Capital Share Discussion Threads

[otemple3] 05/9/2023 14:39

Both are up YTD and PDI doing very nicely since our top up in the recent fund raise tbf - up 33% since buy at 1.5

[adamb1978] 05/9/2023 13:16

...hence why you need the investment portfolio to be making very good IRRs to justify it (financially, rather than operationally) given the inherent risk in small-cap resources cos. CAPD's IRR of 20%-25% is about right as an appropriate return. Obviously the above movements would reduce that. Hopefully the Allied IPO will get away at a good price and then some of these will get taken out to compensate

[podgyted] 05/9/2023 12:34

Leo Lithium:-



Fell from a suspended A$1.14 to A$0.56 on Monday - recovered to A$0.60 today.

PDI fell 11% today.

[smartmoney100] 04/9/2023 12:09

Nice Director buy $100k

[rivaldo] 24/8/2023 07:49

CAPD took part in Wia Gold's recent A$11m fundraising at A$0.032 (a 20% discount ot the share price at the time), summarised here:



Per their disclosure CAPD now own 19.9% of Wia, or 183,216,279 shares - these are now worth around £3.4m at the current A$0.037 price, so CAPD have made a decent profit already on their purchase of around 123m shares:

[hpcg] 23/8/2023 14:52

I think PDI will be acquired too. It looks like they have found a first class resource but will have no hope of developing themselves. I'll view the Q&A which sounds like it has different material to the conference call.

Concentrate - Accounting rules require listed securities to be marked to market.

[adamb1978] 23/8/2023 12:10

Yes, thought the call was good and the fact they went straight to the investment portfolio in the Q&A and said that there were a few questions on it was pleasing.

Some other quick notes:
- investment portfolio resonates most with Resources funds (surprise, surprise)
- Gets more focus from retail
- PF is heavily concentrated in PDI, Allied, LL
- Thinks PDI will be acquired in the next year (crossing my fingers…)
- They look at investments on a standalone basis, with an investment cttee overseeing it, as it can’t be mixed with tenders. This is a problem with the narrative that the two are linked
- ‘Low single digit million dollar’ in Capital Innovation. This feels high to me and I question the value

They seemed to be a lot more open than before about not holding these positions longer-term and admitted that they’re not a natural holder of more mature assets, such as the 3 mentioned above. This was pleasing to hear. Hopefully with interest rates peaking, and potentially decreasing next year, financing costs will come off and we’ll see some consolidation in the sector and amongst CAPD’s investee portfolio

On a buyback, he responded by talking about capex plans for this year, but the emphasis on this year suggested to me that they were also more open on this than they have been previously about launching a programme next year

[concentrate] 23/8/2023 11:52

Thought the call was very good, and the answers on the investment portfolio were very reassuring.

I wonder whether half the issue is the mark-to-market policy. It adds volatility to an otherwise relatively predictable business. The 'seat in the room' benefits and 'drilling for equity' are both reasonable. If they valued at cost (less impairment) it would produce steadier financials.

[deanowls] 23/8/2023 11:31

Some good answers and clearly these boards are being read!

[adamb1978] 23/8/2023 09:11

IMC call in 20 mins for those who are free....

[rivaldo] 23/8/2023 07:36

A good production update from Resolute Mining, where CAPD are drilling contractors at Syama, resulting in the RSG share price moving up yesterday.

Syama's production is being expanded to over 250,000 oz per annum, so this will be a substantial operation:

[podgyted] 22/8/2023 22:54

DS2

"While I think there is some truth in them not really needing the equity stakes to win the business, on this occasion I think they simply invested more because they see it as a great investment."

That's the problem. Their drilling and lab businesses will never shine due to a deep distrust of their investment portfolio and therefore their capital allocation. From a share price perspective their strategy is totally wrong IMO.

BWDIK

[adamb1978] 22/8/2023 11:23

Hi Danger

I had a quick look back after my post above. There's a couple pieces which if looked at differently would adjust my figures from the $23.8m towards the $15m which you state...and perhaps the final difference might be them not including a c.$3m 'investment in associate' in 2017 in their $15m, which it probably should be, as that associate seems to be in their investment total (I cant see where else on the balance sheet it is). I also haven't applied any uplift for the Allied IPO in your second calc.

