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Tri-Star Resources - what is the end game for Odey?

By Gary Newman | Thursday 11 January 2018

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.

I can see why holders of Tri-Star Resources (TSTR) would be less than impressed with the recent open offer, especially given the huge discount to the share price prior to that. This isn’t a company which I have really followed closely in the past, but the recent large fundraising at a 92% discount to the previous share price, and subsequent approval at the general meeting this week, got my attention.

The company owns a 40% stake of Strategic & Precious Metals Processing, a private company in Oman, which is developing a project to produce 60,000 ounces of gold and 20,000 tonnes of antimony annually. Now this isn’t some project which is in the early stages and years away from producing, if ever, and revenue from it is very close to being realised as an antimony roasting plant is currently being constructed and has already been 70% completed. The big problem for a small outfit like Tri-Star has been maintaining its effective share in the project and helping to finance Strategic & Precious Metals (SPMP) through to production.

The latest update mentioned that there had been delays to the expected timescale, and that first production is now expected in Q2 2018, rather than Q1. But by the end of H1 2019, the plant is expected to be running at the expected capacity, and a dividend should be paid by SPMP for the full year 2020. Tri-Star put a further $6 million into SPMP at the end of November via a mezzanine loan – the overall cost of the project had risen from $96 million to an expected $110 million, and the company is also having to work with its other partners and the banks in order to find the funds that it needs. But I would be surprised if there was a problem with that at this stage, given the progress of the project so far.

In order to fund that investment, Tri-Star had to issue $6 million in loan notes to its two biggest shareholders - $3.4 million to Odey European and $2.6 million to OEI MAC Inc – but both are controlled by Odey Asset Management anyway, which collectively holds 53.84% of the company. Under the terms of those loan notes they had to be redeemed by either June 30 2018, or earlier if an equity raise took place.

That was exactly what took place just a few weeks later as the board decided to carry out an open offer to clear a chunk of that debt off of its balance sheet – having already cleared £11.4 million earlier in the year to leave it effectively deleveraged. The open offer raised a total of £4.4 million, prior to expenses, and was carried out on the basis of 2.250106 new shares at 0.01p for every share previously held – based on the closing price prior to that announcement, that would imply a share price of around 0.045p post the open offer.

The proceeds of the open offer, which has just been approved at the general meeting on January 8, will be used to repay £4.06 million of the loan notes – leaving just $500,000 or so outstanding by my calculations, depending on how interest has been paid (the loan was at an annual rate of 25%). It will also leave the company with £250,000 of working capital, but I doubt that will put it in that strong a financial position, as it spent £230,000 on the loan notes – 3% plus £100,000 – and typical admin expenses are in the region of £70,000 per month. At the last accounts up to the end of June it had £1.1 million in the bank, but I would now estimate that to be around £600,000 or so (allowing for the deduction of the interest payments on the loan notes).

Allowing for the fact that it will need to pay back a minimum of a further £370,000 to clear the loan notes at the end of June, plus at least £46,000 in interest during that period, that only currently leaves it with enough cash to meet its admin and general running costs up until the end of March before it needs to consider raising more money again – either that or it leaves it until June, which it has enough in the bank to do, and then raises enough to clear the remaining loan notes as well as raising working capital for the foreseeable future after that.

There is obviously value in this project otherwise Odey wouldn’t be continuing to support it financially, and to be holding such a large chunk of stock. But it will be interesting to see whether there are further increase to its position, via TR1 notifications, after January 12 when the open offer shares are expected to be admitted to trading. I would expect that any open offer shares that weren’t taken up by other holders will have been snapped up by Odey, assuming it was given the chance to do so.   

Given that the Oman project does look attractive – gold is showing signs of strength and antimony performed well towards the back end of 2017 and was as high as it has been since the end of 2014 – and that the market cap of Tri-Star is just £6.9 million odd, I will be very interested to see what the intentions of Odey are here. When the deal was done earlier this year to restructure the balance sheet in return for giving Odey a big stake, that came along with a waiver which meant that it didn’t have to make a compulsory takeover bid, despite holding well in excess of 30% of the shares (54.27% at the time).

But with the Oman project now close to completion, I would be very interested to know if the view of Odey has changed and whether it might now be interested in looking to take the company private. Based on the project alone, I think that the shares here do look quite cheap at the current price of 0.04p on the ask – even just in light of the open offer implying a value of 0.045p – and I would expect to see further support from Odey, assuming of course that it doesn’t decide to try and grab it for itself on the cheap.

The big worry here would be financing the continuing running of the company through until those likely first dividend payments in 2020 – I wouldn’t be rushing to sell if you are a long term investor, but I also think that the share price could become cheaper as further fundraising will be needed before the summer, so I wouldn’t be in any hurry to buy either.

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