mined per year but the company’s stated plan is to slowly ramp up mining up to 3m cts/year. Thus 58.5m cts may be a reasonable conservative figure. Halving that already reduced figure may be excessively conservative. Also surely taking your value of 38.9m and dividing that by the current 118.148951m shares gives a fair value 0f 32.9p rather than 20.8p. If you use 58.5m as resource this gives 57.7p a share using your methodology and dividing by 118.15m shares.
I fully agree with you that based on fundamentals the share is undervalued .
According to one site Tobin’s Q ratio for the company is 0.25 (average company should be 1) and this would give a valuation of 4*9.625p or 38.5p.
Using John Price’s predicted return methodology (see his book The Conscious Investor for more details) I worked out possible values for a range of scenarios. Like you I have assumed similar earnings till the end of 2011 and started with an estimated EPS for 2011 of 1.77p. I agree a PE of around 5 is crazy. One site gives average historical PE for the company of 21.04 and perhaps using a PE of 15 is reasonable. I used the current mid price of 9.625p. I also assumed no dividend payouts over the next 5 years (although I suspect they will re-commence) and like you I conservatively haven’t added any additional turnover/profits for possible Tsavorite and or other gem sales. I modelled three different growth rates. The company’s stated plan is to get up to 3m cts mined/year. Suppose it takes 5 years to get there from 2.2m this gives an increase of +6.4% mined per year (Model A) which is a little bit lower than the rate they have been achieving. I also modelled two options where the price/ rough ct increased over the 5 years – conservatively from $8-$10/ct (Model B) = a +8.5% increase in price per year or more optimistically from $8-$16/ct = a +14.9% increase in price per year (Model C). Put these together, gives modelled growth rates in EPS (simplifying things by not including increasing taxation) of A) +6.4% (increasing to 3m cts mined over 5 years with no change in price) , B) +15.44% (to 3m cts but price increases to $10/ct in 5 years and C) +22.25% (up to 3m cts mined and price increases to $16/ct over 5 years). I then used Price’s predicted return methodology to estimate % annual return over next five years if you buy the share at 9.625p. To estimate intrinsic value I reckon that given the risk and uncertainty with mining one should require a minimum 20% return. Using Price’s approach I then calculated what the maximum price you should pay today to get a 20% return for the given set of parameters. (For comparison I also modelled this for minimum required 15% and 10% returns.). The results I got were as follows ..
The predicted annual increase in value [made up in good measure by increasing sentiment (P/E) as well as increasing earnings] for the three different growth scenarios was A) +30.34%, B) +41.41% and C) +49.76% per annum. Requiring a minimum 20% return pa over 5 years gives the maximum current price you should pay now (which can be used as estimate of intrinsic value) of A) 14.55p, B) 21.87p and C) 29.12p. Scenario B) comes up with a very similar figure to your average estimate of 22.8p.
Using required minimum rates of return gives for 15% values of A) 18.00p, B) 27.06p and C) 36.04p and for 10% values of A) 22.48p B) 33.80p and C) 45.01p