UG2: digging deeper

[] — AFTER my column last week on unlisted exploration group UG2 Platinum I received a refreshingly frank response from company CEO Gustav Trichardt.

But I still have some questions – questions that shareholders in UG2 Platinum should be mulling ahead of a meeting to approve the company’s new strategic direction.

Last week we questioned the sudden shift by UG2 Platinum away from platinum group metals (PGM) exploration into coal mining. In my opinion the sudden shift was just too convenient – especially since related parties appeared to be involved in the deal to acquire a company called Elementary Energy.

The way I understand it now is that if UG2 – which has not had much success in PGM exploration – did not shift focus into coal the company would have been wound-up.

Naturally the question remains whether UG2 (which will presumably change its name to reflect its new focus) can make amends with coal exploration. One needs to remember that the coal mining business – despite being touted as mining sector with the biggest growth potential – is no cinch.

I received a refreshingly frank response from a company CEO

Players need plentiful capital, skill and a compelling strategic vision. Mistakes can be costly. Just ask JSE-listed SA Coal Mining Holdings (see my column “Dank & Depressing, April 14).

Trichardt tells me that UG2 Platinum’s project in Vryburg did not deliver the anticipated after drilling more than 4500 metres and that the geological team recommended not incurring further costs (partially due to the depth of the target and also due to the prevailing economic climate).

And I see from UG2’s 2008 annual financial statements that the original Tromsburg platinum project was handed back to its original vendors, who were counting on the company listing before June 2008 (if the project was viable).

The Vryburg project will be kept in reserve, perhaps with a view to establishing a joint venture with a mining house when the PGM market picks up.

Trichardt says UG2 was offered the opportunity to acquire Elementary Energy – a company with interests in Botswana coal exploration project – towards the end of last year.

The opportunity was presented by the majority shareholder in Elementary – the Kumalo Family Investments, which holds a 51% stake. Trichardt says the initial high risk funding is provided by venture capital funding specialist, Silver Seed Capital, which holds a 49% stake. This explains why Silver Seed director Sandro Veloza is listed as a director of Elementary.

Addressing the related party concerns raised in my previous column, Trichardt says Elementary was a dormant company at the time of acquiring an interest in the Botswana project.

Trichardt says he acquired the dormant company – which explains why he was listed as a director as at late April 2008.

The latest UG2 annual report does note the transaction as a related party transaction. While Trichardt and Veloza are identified as related parties, the annual report stresses that both recused themselves from voting on the ratification of the acquisition at the company’s upcoming AGM.

The plan is for UG2 to acquire 100% of Elementary. As things stand Elementary owns 21% of Stanbridge Holdings, a Botswana registered company. There is an option for Elementary to acquire another 9,6% of Stanbridge.

Stanbridge Holdings, under a shareholders agreement owns a prospecting license for coal and coal-bed methane over an area covering 495 square kilometres. Stanbridge also has an option to acquire a another nine prospecting licenses in Botswana (which, Trichardt tells me, the geological team of Stanbridge is currently evaluating).

But the really interesting bit is that the settlement consideration shares for the transaction – ie 100% of Elementary – will be just over 530m UG2 Platinum shares.

That would have the effect of increasing UG2 Platinum’s issued shares up to around 650m.

At what price the new shares will be issued at is not made clear in UG2’s annual report. This is a pity, because it would have given an indication of what the company’s directors reckoned Elementary Energy was worth.

Presumably shareholders will be furnished with such key information in the weeks ahead.

Trichardt says auditors are busy with an independent evaluation of the parties concerned and will shortly provide a “fair and reasonable” report.

There is an inference that Elementary’s equity stake in the coal project in Botswana could be valuable with the latest UG2 annual report noting “an estimated in-situ resource of 1,1bn tonnes of power generation and export quality coal”.

Trichardt reiterates that the initial results from the Botswana project are very encouraging. “The cores extracted from the first boreholes drilled (where a 40m coal seam was intersected) are currently at a laboratory and assay results should be available within the next six to eight weeks.”

He points out that the concession area is contiguous to CIC Energy Corporation’s Botswana coal field and adjacent to that of Saber Energy (“where Saber are well advanced in identifying a large Coal Bed Methane reserve”).

“The prospecting license that is held over the property, also permits prospecting for CBM in addition to coal, which leaves Stanbridge Holdings with some interesting options.”

That’s well and good. But one simply has to ask why the vendors of such a valuable interest would happily swop this stake for shares in an obscure and unlisted exploration company like UG2?

Surely if Elementary did hold a resource of 1.1bn tonnes of top class coal it would have been the easiest thing in the world to attract bids from any number of blue chip mining groups?

This way the vendors could have the option of cashing out at top dollar or swopping their stake out for highly rated scrip?

The bottom line is that investors (assuming UG2 will need to raise fresh capital) have to be convinced the related parties involved in the Elementary transaction have got shareholders’ interests at heart. The first port of call should be the independent evaluation documentation, which could provide the most important clues.