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I managed to make even more friends in the Bulletin Board Moron community on 4th February when I explained why anyone with half a brain cell should short Baobab Resources (LSE:BAO) at 35.75p. Since then the company has issued 2 RNS releases about its flagship Tete study blathering on with all the usual guff and telephone numbers. Yet the shares are this morning at 29.125p. Oops looks like I was right and the Bulletin Board Morons wrong. Again. So what’s new pussycat? …. There is a placing on the way….You can smell it.
You can read my original assessment of Baobab HERE
So what is the news about Tete? First up was the Pre Feasibility Study which we were expecting to be released in February. But on the 19th we were told that a few more weeks were needed. Oh. But it all looks very good anyway and no doubt will come in with an estimate of the NPV of Tete close to that in the 2011 scoping study, i.e. $1.4 billion. So work is already pushing on with a Definitive Feasibility Study already. No need to wait for PFS results as everything looks jolly spiffing anyway. Indeed this morning we were told that the total resource at Tete had increased to 725 million tonnes, albeit I point out to you that only 152 million tonnes of that is in the indicated category, the vast bulk is in the inferred category.
None the less the company presses on stating again that: “The Definitive Feasibility Study (“DFS”) drilling programme commenced at Tenge on 2 February 2013. The objective of the programme is to elevate resources that lie within the Stage 1 pit shell to a ‘measured’ category (representing the first c.10 years of operation at 2mpta pig iron production), as well as collect representative material for the next round of metallurgical test work.”
Ok but let’s get dirty and talk cash. Or rather the lack of it.
At June 30th 2012 Baobab had cash and loans due of c£1.3 million but trade payables of just over £1 million. In effect net cash was £300,000. Since then £7 million has come in as a result of investment by African Minerals Exploration & Development and the company raised c£1 million just four weeks ago at a net 14.4p via an offshore equity drawdown (aka Death Spiral) vehicle. It can raise another £13 million from the same vehicle but death spirals are not usually helpful for the share price.
Cashburn last year was £7 million but the PFS (let alone DFS) will be expensive and so I would imagine that cash burn this year will be rather larger. Do your sums. The company would – even on unchanged cashburn- be out of cash by midyear. My money is that it is right now down to its last two or three month’s cash.
Hello sailor: placing ahoy!
Get that placing out of the way ( hence the flurry of upbeat RNS releases) and then merely to keep going for four more years until production starts Baobab will have to issue even more shares – vast amounts.
Then there is the medium term cost of finding capex of $690 million. That will require a lot of debt which may or may not be easy to secure. But inevitably there will also have to be significant equity raised. You simply cannot expect to 100% debt fund a project like this. Therefore even if the debt is secured there will be large scale equity dilution ahead.
Baobab’s placing will be with institutions at a discount to whatever the current share price is. It wants its BB Moron followers to read the RNS and go wow 725 million tonnes, that is a lot, let’s average down and so push the stock up. That will allow it to issue more shares at a higher price (but still a discount to the market price). The Death Spiral may also be called into play. It depends how short of the readies Baobob is right now. But a Death Spiral can only raise so much at a time. That is why a placing pretto soon is a slam dunk cert. Shares in baobab are about to be issued like confetti.
Ahead of that process – sell.
And now for the BB feedback on my thoughts: “Go pack to serving pizzas. Your tips are all rubbish. You do not understand iron ore like we do. I have contacted the company and urged it to sue you. You must have a short position (I don’t) I am reporting you for market abuse. You are a miserable man with a grudge. What about Norseman Gold? Your writing style is so amateurish why can’t you act like a professional. Please save your reputation by saying BUY. JimBob Ellerton is going to have you a lawyers letter from posh City boy lawyers Pinsent Masons on its way.” Oh, sorry that was another stock and I told him where to stick his lawyer’s letter. All these cash strapped juniors blend into one after a while.
Bring it on morons. You said the same last time – at 35.75p. Wake up and smell the napalm. I am right and you are getting burned.
Tom Winnifrith is not in the slightest bit miserable this morning and writes for 10 websites in the UK and US without pulling any punches. You can find links to all of his work on www.TomWinnifrith.com
You can also follow him on twitter @tomwinnifrith
Tom also manages a fantastic Celtic Italian restaurant in Clerkenwell, the Real Man Pizza Company where he does not cook pizza but enjoys an occasional stint in the kitchen where he serves the meanest pollo e funghi this side of Naples. Pop in to Real Man today to eat and mention the words “you were so accurate in your assessment of Baobab” and the waiter will offer you a free glass of delightful Gascon house wine with your meal. You can find directions at www.therealmanpizzacompany.com
