If this idea wasn’t so compelling I’d just post an update on the thread of my previous idea. However, ARSD deserves a stand-alone write-up at this point due to the number of changes that have gone on over the past 6 months that have materially increased the value of the Company. 

 

What was once perceived as primarily a story stock is now a bona fide value investor’s special situation.  An existing business reasonably priced.  An expansion plan that apparently is completely un-noticed.  And a base metal mine that Mr. Market seems to think is a zero. 

 

I will give you a brief update on the story side, but I refer you to my previous write-up for historical background. 

 

Then I will run through the numbers of the existing business. 

 

Lastly – I will point out that there remains one last hidden asset in ARSD that provides a further upside. 

 

In regard to the above I know many will look at the stock chart and get a bit antsy, however, I think I will demonstrate that the while the story has been playing out the stock price has not changed enough to reflect everything that is going on. 

 

 

ARSD’s operating subsidiary - South Hampton Refining Company - owns and operates a 97 acre petrochemical facility located in Texas.   40 acres are currently in use allowing the Company ample expansion opportunities.  The Company produces high purity petrochemical solvents and other petroleum based products – it produces a very nominal amount of motor fuel products and other commodity type products commonly sold directly to retail consumers or outlets.  85% of revenue relates to products sold as intermediate components to manufacturers in various markets such as expandable polystyrene (Styrofoam), polyethylene, adhesives, foams, synthetic rubber and food processing.  10% of revenue is oil related and consists of gasoline blends sold to the majors or other miscellaneous products such as degreasers / flow enhancers, etc.  5% of revenue is for toll processing to customer specific needs.

 

ARSD also owns a 50% interest Al Masane Al Kobra Mining (ALAK), a joint venture that is developing a poly-metallic (copper, zinc, gold, silver) mine in Saudi Arabia. 

 

Update on Story

 

The “story” before was:

 

a)      existing chemical business getting fixed and results should dramatically improve reported numbers

b)      chemical business capable of growing materially with expansion

c)      Company story about base metal mine opportunity in Saudi Arabia needs to “get out”

d)      Company needs to get off the bulletin board and onto national exchange

 

So let’s see what happened:

 

a)      chemical business operating efficiently and growing organically and for 2007 producing on a normalized basis around $17 - $18 million in ebitda.

b)      Board approved expansion to double capacity.  Company currently turning away new business that would use up 25% of that capacity immediately.  Permitting process in progress and development work has been completed looking for Q2 start of operations for new capacity.

c)      Well, well.  Bunch of stuff here.  I’ll give the snippets and then if you want you can dig the stories out. 

 

First there’s this:

 

 

Then this:

 

 

And actually the Company had been busy before that as this article explains:

 

And lastly regarding d)  Company is listed on Nasdaq effective 1/23. 

 

So essentially everything has played out.

 

 

Next - lets run through the numbers side which I think will show you there is significant upside left in ARSD. 

 

Current Stats:

23 mil shares @ $6.90 = $158 market cap which is also EV as there is no debt (debt on balance sheet is transferred to ALAK). 

 

Normalized ebitda for existing chemical business is $18 million.  The Company is on track for that for 2007 (making adjustments for expansion expenses, expenses with the mine, etc.) and is supported by the fact that over the long term the company expects operating margins to be in the 15% to 16% range. 

 

The implied ebitda multiple is 8.8x.  This multiple is in the range of acquisition multiples in the industry. 

 

So, lets call the current stock price roughly right, reflecting the existing chemical business with normal organic growth.  What else is of value at ARSD? 

 

The Company’s expansion plan is in full swing and should be completed in Q2 per Company plans.  Based on discussions with management and from prior press releases the goal of the expansion plan is to double capacity.  Management expects 25% of this capacity to be filled almost immediately and full utilization over the next year to 18 months.  The expansion plan should be marginally more profitable than the existing business, but I’m not factoring that in as the business has been run very lean in the past.  I’m just assuming they can maintain a target operating income of 15%.  This implies that incremental ebitda will be at a $6 million run rate by Q4 of 2008 and by 2009/2010 the business could be producing $15 million in incremental ebitda.  Apply an 8x multiple to these numbers adds $2/share in value this year and over $5 per share in 2009. 

