Description

Summary: Indiana Resources, an Australian small-cap junior miner who just settled a long-running legal dispute with the Tanzanian government for $90mm USD gross proceeds, now consitutes a highly attractive and substantially derisked workout investment. Trading at 9.5c today, it is reasonably likely investors receive 11-14c in distributions in the next 7 months, along with retaining some stub optionality in an exploration portfolio worth 1-2, offering potential total value of 12-16c and a very high mid-case IRR. This opportunity exists because there is significant uncertainty in the market regarding Tanzania's willingness (and/or ability) to pay; because the market doesn't realize IDA's ownership in the award is likely to be much higher than its current equity share in the claim; because the market fears a large tax bill on any award; and because this is an Australian micro-cap with challenged liquidity. Most of these risks should be assuaged in the very near-term (next month), making this highly actionable.

Liquidity note: this trades $250k AUD/day, and even though liquidity occasionally gets much better, this is therefore only for PAs, or tiny funds. Obviously this involves a promise to pay from a bad credit (Tanzania), so this should be sized appropriately.

The Tanzanian settlement

IDA recently settled with Tanzania, regarding a $110mm USD ICSID-Tribunal Award handed down originally in mid-2023 (see here for background) process and should be considered more of a workout situation. The terms of this settlement are quite straightforward: Tanzania would pay 82.5c on the dollar of the original award amount (but nothing for accrued interest in the meantime), in three installments of $35mm (already paid); another $25mm by 25 October; and then a final $30mm payment by 30 March 2025.

While the market remains somewhat skeptical over Tanzania's willingness to pay, I believe these fears are massively overblown, both because they have already coughed up a significant chunk of the award ($35mm out of $90); because they agreed to a very near-term repayment schedule; and crucially because the ICSID process remains in place, with accrued interest still growing in the background, if Tanzania defaults at this juncture. Whilst anything is of course possible, it would be strange indeed to pay one chunk of the settlement and then default - ballooning the obligation up again to the $130mm range and allowing IDA to move for immediate attachment of foreign assets - rather than simply just default before paying the first 1/3 of the settlement. It is also worth noting that Tanzania has come into receipt of over $1.1bn in World Bank-related loans - the World Bank is the parent organization of the ICSID entity - which I believe could be partially rescinded or put in jeopardy if Tanzania defaulted at this stage. See here.

Upside in settlement % share versus stated equity % holding

After Tanzania payment risk, there are two further main determinants of final value to IDA shareholders: ultimate equity ownership in the award; and tax leakage. With regard the former, I believe there is broad misunderstanding as to how high IDA's ownership % could actually be. IDA's equity ownership % in the Claimants - the entities that made the Arbitration claim and thus received the settlement - is about 69% at the moment, and there are two other equity owners: Loricatus (18%) - a Mauritius based legal trust of (apparently) little or no scale; and MMG Exploration (13%), a subsidiary of MMG Ltd, an HK-listed $4bn USD market cap mining group.

Indiana, as lead Claimant, not only organized litigation financing from a litigation funder to pursue the arbitration, but they also spent - by my count - another $5-6mm USD in extraneous legal costs (not shared with the other Claimants) bringing this settlement to a conclusion. The arbitration Award mentions the justification of payment as the return of 'sunk costs' (grossed up and at an exploration multiple, but still) and therefore Indiana's position is that any settlement of the award should be split pro-rata based on total sunk costs by all the claimants. Note that there were numerous capital calls to the other claimants, one of which (Loricatus) did not participate in at any time (this was the topic of a previous arbitration, in Australia, allowing IDA to step-up their equity claim already somewhat). Meanwhile MMG is a multi billion dollar concern and clearly 13% of the net award value here - about $8mm USD is absolutely meaningless to them.

Practically speaking IDA is at an advantage too, because IDA received the entirety of the first payment, directly, and will control the bank accounts into which any subsequent payments are made (since Tanzania's entire relationship faces Indiana alone). The minority shareholders thus negotiating with IDA will thus have a very hard time extracting full value if, or when, IDA plays hardball from a position of strength, sitting on all the cash. Loricatus, especially, seems ripe for upside here. According to Indiana, they contributed only a total of $2mm in total contributions over the life of the project - recall this is a tiny Mauritian entity with no ability to meet subsequent capital calls of just a couple million USD - that would now, according to the settlement at stated equity terms, be worth $12mm, even though Loricatus shouldered none of the extraneous legal burden and missed multiple capital calls. This would allow them a balloon gain and an equity return many multiples better than the lead claimant who did all the work. I believe IDA will offer them something like $4mm and buy them out at a fraction of their claim. Admittedly MMG is clearly resourced very differently and could pursue legal avenues to go after the 'fully value' of $8mm here. But will they care?

Ultimately, this is all upside for IDA shareholders as bear-case assumption - the current equity ownership % stake, unchanged at 69% - still leaves decent upside from current.

Tax on any settlement should be near-zero or zero

A further risk weighing on sentiment is the idea that any proceeds could potentially be taxable by the ATO. However given that the vast majority of the Award was structured as a 'return on funds invested' and thus should be exempt from taxation. I believe, of the $90mm (gross) USD award, as much as $75-77mm is sunk costs; as mentioned IDA incurred another $5-6mm in extraneous legal fees; leaving maybe $9-10mm as 'deemed interest' on the award (which I believe is taxable). Of course it is still unknown what final ownership % IDA will receive of this gross $90mm, in the end, but even in the case they somehow got up to 100% of the award (!), only the interest component would be initially taxable...but IDA also has almost $30mm AUD of accumulated NOLs on the balance sheet (as at June'24), some or all of which may be usable against income derived from Tanzania (since these NOLs were largely generated in Tanzania. All told, I am quite sanguine about net tax proceeds here and only think they will even potentially be an issue in the near max upside valuation case.

Valuation

Bear case: assuming 69% ownership in the claim; 68 FX; and a simple $6mm AUD - swag - stub equity value for the exploration portfolio left over (1c a share), I get 11.9c of total value.

Mid case: assuming 75% ownership in the claim; and all of the above, I get 12.7c of total value.

Upside case: assuming 90% ownership in the claim; and all of the above, I get 15.1c of total value.

Alignment

The MD, Bronwyn Barnes, has captained IDA since the Tanzanian assets were originally stolen many years ago all the way through the ICSID process and now settlement. She owns about 6% of the company and is the second largest shareholder; I believe the bulk of her net worth is tied up in this stock so clearly she is aligned to simply return capital. The company has publicly stated a 10.5-12c return number (ie before upside in the equity % they receive of the award and not counting residual value in the exploration assets) so they have already said they will return essentially all the capital. 

Catalyst

Risks: Tanzania renegs; no further upside in % ownership of claim; some strange balloon tax emerging.