Friday, 23 December 2016

Ardrea Resources


It’s hard not to be charmed by the prospectus of Ardea resources. Something about the long term consultant getting his first shot at a Managing Director role, the all or nothing plan of investing all money raised into exploratory digging in the next few years and the hopeful and earnest pictures of gold nuggets, abandoned mine sites and old letters makes it feel like something out of a Poldark episode.
The whole project seems to be a creative way Heron Resources management have dreamt up to finance exploration of some of their existing tenements they think look promising without annoying their shareholders who would rather they focused on their existing mine. Ardrea resources will be given the tenements and in exchange Heron Resource shareholders will be given over half of the shares in Ardrea Resources. Ardrea will then raise 6 million dollars through the IPO selling off the other shares
While it's an elegant solution, it is a rather expensive way of doing things. The IPO will apparently cost $900,000, or 15% of the money raised and that’s before the additional salaries of board members and directors that will need to be paid each year are factored in. The cynic in me thinks that if those gold nugget pictures that are talked about so excitedly in the prospectus where compelling enough Heron Resources management would have convinced shareholders to let the company do the drilling themselves, though perhaps that's unfair.


The payoff tree for Ardrea is pretty simple: The two year exploration will either turn up something that warrants a mine, or the company will have burnt through nearly all its money on the exploration drilling and the shares will be close to worthless. This means that in order to evaluate this deal we need to decide on two things: how much the share price will be if the drilling turns up something, and the likelihood of that happening.
To try and quantify what the Ardrea share price would be if the drilling work uncovers a feasible mine site we can use the share price of Heron Resources itself. As it stands currently, Heron Resources has had the Woodlawn mine approved as economically feasible with works due to start early next year. With this information supposedly factored into the share price, the company has a market cap of just under 52 million dollars. If you subtract the net cash the mine has of around 24 million dollars, it means the market value of the Heron Resources mining site plus any other remaining tenements is around 28 million dollars. The market cap on listing of Ardrea Resources will be 14.3 million if fully subscribed, meaning that if Ardrea was to find a mine site that a feasibility report showed was worth developing, the market cap and share price doubling to 28.6 million and 40 cents respectively may be a reasonable assumption. I know this may be overly simplistic, but there seem to be so many unknowns in regards to what could be found that trying to be more specific seems futile.
Trying to assign a percentage to the drilling finding anything is harder still. I’m not going to even pretend that phrases like “’wallaby style magnetite epidote alteration’’ mean anything to me, so the Prospectus isn’t really much help in this regard. There are a couple of things though that make me feel this percentage isn’t that great. Firstly, these tenements are not exactly new, with the Prospectus mentioning they have been looked at by previous miner’s numerous times, which can hardly be a good sign. Secondly, I keep coming back to the idea that if this really was a great opportunity, there must be easier ways to raise 6 million than through an IPO. Surely there would be private investors who would jump at the chance to put up money if they thought this opportunity was worthwhile. With all this in mind, I find it hard to be confident that the drilling prospects are above 50%.
With that low of a chance of a payoff, the deal doesn't seem that enticing.
There’s one more reason I’m reluctant to invest in this Prospectus. One of the conditions of the prospectus is that Heron Resources shareholders get priority if the IPO is oversubscribed. This means that for the average non-Heron Resources holding investor you are in a catch 22 situation: If the Heron Resources shareholders know this is a good deal, all or most of the shares will be snapped up before reaching the general public, and you will be left out. If, on the other hand, Heron Resources Shareholders think that this drilling project isn’t worth it, your bid will probably be filled.


This one is a pass for me. If I had shares in Heron Resources it might make more sense, but as it stands there are too many potential downsides to make the potential payoff worthwhile.

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