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Andulela: a tough call

Marc Hasenfuss | Tue, 07 Apr 2009 12:13

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[] -- PENNY stock pundits must be keenly mulling the value proposition at mining investment company Andulela, which has seen a precipitous fall in its shares since reverse listing (via DNR Capital) onto the JSE in late 2008.

The fall in Andulela's share price from about 75c in September 2008 to as low as 6c this week is the market's less-than-subtle way of suggesting to the proponents behind the reverse listing that the transaction brought woefully overvalued operating assets to the market.

And it looks like the market was quite right. Last week Andulela, which is chaired and effectively controlled by mining magnate Sam Jonah, impaired its only asset - the 41.8% stake in Kilken Platinum - by a whopping R287m.

Notwithstanding markedly softer conditions in the platinum group metals market, the impairment is startling. It would seem Andulela (then in its former guise of DNA Capital) could not have got its timing worse when it paid R450m for the stake in Kilken in 2008 - a deal that was settled by the issuing of preference shares, new scrip and, most notably, R90m in cash.

The cash pile and paper was issued to Jonah Mining, which held the 41.8% stake in Kilken via a 50% shareholding in Abalengani Mining Investments (AMI) and JB Platinum Holdings (JPBH).

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The remaining 50% shareholding in each of AMI and JBPH is held by Abalengani Platinum. This means that Andulela and Abalengani hold a combined 83.6% stake in Kilken.

While the R287m impairment suggests that Andulela's Kilken stake still carries a value of more than R160m, the market is of the opinion that the investment company has a worth of only R25m.

Some market watchers may feel Andulela has been "rolled" by snowballing sentiment for junior mining stocks, and that the share has been bashed too hard.

Kilken cash flow factor

That's fair chirp. But there are risks associated with Andulela - most importantly, that the chance of this investment company building up a portfolio at this delicate juncture depends on the securing of convincing cash flows from Kilken.

Kilken earns its keep by processing tailings for Rustenberg Platinum Mines (RustPlat) and then selling these tailing back to the mine. This agreement, according to Andulela, will continue for as long as RustPlat produces tailings from the Amandelbult site, which is estimated to be at least 50 years. It sounds like a solid business, and one that should do well when the platinum group metals cycle is back in an upswing.

But Andulela's interim results to end-December 2008 showed little sign of operational activity, let alone all-important operational cash flow.

Original investors in DNA Capital - which include a number of financial institutions that helped raise about R100m in new capital - can't be too charmed at developments (gee, think what R100m would buy in today's market!).

As things stand there is no cash underpin in Andulela, and Jonah Capital needed to pump R5m worth of working capital into the business during the interim period.

The performance (or lack thereof) from Kilken is worrying because the mining operation made a special distribution of R12.8m to its shareholders ahead of the Andulela deal. Such a windfall might well have placated Andulela investors at this delicate juncture.

Naturally, punters would have noticed Andulela chairperson Jonah's contention that management remained positive about future dividend cash flows from Kilken and "overall profitability of the investment in Kilken".

One can't entirely disregard the view of Jonah, who - after all - is the doyen of the African gold industry.

But in this time of diminished mining activity, exactly how convincing will those future dividend cash flows from Kilken be?

Only for diehards

While punters can ruminate about the possibility of future dividend flows, there is a more immediate issue current and prospective Andulela shareholders need to consider.

Andulela has been granted a call option and Abalengani a put option over the remaining 50% of the shares in AMI and JBPH.

This means that if the AMI and JBPH options are exercised, Andulela will effectively increase its stake in Kilken Platinum to 83.6%.

But here's the rub. If the AMI and JBPH options are exercised, Andulela's consideration for both options amounts to R450m - a transaction that may be settled by issuing new Andulela shares. That does not sound like a fantastic deal (except for the vendors) with the value of Andulela's Kilken stake already heavily impaired.

According to a note on Andulela's interim results, new shares to settle the options will be issued at a price equal to the volume-weighted average traded price of the group's shares 30 trading days before the options are exercised.

At current prices Andulela would be looking at issuing 7.5 billion shares, a development that would require shareholders to approve an increase in the company's authorised share capital.

Such a share issue would represent a more than fifteenfold increase in Andulela's issued share capital.

With this in mind, one can only hope that Andulela's share price undergoes a marked re-rating upwards before the options are exercised, otherwise current minority shareholders are going to be diluted out of existence.

I note that the AMI and JBPH options (which still need consent from RustPlat) expire at the end of October 2009. By that time Andulela's full-year results to end-June should be published, giving the market some guidance as to the cash-generative abilities of Kilken.

In the meantime, I'd recommend that only the hardiest of penny stock punters tilt at Andulela.

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