Post Q1 - Oak Bloke musings....
Including what on earth is a Bas Rat?
Dear reader,
In today’s 2nd innings from the OB my musings continue. But no macro commentary. Just a focus on shares.
A new benchmark
Last week’s Q1 comparisons of “Top Ideas for 2024” led to some interesting comments. A reader asked why I hadn’t simply added a simple ETF-based portfolio to compare and compete. I agreed - great idea - how does the Oak Bloke ACTIVE portfolio compare to the ETF passive?
Because if a passive is superior then logically I am wasting my time writing. And therefore reader, you are wasting yours, too, even by reading this?! Let’s find out. Are the days of the OB numbered?
The passive portfolio comprises 40% VTI (US Stock Market), 35% VXUS (world stock market ex-US), 20% BND (Bond Tracker), and 5% IBIT (Bitcoin). I’ve used Dollars rather than Pounds as these are US ETFs, so $4000/$3500/$2000/$500. These were (imaginarily) added 1st April and so far the passive index is down 0.1% (Bitcoin is down 6% on the week) so I suppose takes 2nd place behind Paul Scott. It’s early days!
Oops!
I also realised last I had wrongly credited Simon Thompson with a YTD performance of +5%. The “Bargain Shares” 2024 tips were published on the 9th February. So crediting gains from 1st Jan to the 8th Feb wasn’t fair. Taking this into account (as though a reader has invested £1000 in each of the 8 ideas at the bid price of 8am on the 9th Feb not 29th Dec with a £4 deduction for the purchase) the performance is quite different: -3.2% YTD. He slips to #3 place with OB and Charles Archer snapping at his heels.
BELL
The OB 20 fell this week on negative news (a delay) from Belluscura. The extreme drop in Belluscura felt overdone and as I expected the price began recovering towards the end of the week. It does not make sense to me that TMTA would have agreed to the merger which of course included £0.6m of their shareholdings being swapped for BELL shares.
Meanwhile BELL has since confirmed that responsibility for manufacturing lies with Innomax, so the “line of credit” is solely for working capital relating to US orders…. and there’s lots of those to fulfil.
So the delay was a disappointment to be sure - but the delay was due to the slow completion of the legal work. Is that under BELL’s control? Or instead the Lawyers? I consider the criticism of the CEO to be unfair, and the value here is substantial. I gave a long list why in my prior article, so there’s no point repeating that.
The OB doesn’t stand alone in considering this. On Friday, Investor John Humphrey Gunn known as “Mr Magic” took a notifiable long position in Belluscura, while shorters closed their shorts on Belluscura in fear.
In fact a number of OB20 ideas reverted strongly last week, and 12 of the 20 are now priced above their 50 day average.
KZG
Kazera, for example, has moved from a 44% loss a week ago to 20%, on news that production is now imminent. Its debtor, Hebei, reports progress (via ASX listed Arcadia) on the processing facility next door to the holding they are buying from Kazera. Will we see the ~$9m owed (including accrued interest) arrive in Q2? That debt alone is 1.5X the market cap of Kazera on Friday, and on top of that Kazera has a 2.5% royalty over Aftan’s Lithium/Tantalum as well as the Diamond and HMS (Heavy Mineral Sands) operations imminently beginning.
PINE
I see Pinewood’s 24.5p special dividend is now a month away. If, like me, you bought PINE at the start of the year at 32p when I introduced the idea, so for a net 7.5p a share after the special dividend, then you’ve already profited at a 39.7p ask today. Have you missed the boat if you didn’t?
Today you are paying a net 15.2p/share or £243.2m net market cap, for a SAAS business called Pinewood Technology with £25.3m Recurring Revenue and £11m EBITDA in 2022 (and up 16.9% at £6.5m EBITDA in H1 2023), and 32,800 users up 7% for the period. So 18.7X EBITDA but where the growth shrinks that number in 2024 and beyond.
If PINE can achieve a 1% penetration to its total addressable market that equates to a £90m+ recurring revenue. Applying a 58% gross margin, long term depreciation/amortisation of £8m and tax at 25% drives a net profit £35-£40m+. Comparing such a business with Peers Sage/GB Group/Aveva a 25X PE multiple is reasonable. That puts Pinewood on an up to £1bn market cap. So that’s still 4X what you can buy it for today. Plenty of upside for Johnny come latelies.
BSRT - Is Baker Steel about to shoot out lights?
“Baz Rat” as I affectionately call Baker Steel (ticker BSRT), is up 11% YTD. Only 11%. And is slightly down since the 29th Feb at a £48.2m mar cap….. more on that in a little while. Read on reader, read on, I am fizzing with excitement on this one.