Changing my figures per the above gets me to just under 20% IRR...and taking the '4x/4yr' figures which you stated but taking it back to 2016 when they accelerated this strategy that gets to a 24% IRR, which is close enough amongst friends. As I mentioned above, I think the return is fine and the net realisation/spend is improving...but its an almighty distraction from the overall equity story. I can't help think the share price would be higher if the story was just about picks n shovels, the operational performance and the portfolio was gradually monetised (rather than added too, per PDI) plus shares bought back below NAV.

All the best, and fingers crossed this bounces off the c.80p support which has previous been there,

Adam

[mtioc] 22/8/2023 10:55

Forgive me, I don't know the history particularly well, but weren't some of these equity stakes acquired in "drill for equity" arrangements when the fleet was c. 60% utilized. If true, that is not quite the same as investing cash and adds to the case that the management team are savvy. Apologies if I got this wrong.

[dangersimpson2] 22/8/2023 10:03

I think you are probably missing some realisations in there since you have a net total of $23.8m, whereas in the H1 presentation, the company said:

Capital has invested a net total of $15.0 million in the investment strategy to date

I've got to admit I didn't go through all the detail; I simply went for the current c$50m mark to market portfolio value, added on a guess of $10m uplift from Allied IPOing (perhaps counting chickens before they hatch) and compared to $15m net total invested.

Or that the stakes were worth $13.3m at the start of 2020, now worth around $60m (assuming Allied IPO uplift), having added about $6m net.

Hence the roughly 4x in 4 years, but I've not done anything like an IRR here, just eyeballed some figures. However, the magnitude of these gains, I think, is enough to conclude that they are excellent capital allocators, especially considering their history of acting countercyclical and having a sector-leading ROCE. They act like owners, which can be a good thing or a bad thing, depending on your perspective.

I certainly agree on the lack of buybacks, though. It is hard to justify buying a new mining fleet for load & haul contracts when they could just buy all their existing fleet at a 20% discount. The reality may be that they may be getting very lucrative drilling contracts with incredible IRRs out of these deals, or they have strategic purpose, but the IRRs on the mining side stand-alone so far have been unimpressive compared to the rest of their business.

On governance, for me, there are definitely a few niggles, including some of what you list, but not enough to overcome the valuation anomaly I see compared to other listed "picks and shovels" peers and the general market. Institutions tend to be more focused on this sort of thing than PIs, though, which is why I don't think we are seeing new institutions keen to buy aggressively in the market, despite a lot of institutional-facing research giving a valuation around double the current price. (Although UK equity fund outflows probably aren't helping things.)

On pay, last time I looked, CAPD paid the board far less than TSX-listed Geodrill, despite being a bigger business. So overall, I don't think remuneration is excessive for the industry.

While the lack of institutional buyers can be frustrating, ultimately, if you have a team of excellent capital allocators at the helm who tend to act like owner-operators, the intrinsic value compounds rapidly, and the share price eventually catches up.

[adamb1978] 22/8/2023 09:12

DS2,

Here the figures behind my IRR figure, which is 14%:

Started at 2016: $1.8m carrying value at Dec-16, so treat this as a cash outflow in effect buying the stakes. Then cashflows:
2017: $(5)m
2018: $(3)m
2019: $(8)m
2020: $(6)m
2021: $1m
2022: $2m
H1 23 $(3)m
carrying value: $42m

Gets me to an IRR of 14%. I haven't checked my spreadsheet which has been built over the years, but believe its accurate. The starting date would bring some small deviations, but given it only started at $1.8m, it's not going to be a massive driver (eg deleting it changes IRR to 17%)

Its a reasonable return, and in excess of their cost of capital, but not crazily good. Perhaps your 4x could be consistent if you took a different time frame to me - for example, a 10m outflow in 2016 and $40m inflow today is a 24% IRR.

Adam

[rivaldo] 22/8/2023 07:35

Agreed ds2 - imo CAPD simply believe PDI will continue to be a very worthwhile investment. You can't argue with the huge value achieved to date.

Good drilling news overnight from CAPD investee company Awale's Odienne project, where CAPD are the drilling contractor:



"Awalé Reports High Grade Gold at Charger Target, Odienné Project
PR NewswireAug 21, 2023 8:30 AM EDT"

"Drilling results from Charger and Sceptre East continue to deliver great results. We are happy to see another 100 gram-meter interval within 65m downhole width of mineralization at Charger, which included 12m at 4.9 g/t Au. We await results from a further 6 holes at Charger and see it as a significant high-grade target that can advance toward resource development drilling in the coming year. Additionally we eagerly await results over the ensuing months for the new Lando, Sceptre Main and BBM targets.