 

Putting this in terms of return percentages that is 25% to 70% upside for the growth opportunity. 

 

 

Simple math first.  Based on the formation of the JV with the Saudi partners and using ARSD’s cost to establish the mine this asset is worth $30 million.  But that is not a reasonable indicator of the value given all that has transpired over the past three months which puts the mine on a firm development track.  Thus we need to look at a cash flow based analysis. 

 

Based on the historical studies the operating plan for the mine is as follows:

10 year life. 700,000 tons per year mined.  Yield = 17.5 million pounds copper, 62.6 million pounds of zinc, 22,000 ounces of gold and 800,000 ounces of silver per year.  Operating costs were projected to be approximately $60 per ton. 

 

For purposes of my calculation I am using current metal prices, cash costs plus an inflation factor of 10%, estimating G&A at 8%, and 20% for Saudi taxes.  Using a discount rate of 15% I arrive at a value in excess of $5/share.  Haircutting all metal prices by 20% results in a value in excess of $3/share. 

 

Incremental value to the current stock price for this piece is 40% to 70%. 

 

 

Current Chemical business value = $150 million.

Expansion plan value = $48 million (2008) - $120 million (‘09/’10)

Base metal mine value = $75 million - $120 million

Total Value = $273 million - $390 million

Per Share =  $12 - $17

 

Incremental value to the current stock price for the expansion plan AND the mine is 70% to 140%. 

 

From the 10K -
"On June 22, 1999, the Company submitted a formal application for a five-year exclusive mineral exploration license for the Greater Al Masane area of approximately 2,850 square kilometers, which surrounds the Al Masane mining lease area and includes the Wadi Qatan and Jebel Harr areas. The Company previously worked in the Greater Al Masane area after obtaining written authorization from the Saudi Ministry of Petroleum and Mineral Resources, and has expended over $3 million on exploration work. Geophysical, geochemical and geological work and diamond core drilling on the Greater Al Masane area reveals mineralization similar to that discovered at Al Masane."  (my emphasis added)

In talking with management, the additional work was specifically done on two areas inside Greater Al Masane... from the K,

"The Wadi Qatan area is located in southwestern Saudi Arabia. Jebel Harr is north of Wadi Qatan. Both areas are approximately 30 kilometers east of the Al Masane area. These areas consist of 40 square kilometers, plus a northern extension of an additional 13 square kilometers. The Company's geological, geophysical and limited core drilling disclosed the existence of massive sulfides containing an average of 1.2% nickel."

That is a potential WOW.  The current mine at Al Masane is 44 sq kilometers....there’s an opportunity for 2,850 sq kilometers in Greater Al Masane??   And ARSD may have an "in" on this??   Now, before this gets all crazy there are limitations in place in SA that limit the amount of land one entity can control to 100 sq. kilometers.  But that still more than doubles the existing opportunity.  And the company is exploring ways to be part of developing significantly more. 

 

Needless to say that would be stunning.  From discussions with management and IR the Wadi Qatan and Jebel Harr areas would be serviceable from the infrastructure used to set up the existing mine.

 

I’m not even going to attempt to put a value on this right now.  But this is NOT a pipe dream.  My discussions with IR suggest that management intends to try to fully exploit the whole area given their position as one of the “discoverers” of the region.  It hasn’t been discussed much because the Company wanted to get the JV operation formally approved.  Now that that has happened (and their exists now a Saudi Arabian entity to bring this mine to production – as opposed to an American entity), I would expect to see efforts made to expand the existing 44 sq. kilometer lease.  That would be some unexpected upside, though I’m not counting on it.