On a bid/ask of 43.6p/47p a share while its NAV is 75.3p so on a 40% discount. Incredible. But how real is that NAV? But am I justified to say “Incredible”? Read on reader, read on, judge for yourself!
#1 Futura is the largest holding and has begun the supply of met(allurgical) coal. This is used in steel making and prices are generally higher than for thermal coal. Around US$200 a tonne, while operating costs are US$85 a tonne. Once ramped up, production is aimed at 2m tonnes/year that’s annual operating profits of US$230m and BSRT own 24.3% assuming full dilution so £44m op profit. A 1.5% royalty adds $6m or £4.7m. I’ve conservatively estimated an income of £8.5m/year (out of a potential £48.7m operating profit). £8.5m on a 10X basis puts BSRT at £85m, so 3X its current NAV (35.8% of £80.16m) and 5X its market cap. (the 35.8% holding of a £48.2m mar cap is £17.2m)
Short term $200/tonne of met coal appears achievable over the next few years.
What about the long term risk of coal declining? Well as much as I’d love Green Hydrogen to succeed this quote from “StocksDownUnder” summed up why I’m very positive about Futura long term:
“it’s also important to recognise the low likelihood of metallurgical coal coal used for the production of steel being phased out anytime soon.
This is because alternative technologies used to produce steel are still incredibly primitive and unaffordable. Take green steel steel made from hydrogen for example. It will likely remain highly uncompetitive given the round-trip losses from converting sunshine or wind into hydrogen.
As Bowen Coking Coal’s Executive Chairman Nick Jorss has said “There are only two things that will stop so-called ‘green steel’, created from renewable hydrogen, displacing steel created using coking coal via a blast furnace: 1. Physics, 2. Economics.”
So that’s conservatively already 3X the NAV, but we still have other holdings making up the remaining 2/3rds of the NAV.
#2 Cemos is the 2nd largest holding and privately held. I had the bright idea to check “Ciments Du Marcoc” a Moroccan competitor. This is what I found. Growing profits, growing sales. While the above is in the north, Cemos is located almost opposite the Spanish Canary Islands in the Western Sahara - in the South. At first glance that’s a terrible place to make cement. But actually no, apparently there is a lot of Oil & Gas there.
In a recent interview Trevor Steel indicated that Cemos would probably start paying dividends in 2025 (he mentioned £4m a year). Up until now they have been investing in clinker and expanding. A £4m dividend again at a pretty conservative 10X the dividend would place Cemos at £40m, but at 29.8% of the NAV of £80.16m it is priced at £23.88m. So 1.67X the NAV is “fair”. And 2.9X the market cap (i.e. a 40% discount) is cheap. Put another way, a £4m dividend on a holding you can buy for £14.4m is like a 27.8% yield!
#3 Listed holdings - Caledonia/Silver X/MTL/First Tin/Tungsten West
There are 5 listed holdings. So I simply went through and calculated post period gains since the last NAV update. WOW!
A £3.9m gain on holdings you can buy for £7.2m (15% of mar cap). While BSRT itself has moved from 44p LOWER to 43.7p in that same period post Feb. Where is the sense in that reader?! £3.9m should be a 4p/share rise.
These 5 holdings are 15% of the NAV so £12m. Well, if you add up the current listed stock market price these come to £15.41m. So there’s a £3.41m mispricing there too!
But that’s not the whole story. MTL is absolutely flying with its gold mine in the Phillippines, it is working towards establishing a 2nd site. Gold miner Caledonia has moved only 3% despite substantially higher gold prices. I’d be surprised not to see a rerating after its Q1 results, and as it moves to commercialise Bilboes and other holdings. Silver X is another turnaround story so the 14.63% rise doesn’t reflect this reality (in my opinion). First Tin has an IRR of 55% and Tin prices are $28,600/tonne and heading higher. At $30k tin the IRR is 59%. The target price for 1SN is 50p a share so 10X today’s 5p ask.
Finally TUN is a turnaround story too. The Plymouth News is awash with positive news about the mine. I recently compared the Tungsten at Hemerdon versus that at the Pilot Mountain which has got all POW-wowers excited (and GMET holders too). But Hemerdon’s Tungsten is far more extensive and higher grade. (Albeit no garnet just tin credits - so both are great projects). My point being even where TUN has more than doubled since 29/02/24, it’s not anywhere close to a fair price - if the project can go ahead - and bearing in mind a good degree of risk is taken care of, it’s now at a final hurdle of environmental approval.
#4 Bilboes - BSRT also holds a 1% NSR Royalty once Caledonia starts mining Bilboes is valued at 7.4% of the NAV so £5.93m valuation for BSRT. But 168koz at $2,300/oz and 1% NSR is $3.86m or £3.04m per annum (10 year mine life)
So at a 40% discount to NAV, you are paying £3.56m to receive £3.04m for 10 years. Even discounting those cash flows at 10% and deducting the £3.56m you get a NPV of £14m.