At Scepter East, its sheer scale and potential is coming to light. Turning the rig 90 degrees and drilling West to East in the final hole for the program returned a high chalcopyrite/molybdenite vein density, with the hole ending in mineralization at 365m . These early holes provide a better understanding of the system's controls on copper and gold mineralization. We are still learning about the geometry of Sceptre East but these first holes are the critical steps in developing our model, said Andrew Chubb , Awalé Resources CEO."

[adamb1978] 21/8/2023 21:34

Hi Danger

Yep, their returns from the investments have been fine - I cant recall what base year I took but I calculated a 16% IRR (I'd be interested in your 4x maths - sounds a lot lot higher than I have). The question though isnt necessarily just a financial one - its also an equity story question. For me, a big attraction of CAPD is that its a picks and shovels (almost literally) company - so an enabler of the wider industry. That becomes more murky when its also partly a junior miner fund.

re governance: I think its partly linked to the portfolio issue, but its also broader. There's no non-exec Chair as there is for 99% of plcs, there's a NED who they admit isn't independent and the NEDs are paid c.£100k which is massively inflated for this size company...call me cynical but you could argue that they're paid inflated fees in order to waive through the £500k package for JB and let him run the company as he wants!

CAPD is a strong company operationally, but really feel that value is being left on the table from these issues. For example, rather than spend another $5m on the portfolio in the last 6 months, I think that would have been better spent hoovering up shares from weak hands.

Adam

[dangersimpson2] 21/8/2023 21:04

While I think there is some truth in them not really needing the equity stakes to win the business, on this occasion I think they simply invested more because they see it as a great investment. And, of course, although not inside, they are pretty close to the company.

With debt interest at 10%, there should be a high bar for investing more in the equity stakes, but so far this year, they have beaten that with around 23%. This easily eclipses my own return for this year so far, so perhaps I should just be trusting them to know what they are doing. The long-term returns since they've followed this strategy are also excellent.

We can debate if this is weak governance (it is not like they are trying to hide the fact that they will invest in their customers) but doing 4x in 4 years while borrowing at 10% is in no way a poor capital allocation decision. Very few holders will have beaten that return, given the way UK small cap equity markets have been since the end of 2021.

[shanklin] 21/8/2023 17:38

It also ups the debt where CAPD used to always be cash positive.

[adamb1978] 21/8/2023 16:41

Thanks DangerSimpson. I guess that#s most of the H1 cash outflow for new investments.

Think its completely unnecessary - PDI are a A$400m mkt cap company...you'd like to think that CAPD would win the business without this additional stake. Poor capital allocation decisions and weak governance as I've said before.

Would be nice if as interest rates peak/reduce, we see some consolidation amongst CAPD's customer base such that some of these positions get cashed out. The PF is 25% of market cap but as you say, I dont think any of it gets priced into the share price. Arguably the portfolio is actually negative value given it confuses the equity story

[dangersimpson2] 21/8/2023 15:42

Looks like CAPD have increased their stake in PDI, presumably in the 15c placing in May. The latest PDI presentation has them at 9.8%.



At A20c this means the CAPD stake is worth around $26m. Given their willingness to put fresh cash into an already large position, they likely see Bankan as a new Tier 1 mine that is pretty certain to be developed, and has a high chance of delivering long-term production drilling contracts on top of the existing exploration drilling and capital gains from their equity position.

Overall, the total equity portfolio is likely to be above $50m again, prior to any uplift if/when Allied IPOs. So this is starting to be a material part of the capital structure again. Although one that never gets fully priced by the market due to its illiquidity/volatility.

[benjonesinvestments] 18/8/2023 16:27

Hi Adam,

I think you may have a point on Boyton aiming for a larger company over prioritising return on capital. I like their drilling business and I like the labs business but I'm also sceptical on the mining business. Particularly given its capital intensity and debt funding requirements.

I'd rather see them pay down debt before buying back shares but both look to be preferable over the mining business. I think it's worth asking management's view on this and how they view capital allocation going forward.

[adamb1978] 18/8/2023 16:22

HI Shanklin - understand, hence linking it to the Allied proceeds. No impact on leverage, boost the share price...etc. If they do eventually want to sell (I have my doubts given the age of the Exec Chair), getting the price up would be a good thing!

[shanklin] 18/8/2023 15:58

With the known African risk, I don't its been phenomenally wise to introduce a load of leverage so that we have another load of risk to worry about.

Presumably if the ultimate aim is to sell CAPD on to a trade purchaser, the company may have little or no interest in short term share price movements