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Lunch with Paul Atherley of Leyshon Resources – valuation is just wrong

By Tom Winnifrith | Tuesday 28 August 2012

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

Wednesday saw me enjoy lunch with Paul Atherley, the CEO and largest shareholder in AIM listed Leyshon Resources ( LRL) which at 11.5p is capitalised at £27.76 million. That is simply the wrong price.  Other than the value in Leyshon, and the fact that Atherley is a Man United supporter who actually hails from the grim North rather than Esher, a number of other matters struck me.

The capital intensive nature of being a mining or oil junior means that it is very rare for the CEO to also be the largest shareholder. Consequently there is a dreadful tendency in this sector for CEOs to plunder the company via vast pay packages, given themselves some equity exposure via share options – in case the shares take off – but generally to treat the enterprise as a lifestyle support operation by issuing equity over and over again so screwing those who own the company, shareholders.  Paul was once an investment banker himself (assisting with these fund raisings) and knows the score. But here is a CEO whose interests are very closely aligned with those of other shareholders.

We rather agreed that investor ennui and the utter failure of so many juniors to deliver had reached a level where there were perhaps two more fund raising windows for the AIM juniors – this Autumn and next Spring. Miss those windows for whatever reason and there will be a blood let with some companies going bust/becoming shells with little cash. From a new, lower base, rebuilding can occur.

Leyshon is odd in that for two years it has been cashed up as a result of selling a gold mine in China that it brought into production. Was it good timing to sell when it did and to sit on the sidelines while asset values declined? Was it luck? I suspect a bit of both. But Atherley says that he has looked at 400 projects since he banked his windfall. These days they are being chucked at him daily because there is simply no cash around to develop anything mining related – as such assets that need development capital can be bought very cheaply. Atherley is in no rush. The interest he earns on a cash pile of A$50 million (£33 million) is – with Aussie yields at 5% - enough to cover all PLC costs and the costs of due diligence.

Atherley has indeed bought shares back for cancellation when he has been able to do so at a 15% discount to net cash or greater. Given the financial issues some folks face that is not as hard as it seems.

At last Leyshon has committed to spend a bit of cash on a project – a gas project in China where Atherley lives. It is not that he has gone off gold ( he is still a bull, although he is a base metals bear) just that the maths on this scheme are so attractive. For A$2.5 million plus the issue of 10 million Leyshon shares Atherley has picked up a 100% stake in the Zijinshan Production Sharing Contract located on the eastern fringe of the prolific Ordos Gas Basin in Central China. He will now spend cA$5 million on drilling this prospect. If he finds gas then a State owned company can buy 40% of the asset back to fund taking it into production. But it would not cost much as the area is gas prolific and littered with pipelines. Gas is sold in an attractive fixed price contract as China is desperate to pretend to be a bit green by using more gas and less coal.

There are two outcomes here. In a year’s time this is a duster and Leyshon still has c £28 million of cash (i.e. it trade at a tiny discount to net cash). Or this is commercial in which case Leyshon has an asset which would have a material tangible value plus a cash position that is greater than the market cap.  It strikes me that on a risk/reward basis, with the miserly Atherley hoarding the cash as if it was his own (as such a large shareholder he seems to feel that way), this looks like a very good bet. A few more buybacks at a 15% discount to net cash and the maths looks even better under either scenario.

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