#5 Nussir is a green Copper/Silver/Gold project, fully permitted and has a DFS but is awaiting a FID. It has a 23% IRR. But based on what? A $6.5k Copper Price! So crudely the IRR is above 30% IRR at today’s prices. BSRT own 12% of Nussir, where the NPV was $132.6m (so worth $16m NPV to BSRT) or $20m+ at a $8.5k copper price. That’s based on P&P (proved and probable) copper. The Inferred takes the project value up another 50% to $189.8m (at $6.5k/tonne copper). Yet the NAV holds this at £3.3m and the market think a 12% stake in Nussir is worth less than £2m.
£2m for a £17m NPV.
#6 Kanga has 25 billion tonnes of Muriate of Potash which it reckons it can mine for $76/tonne (AISC), while MOP sells for $282/tonne. A $457m capex would afford a 600Ktpa capacity, and be worth $604m NPV on a 30 year LOM at $125m EBITDA/pa.
BSRT’s 6.6% ownership means the share of NPV is £31.4m. Yet the NAV has this at £3.04m and the market prices it at £1.83m. So a theoretical 17X upside.
#7 So we finally arrive to BSRT’s Prognoz and even more hidden value! Valued at ZERO in the NAV… written off.
Readers familiar with ex-FTSE100 Gold Stalwart POLYMETAL who delisted to Kazakhstan (Yek shemesh, thank you please) and since has sold its Russian business holds the world’s largest (I think) Silver Mine, Prognoz. The mine starts producing a rate of 5-7m oz per year next quarter 3Q2024.
BSRT has a NSR of 0.5%-2.5%. My understanding is that the percentage increases as the price of silver increases. Assuming 6m ounces per annum at $27 and a mid point 1.5% NSR then that’s a £1.9m royalty per annum. Now the challenge is that BSRT may not be able to collect, but that money owed will accumulate (in Russia). We have seen this with various other stranded Russian assets, where the value accrues but can’t be realised…..
But Russian accountancy rules force the Russians to account for the liability also! So the liability remains “on the books” of Polymetal Russia and that can be messy and also it means the Russian state cannot collect as much tax since the liability reduces profit and offsets. So there’s an incentive for both the Russian owner, the Russian state and non Russian owner (BSRT) to find a compromise price to buy out the NSR. It probably means BSRT taking a big hair cut. Also the Russian state will take a 2nd slice, too, in “special tax”. But let’s say the NSR over 24 years LOM is worth at least £40m-£50m even if BSRT gets £10m or even £5m that’s a 10%-20% increase to today’s NAV. Seems a win-win-win in the making.
To conclude about BSRT, I hope I adequately explain why I feel justified in the use of the word “incredible” for a discount of 40%. I’ve positioned to take advantage of the hidden value.
IP Group
I recently spoke about the IPO FY23 results. A reader speculated that Nuclear Fusion is “commercially still way off in the distance - even 20 years is optimistic.” They may be right. But does that mean a holding like First Light Fusion cannot prosper while governments pay to make it happen? Like the US did this week. And especially if you can demonstrate progress. This week IP Group’s First Light Fusion announced a world-record pressure achievement of 1.85 Terrapascals (vs a previous 1.5 TerraPascal) using a US “Z machine” which has a 80 Terrawatt peak power - using the amplification technology of First Light.
First Light is pursuing a form of inertial confinement fusion called projectile fusion, which creates the extreme temperatures and pressures required to achieve ‘fusion’ by compressing a target containing fusion fuel using a projectile travelling at a tremendous speed. This differs from approaches pursued by other mainstream fusion companies in that it doesn’t involve using complex, energy-intensive, expensive lasers, or magnets. Without the need for hugely complex and expensive lasers to facilitate the fusion reaction, this is a simpler, cheaper, more energy-efficient approach to achieving fusion with lower physics risk. The amplifier massively increases the pressure delivered from the impact of the projectile, necessary to achieve fusion. First Light has had its first shot on the Z Machine and later this year gets two more shots and believes it can further increase pressure. More TerraPascal records to follow, reader!
I firmly believe this is a great opportunity - and people like Bill Gates thinks Fusion a great opportunity too. Where Gates open, others follow through.
ANIC
Agronomics made a further investment into Liberation Labs is significant. But I feel I should write a separate article about this.
TEK Capital as at 11/04/24
Even with Bell and Lucy dropping in price, it was interesting to see TEK is at a 60% discount to its NAV, where for each 8.5p share you buy you’re getting 12.9p per share of cash or publicly listed holdings.
