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David McKay, executive editor

Mind the (NAV) gap

David Mckay | Mon, 06 Apr 2009 07:04
[miningmx.com] -- NOT even the heft of Brian Gilbertson's reputation can provide investors with the comfort they so cravenly need. At R3.20/share, Gilbertson's mining investment firm, Pallinghurst Resources, is trading nearly two-thirds lower on the JSE than in September, just as the sub-prime crisis was unfolding.

"All exploration plays are being hammered," said Arne Frandsen, Pallinghurst's CEO, and a former JP Morgan banker. "We're being tarred with the same brush." That doesn't seem unreasonable to me, notwithstanding the special place Gilbertson has in the South African mining milieu.

For years, Gilbertson has engineered transactions that have come to represent tectonic shifts in the mining industry. The unbundling of Gencor was one; the listing of Billiton in London was another, a development that presaged the UK listing of Anglo American. In merging Billiton with BHP, Gilbertson then became the founding father of the world's largest mining firm, and in grooming Marius Kloppers - now CEO of BHP Billiton - he was seminal in setting its future course.

Yet for all this, one suspects that Gilbertson's latest incarnation, Pallinghurst Resources, must accept its place in the market, just like any other exploration gambit. In today's market, that's akin to sitting in a dinghy amid monsoon weather.

The difference with Gilbertson, however, is that he has friends, rich ones. It's this distinguishing factor that provides Pallinghurst Resources with a depth few start-up firms could dream of having. Sure, Pallinghurst Resources has chewed up $60m in cash in the last financial year (only $20m left as of end-December), but when you have the muscle of Pallinghurst Advisors behind you, who cares?

Pallinghurst Advisors is private entity with capital P. In addition to Investec, it consists of the Korean steel manufacturer, Posco, and AMCI among others, each of which has contributed up to $300m in capital which, insured by Gilbertson's track-record, they believe will be put to good use.

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Projects are wheeled in for inspection by Pallinghurst Advisors, and once approved, the project is offered on a first right of refusal basis to Pallinghurst Resources. Pallinghurst Resources obliges, partly because it's Gilbertson and Frandsen again who sit on its investment committee. Cosy, but effective.

Rejection of a project by Pallinghurst Advisors is also unlikely. Says Frandsen: "If you have someone who likes red, then you don't turn up offering blue". You also try not to waste the time of people with the kind of dosh AMCI has, I would have thought.

So far, Pallinghurst has five projects under its belt including control of Gemfields, an LSE-listed precious stones company, and a platinum company, Platmin, listed in Johannesburg. Then there's the Faberge brand Gilbertson helped prise from Unilever; a manganese project in southern Africa's Kalahari; and iron ore assets in Australia.

But it's not all plain sailing. Gilbertson has warned, for instance, that Platmin's key Pilanesberg platinum project could have wobbles. He's been through enough project startups to know accidents happen. Pallinghurst Resources has also had to write down to market value the entire worth of Gemfields' key Zambian mine, Kagem.

The mine has stockpiled $20m worth of emeralds in anticipation of a turn in the precious stones market but Frandsen's view is that that won't be for between 18 months to two years. In the world of mining, Pallinghurst Resources is defensive to say the least.

In the meantime they'll be no more new projects for Pallinghurst Resources on the basis of 'what we have we hold'. The focus now is development of existing ones. Keep your eyes out, for instance, for the Kalahari manganese business as a bankable feasibility study is due for release next month.

The hope is that Pallinghurst Resources can do something about the significant discount of net asset value to share price. Frandsen calculates R6.50/share NAV against a share price about half of that. He believes narrowing of the discount will come, but will the gap ever be closed?

Isn't Mvelaphanda Resources, another investment mining company, delisting partly on the basis of failing to narrow the discount to NAV? Frandsen is realistic: "They'll always be that discount," he says. "The question is, what's the appropriate size of such a discount: 20% to 25% seems to be where they all trade."

At a 25% discount, Frandsen believes Pallinghurst Resources should be trading at around R4.87/share, indicating there's still plenty of value left in the stock. That's if, like AMCI and Investec, you believe Gilbertson's Protean dealmaking and asset spotting skills remain as sharp as ever.

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