It’s been a tough summer for Metal Tiger’s (LSE:MTR) shareholders, as the company’s shares ground ever lower. In April Metal Tiger raised £4.85million at 3p a share, which included a £4.39million investment from Sprott Capital Partners. However since then you could have picked stock up as low as 1.7p. While it is true that an investment from Sprott is not a guarantee of future success that firm does have a reputation for thoroughness in its due diligence. Did Sprott get it wrong or will Metal Tiger’s recent recovery prove to be the beginning of a more sustained rally?
In many ways Metal Tiger is an obvious buy as part of a speculative portfolio of AIM stocks. Spread your money among ten well-run genuine businesses and you only need one or two of those to multi bag, a handful to survive or gain slightly and the rest to fail and you should make an excellent return over the medium term. I don’t currently own any Metal Tiger stock, though I should have bought some on this basis alone when I started looking at it properly again a few weeks ago.
My inaction cost me an opportune moment to start buying into the company at 1.7p, but now that it trades at 2.1p on the offer have I missed the boat?
I don’t think I have for a number of reasons.
First, naturally, is that investment by Sprott. If Sprott’s analysts gave Metal Tiger a thorough once over and felt there was sufficient value at 3p in April to justify an investment that is good enough for me. 2.1p looks a steal compared to Sprott’s entry point, especially when you consider the strength of copper this summer. The copper price is up c.17% since Sprott bought in.
The divergence in price of copper versus Metal Tiger’s shares opens up an intriguing potential value play. Metal Tiger’s flagship asset is its directly held 30% stake in the Botswanan T3 Copper Project. By any measure the T3 Project could prove to be a monster discovery.
Last week Metal Tiger released the latest results from the extended drill campaign at T3. So far copper mineralisation at T3 extends over 1.5km and is open. The prefeasibility study is now modelling a 2.5Mtpa processing rate (up 25%) and the metallurgical test work results have so far been “excellent”.
And there is the promise of more to come. The T3 drill campaign is scheduled to last until December 2018. Only a tiny fraction of the license area has currently been drilled and the T3 JV is busy progressing environmental permits. The next 6 months could easily see a period of sustained positive news flow, which could provide further uplift to Metal Tiger’s share price.
This all seems to be very encouraging, but what is slightly mystifying is that not only has Metal Tiger’s share price diverged from the copper price, the company also trades at a significant discount to its partner at T3, Australian-listed MOD Resources (ASX:MOD). At A$0.06 per share, MOD is valued at c.£63.8 (taking into account current exchange rates). At 2.1p per share Metal Tiger is valued at £20.3million. When you consider that Metal Tiger also owns just over 5% of MOD, effectively taking its stake in T3 to 33.5%, the ratio of the company’s T3 stakes is 2/1. Why then is MOD’s share price trading at a 3/1 premium to Metal Tiger’s?
The simple answer is that applying such ratios is never that straightforward when looking for arbitrage opportunities, but Metal Tiger’s discount to MOD is suggestive of unrecognised value in the British stock.
This impression is further amplified when comparing the two companies’ balance sheets. According to MOD’s latest quarterly report, that company had A$15.8million (c.£9.3million) and A$1million (c.£590,000) of debt on 30 June this year. Meanwhile on the same date, according to its interim report, Metal Tiger had £4million in cash, £6.3million in liquid assets and no debt. Financially, Metal Tiger looks in much better shape.
Perhaps one issue Metal Tiger holding Metal Tiger back is its troubled ownership of its Thai subsidiary, KEMCO Plc. For right or wrong, KEMCO has created a sentiment drag on Metal Tiger’s share price. Just under a year ago Metal Tiger announced it had raised pre-IPO funding for KEMCO of £514,000. Attached to this funding were warrants. These gave the warrant holders the right to subscribe for more shares in KEMCO (at a 20% discount when it floated) or for more Metal Tiger shares (also at a 20% discount to the 15 day VWAP post 13 October) if the float did not happen before 13 October this year.
Three weeks ago Metal Tiger was forced to admit that the KEMCO float was not going to happen as expected and had been delayed until Q1 2018. There is speculation in the market that this float might now never go ahead, but Metal Tiger is adamant it will. The company claims that the delay is down to questions raised in pre-marketing of the float and also the outcome of legislative change in Thailand.
Whatever the case the whole affair has been a little messy, not least because of the possible overhang caused by the KEMCO warrants. However, the market seems to have missed one crucial point. Even if all the KEMCO warrant holders chose to convert into Metal Tiger stock at a 20% discount, the likelihood is the overwhelming majority of these shares will end up in the hands of longstanding supporters of the company. After all it was longstanding supporters who apparently got in on the pre-IPO fundraise in the first place.
To be honest though I don’t really care what happens with KEMCO. If the float goes ahead and delivers a return for Metal Tiger then great, not least because Metal Tiger has signalled its intention to pay a dividend-in-specie to shareholders. If the whole project turns out to be a bust and Metal Tiger has to abandon it, that doesn’t detract from the long-term potential of T3. That is the real value play here. With the double discrepancy in Metal Tiger’s share price relative to the price of copper and Mod’s share price, together with being able to purchase at a c.30% discount to Sprott’s entry, this very much looks like AIM-investing ABCs.
I plan to make an initial purchase of Metal Tiger before Friday’s KEMCO warrant deadline. If there is any further weakness after that I expect I’ll buy more.
And then I plan just to wait.
Disclosure
The author of this piece does not own shares in the company written about above nor has he been paid to write this article.
