The opportunity to buy a $1 bill and pay only $0.50 for it was created earlier this year in the shadow of the largest gold M&A deal of the year.
The $3.6 billion acquisition of Osisko was announced in April when Goldcorp made a hostile offer for the Canadian gold miner and ultimately saw Agnico-Eagle/Yamana jointly outbid Goldcorp to take control of Osisko.
Soon after that deal was announced, Rio Alto (RIO:TSX) the Toronto-based gold miner made a friendly +$300 million all stock offer for Stan Bharti’s Sulliden Gold which would see the two consolidate their Peruvian gold projects.
Sulliden’s Shahuindo gold project located just 30 kilometres from Rio’s La Arena oxide and sulphide gold mine offered Rio the opportunity to extend their heap leach operations as they developed the larger and more expensive sulphide phase of their mine. It provided for operational and financial synergies as well as the opportunity for production growth.
In order to convince Sulliden shareholders to tender their shares, Rio agreed to create a spinout company (SpinCo) that would hold Sulliden’s Quebec asset and be capitalized with $25 million in cash. The asset isn’t anything to write home about, but the cash enables the company to look at opportunities in this suffering sector.
Sulliden shareholders were issued 0.10 of a new share in SpinCo creating Sulliden Mining Capital (SMC:TSX) which has 31,590,893 common shares outstanding and an enterprise value of negative $12.7 million (based on today’s share price of $0.385 and $25 million of cash).
The new Sulliden’s mandate states the company “is a venture capital company focused on acquiring and advancing brownfield, development-stage and early production-stage mining projects in the Americas.”
With a market capitalization that is half of its current cash balance, SMC is looking to make that money work for shareholders.
The management team at SMC which includes former Sulliden Gold executives Justin Reid and Peter Tagliamonte who were President and CEO of Sulliden Gold, respectively have made two investments since they began trading in August.
Their first, a $530,000 investment in Falco Resources (FPC:TSXV) in early September to take a 1.6% stake in the company. Today that investment is worth $472,000.
This morning, they announced a second and much larger investment; a $2 million private placement into Aguia Resources (an ASX-listed fertilizer development company). After closing, Sulliden will become a 15.7% shareholder in the Brazilian-focused developer.
The deal includes one Board seat for Sulliden as well as a 1% NSR royalty on Aguia’s Rio Grande phosphate project in Brazil (can be repurchased for $1 million anytime over the next 36 months).
Justin Reid, President and CEO of Sulliden Mining Capital, commented, “Our management has completed an extensive due diligence review of Aguia and the Rio Grande project, and we have great confidence in their team’s ability to successfully advance this asset. Our board seat will allow us to take an active role in our investment by overseeing the execution of the project; and if needed, we also intend to offer support to Aguia’s management as the project moves forward.”
SMC is not the only cash box trading well below book value.
Another company like this which we have highlighted in the past is Paul van Eeden’s Kobex Capital (KXM:TSX) which recently changed its mandate to an investment vehicle from a shell company looking for a mining asset.
Kobex has a market cap of $25 million and has $27 million in cash with another $5 million in stock on its balance sheet.
An important factor to consider when looking at these types of ‘investments’ is what the company’s monthly cash burn rate is. A big cash treasury can be a devastating lure for investors if managed by the wrong team.