[miningmx.com] – INVESTMENT companies normally have a hard time of it in the valuation stakes, especially in the mining sector. Better, the logic goes, to own the shares directly rather than through an indirect, or a non-controlling vehicle.
Certainly, Pallinghurst Resources bears the marks of a investment house: its shares trade at a hefty discount to its net asset value, and at levels last seen in the wake of the 2008 economic crisis.
“We estimate Pallinghurst’s current intrinsic NAV per share at $0.57 (R5.07/share). The share is therefore trading at a 58% discount .,’ said SBG Securities in a note in October.
The market, perhaps foolishly, is also discounting the strategic nous and influence of Brian Gilberton, Pallinghurst’s chairman who is renowned globally for piecing together some of the world’s most important mining firms.
Arne Frandsen, CEO of Pallinghurst, thinks writing Pallinghurst off is an error; in fact, 2012 has been a pivotal year for the company, although he acknowledges the share price is “depressing’, as is the discount it trades to its NAV.
“I could have put my pom-poms on,’ he says in an interview with Miningmx in which he was asked to explain the share price performance. “But that wouldn’t have been the right thing. We need to do the right thing by the assets we have, and focus on delivery,’ he adds.
This is sensible talk. As is Frandsen’s other observation that holding its investments in externally listed entities is the best means of raising capital.
Pallinghurst itself has raised $200m for its investments; by contrast, the listed entities have raised $2bn, and are debt-free. They are also producing commodities some five years after Pallinghurst listed on the JSE as an exploration play.
The company has investments in three mineral classes, as it were. Its exposure to steel feed minerals, such as iron ore and manganese, are held in Australian-listed Jupiter Mines in which Pallinghurst has a 17% stake. This investment includes the Tshipi manganese mine in the Northern Cape province in which filled its first wagon with manganese ore this month.
Following the takeover of the Faberge jewellery brand by its UK-listed Gemfields, Palllinghurst now has a 49% stake in a vertically integrated gemstone miner and retail arm.
The third exposure is to platinum group metals (PGM), the burn victim of the South African mining industry in 2012. Until March, the platinum assets were held in JSE-listed Platmin until it was decided to take the company’s affairs private while a consolidation of its properties were conducted with neighbours.
Earlier this week, the company announced the consolidation was complete – creating Sedibelo Mines – and would pave the way for the R3.4bn the Industrial Development Corporation (IDC) said earlier this year it would invest, enough to grant it a 16% stake in the business. There are also plans to create a downstream beneficiation business. There aren’t many of those in the platinum space but Frandsen isn’t giving details yet.
Frandsen says Pallinghurst will make good on a relisting of the platinum assets, most likely during the course of 2013. Right now, the company’s capital demands remain relatively low, especially given the IDC stake. The company’s operating asset is near break-even although Frandsen won’t disclose details on a target to produce annualised platinum production of 250,000 oz by year-end.
The strategy for investors is that Pallinghurst intends ultimately to sell its investments and return the proceeds as a special dividend. But they’ll have to wait: “We’re like a cocoon, midway between the caterpillar and the butterfly. Right now, we’re taking jabs, but the horizon is ten years; that’s always been the goal,’ says Frandsen.
Shareholders understand this, he claims, having followed each one of the company’s four rights issues, the last a R800m offering made in July. “We have persuaded three sovereign funds to invest in the platinum assets; funds that have never invested in South Africa before,’ says Frandsen. That was while South Africa’s mining sector was wrapped up in talk of imminent nationalisation. One wonders what they’ll think of South African mining now?
Imara SP Reid in a research note said the market had not fully grasped the “developmental profile’ of Pallinghurst, and also estimated a more than 50% discount to NAV. “We believe this will narrow as the group moves these projects up the value curve with a corresponding increase in share price,’ it said.
Commenting on sovereign fund investments, Frandsen said: “Their horizon is 20 to 30 years and in the platinum assets, we have resources that can be mined at shallow depths for the next 50 years. We are getting it right and I think soon we’ll be in the harvesting period,’ he says. “This we will realise in the next five years.’
– Finweek
