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Any sort of background legal dispute involving smaller AIM companies is often a red flag to investing, but in the case of Asa Resource Group (ASA) I can still see value and potential here, even taking into account the recent legal challenge to its operations in Zimbabwe.
Things were starting to look very good for the company operationally, with its last set of interim results up to the end of September 2016 looking very impressive for a company that has a market cap of around £27 million currently, based on a share price of 1.6p.
Then along came the news that Zindico Consortium had served a claim in the High Court of Zimbabwe, relating to Asa’s 85% interest in the Freda Rebecca gold mine, and seeking to indigenise that asset.
Under a law passed in Zimbabwe back in 2008, all companies must be controlled by no less than 51% local Zimbabweans, and although in the past deadlines for the implementation of this have been largely ignored, it now looks like the government is serious about implementing this law.
The most recent case to hit the headlines has related to Zimplats, where the government is trying to take over part of its licence areas, and the company has already undertaken measures to ensure that it is falls in line with indigenisation law by handing over control of 10% of the company via an employee share ownership trust.
The court case involving Asa relates to a two-year-old, un-signed draft agreement, relating to indigenisation, with Zindico by the CEO of what was then Mwana Africa (the former name of Asa), which was never submitted to the board for approval at the time.
Asa has already filed papers opposing the claim, and it remains to be seen what the outcome will be or how long it will take for a decision to be made.
There is no doubt though that if the company were to have to reduce its stake in Freda Rebecca, it would have an affect on the profitability of the company, as for the most recent six month period this gold mine produced around 60% of total revenue, and post tax profit of over $5 million.
That performance is also expected to get even stronger once milling capacity is increased and the company has the potential to hit its 80,000 to 100,000 ounces per annum target - compared to the current 30,000oz per annum – and with all in sustaining costs of below $1,000/oz, as compared to the current level of $1,133/oz.
On the gold front there is also plenty of potential from the 80% held Zani Kodo licence in the Democratic Republic of Congo, where the company is awaiting validation of its mining licence and is in a position to start operations quickly – with equipment for a gravity plant already ordered, and reserves of 3Moz to target.
Also within Zimbabwe, the company holds a 75.4% interest in Bindura Nickel Corp, which is listed on the Zimbabwean Stock Exchange, and although that has had problems in terms of the amount of nickel mined, the cost per ton has been reducing significantly – all-in sustaining cost was 33% lower than the previous year, at $5,759/t.
The nickel operation is still profitable, to the tune of nearly $1.2 million post-tax for the last six month period, despite prices of the commodity remaining relatively weak. Performance from the operation is expected to improve going forwards, with higher production, and any sizeable increase in the nickel price will have a significant effect.
On paper the company also looks to be in a decent position, with net assets of over over $138 million as at the last interims, and having recorded a net profit of circa $3.1 million for the six month period.
But I would like to see it strengthen its financial position as it only had cash in the bank of some $1.1 million, and although that is largely down to the amount of capital being invested in projects, it doesn’t leave much of a buffer. Although it could well have been boosted further during the four months since those results, assuming a similar level of profitability for the company.
I would also like to see a bit more cover for the current liabilities of the company, including a $12 million loan, as they are only just covered by current assets.
So in summary, from an operational side of things the company looks to have plenty of upside potential going forwards as long as gold and nickel prices stay at, or ideally above, current levels - although cost reductions are also helping to improve margins as well – and it should continue to make a net profit of a level which makes the current market cap look cheap. Plus that will be further boosted as and when the DRC mine comes online, and that is now even more important from a sentiment point of view, given the court case involving Freda Rebecca mine.
In terms of the court case, the worst case would seem to be that the company has to comply with indigenisation, which would of course cause a big hit to overall revenue and profitability (potentially offset by the DRC though), via its reduced share in the operation, if it comes to that.
But what I find encouraging on that front is the fact that the largest shareholders in Asa – including China International Mining with over 16% - are Chinese, and relations between China and Zimbabwe are very strong at the moment, and there have been some suggestions that indiginisation isn’t being applied to the Chinese interests in the same way that it may be to others.
Obviously this company carries plenty of risks, in the form of geo-political risk in the countries in which it operates (as we’ve seen from this court case), as well as those relating to commodity prices.
But given the fact that it is producing from two different licences, with potentially a third about to come online, and across two very different metals, plus is now making a decent level of net profit (if that profit from the interims extrapolates across the whole year then its shares would look incredibly cheap on a PE basis), I can see value at the current share price. Just be careful not to risk too much as the outcome of any court case in countries such as Zimbabwe is always uncertain to say the least, and the mining permit in the DRC still needs to be issued.
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