Now for the non-OB 20 news:
Graphcore:
Graphcore is a holding with Molten/Chrysalis - I’ve suggested for several months that Graphcore was up for sale. Pitchbook agree, and it makes the most likely VC exit at 97% probability - I like those odds!
For GROW this (and another sale in progress) turns up to 44% of GROW’s market cap into CASH. A buyback at a 80% discount to NAV is a beautiful thing to behold!
For CHRY this gets closer to some serious buy backs. A Klarna IPO is also on Pitchbook’s radar too. The buy back impact which I describe in CHRYstalling value would take the NAV from £1.43 to £1.80. Meanwhile you can buy CHRY for 81p.
VPC
I see a capital return announcement is expected next week. This is in wind down but 82.6p of assets for 52p which should generate dividends of 2p a quarter during 2024 at least offers upside in my view. I look forward to the detail.
ORCA
Terms were agreed on Orcadian’s Pilot to Ping, retains 18.75% and Ping get 81.25% but bear the cost to first oil. Tax write offs and capital allowances mean Ping can expense and offset over 90% of the development cost, so as an existing 3-field producer in the North Sea the deal is a no brainer for them.
But for those who read my article Orca in the North Sea will know that the remaining 18.75% is a great deal for Orca too. The NPV is $129m based on 2P oil (proven & probable) or $80m based on 1P (proven only). This is based on $85 oil - but today we are at $90 and some think we are heading towards $100. The next step is a Field Development Plan which is also worth a $3.1m milestone payment to ORCA.
Even with the share price rising slightly on the news, Orca is a £8.8m mar cap. It’s difficult to understand how Orca remains so cheap.
Avacta
Developing targeted oncology drugs and powerful diagnostics announced it began the first cohort of the two-weekly Phase 1a dose escalation study of its lead pre|CISIONTM drug AVA6000. A peptide drug conjugate designed to target the release of the chemotherapy doxorubicin to tumour tissue. Pre|CISIONTM technology is designed to render a chemotherapy inert until it encounters Cancer. Targeted release of a chemotherapy aims to reduce damage to healthy tissues and side effects, improve the tolerability for patients and thereby allow optimisation of the dosing schedule to improve efficacy.
The safety and tolerability is continuing to be assessed and data to date demonstrates that the pre|CISIONTM platform targets the release of the chemotherapy to the tumour as intended, that AVA6000 significantly improved the safety and tolerability of doxorubicin and that AVA6000 is already showing encouraging preliminary clinical signs of anti-tumor activity.
In the final cohort even at a 385 mg/m2 dose level… 3.5x the standard dose of doxorubicin, dose-limiting toxicities were not observed and the Safety Data Monitoring Committee has concluded that this dose level is safe.
Based on this very favourable three-weekly dosing safety profile, Avacta commenced a two-weekly dosing safety study and anticipates a review of data by the end of April.
The two studies will provide information to allow the Company to define the dose and schedule to be used in a dose expansion efficacy study in the second half of 2024.
This data will be used to determine the Phase 2 efficacy study which will follow on immediately (early 2025).
Anexo:
Further good news for ST’s Anexo - a Supreme Court ruling in Hassam vs Rabat that a fixed tariff for whiplash doesn’t mean a fixed tariff for non-whiplash damages.
A major worry for Anexo disappears. Did the market recognise this? Nope! Not yet!
On top of a recent case law precedent which puts the burden of proof on the insurer to prove they do not owe for disbursements could/should be transformative for Anexo’s burgeoning Accounts Receivable. If the debtors are actually collectable the share price would double - but in usual style there’s radio silence from Anexo. I’d be shouting about this if I were Anexo.
Beeks:
Further good news for PS’s idea, and a strategic partnership with STT was announced. Shares up around 5% on the news. Beeks is on a P/E of 25.3. A beek expensive.
GMET:
Further good news for CA’s idea and a 2000m drill program for Pilot Mountain was announced. Bizarrely the market wasn’t happy with this and shares are down 5% on the news. Pilot has a Mineral Resource Estimate (MRE) of 12.53Mt @ 0.27% WO3 for 34.3kt of contained tungsten metal with significant silver, copper and zinc credits. Plus a recent discovery of 40% Garnet mineralisation, which at $220/tonne, 5Mt would be valued at over a $1bn in revenue terms alone.
RBG
Last week I wrote an article about a value play Revolution Bars Group and said I’d wait for the interims and had serious reservations. The day after my article they suspended the share so if I’d been bullish about RBG that could’ve been embarrassing! :)
Regards,
The Oak Bloke
Disclaimers:
This is not advice
Micro cap and Nano cap holdings might have a higher risk and higher volatility than companies that are traditionally defined as "blue chip".