Description

This is a simple idea but its size and liquidity probably make it applicable as a PA investment only.  In summary, shareholders can elect to participate in a buyback for a guaranteed 10% gross return (minimum 35% IRR) or alternatively hold onto their shares which pro-forma for the buyback would be trading at a 40% discount to NAV (NAV almost entirely cash) in an entity that is being liquidated. 

Brief Background

Chesser Resources was a mining company with assets in Turkey.  In October 2014 the company completed the sale of its major asset.  Post that sale the company was left with a substantial cash holding and some pre-production (exploration) assets of minor value.  At the Company’s AGM in November 2014 shareholders approved a revised strategy that involved a $0.15 per share capital return to shareholders (completed in December 2014), a significant reduction in operating expenses and the search for new investment opportunities to deploy the company’s residual cash balance.  

In late 2014 new large shareholders joined the share register, including an activist (Sandon Capital).  These shareholders demanded that the Board cease the search for new projects to deploy cash into and instead return additional cash to shareholders, effectively proposing the liquidation of the company (which was trading at a discount to NAV, of which the bulk of the asset value was cash).

After separate general meetings were called by two of the large shareholders with the intention of removing the majority of the Board, there was a negotiated solution reached whereby certain Board members resigned and were replaced by representatives of the large shareholders.  The board has confirmed that (i) it will cease the search for new investment opportunities; (ii) it will not be investing new capital in its remaining exploration assets; (iii) it will look to monetize / otherwise exit its remaining exploration assets; (iv) it will return further capital to shareholders.

Equal Access Buyback

On 2 March 2015 the Board announced an intention to complete an Equal Access Buyback of shares at $0.0353 per share.   All shareholders will have the option to participate in the buyback.  The maximum size of the buyback will be $6.2 million, or approximately 176 million shares (~79% of total shares outstanding).  However, the expectation is that shareholders that elect to participate will be able to sell up to 100% of their shareholding:

“The current expectation of the Board is that some significant shareholders may elect not to participate in the proposed EAB, preferring to retain their existing holdings in the Company, allowing participating shareholders to offer up to 100% of their Shares.”

(Source: http://www.asx.com.au/asx/statistics/displayAnnouncement.do?display=pdf&idsId=01606078)

Valuation / Return (1): Participation in the buyback

The buyback price of $0.0353 per share represents a premium of 10% to the current share price of $0.032 per share.  As shareholders are expected to be able to sell 100% of their shareholding into the buyback this represents a gross return of 10%, or an IRR of at least 35% assuming the buyback is completed in Q3 2015 as expected. 

Valuation / Return (2): No Participation in the buyback

The buyback is being completed at a discount to NAV, meaning that it is accretive for shareholders electing not to participate.  The other side of this coin is that the composition of NAV post buyback will be constituted by a materially lower amount of unrestricted cash.

At 31 December 2014 the company had $0.042 per share of net asset value, comprised of $0.044 per share of assets and $0.002 per share of liabilities.  Of the assets, $0.032 per share was unrestricted cash and a further $0.008 per share was restricted cash (in “Other Financial Assets” on the balance sheet).  The restricted cash is expected to be released.  From the company’s 31 December 2014 accounts:

“Included in other financial assets at 31 December 2014 is $1,800,488 (2013:$nil) in cash received from the sale of the Kestanelik Project that is held in a bank account maintained by the Company and is subject to the satisfaction of certain conditions related to the legal transfer of the Karaayi property before the cash can be freely utilised by the Company. The Company considers that it will meet the conditions for the release of the cash.” 

The company’s cash balance had reduced to $0.038 per share at 31 March 2015 (note: full financials are only published half yearly but a cash flow statement is published quarterly).   Adjusting the 31 December 2014 NAV for the reduction in cash results in a NAV of $0.039 per share.

If the buyback is completed at the maximum size ($6.2 million at $0.0353 per share for 176 million shares) then NAV per share will increase to approximately $0.051 per share, of which only $0.006 per share would be unrestricted cash.  The current share price of $0.032 per share represents a discount of approximately 40% to the post buy-back NAV per share. 

Per above some significant shareholders (insiders) are electing not to participate in the buyback. 

Catalyst

Completion of the equal access buyback