Spec Value Hunter Comment - June 20, 2012: Northcliff completes acquisition of 30% Sisson stake from Geodex
Northcliff Resources Ltd has completed the acquisition of a 100% interest in the Sisson tungsten-molybdenum project effective June 21, 2012 after shareholders of Geodex Minerals Ltd on June 18 approved the sale of its 30% interest to Northcliff for $1 million, 16,003,700 Northcliff shares and the return of 3,333,333 Geodex shares Northcliff bought through a private placement that was part of the original farm-in deal. Geodex has set June 28, 2012 as the record date for a distribution of the Northcliff shares on the basis of 0.145 Northcliff shares for each Geodex share. This means that to get Northcliff one must have bought Geodex on June 25 or earlier under the 3 day settlement system. At the current $0.07-$0.08 trading range for Geodex this spinout implies a Northcliff price of $0.50-$0.55 which is what Northcliff is currently trading at, when it does trade. This assumes Geodex will trade at zero on June 26, which will not be the case because although the junior will have about 110 million shares issued, it will have $1.2 million working capital. More likely Geodex will sink into the $0.02-$0.05 range as shareholders who were long for the Sisson project dump their Geodex stock to collect a capital loss and avoid futher declines if Geodex conducts a rollback as it will likely need to do in the not too distant future. This suggests an abitrage opportunity for Spec Value Hunters looking for a position in the illiquid Northcliff. In my May 30, 2012 Spec Value Hunter Comment I recommended Northcliff as a Good Absolute Spec Value Buy to a maximum of $0.75 on the premise that tungsten prices will be strong for the foreseeable future and that the feasibility study Northcliff hopes to complete in Q3 of 2012 will support an after-tax net present value in the $300-$700 million range. If the feasibility study achieves this valuation range, we could expect the market to assign a pre-financing valuation of $100-$200 million to Northcliff compared to the current $43 million implied by a net 100% interest, 80,509,845 shares fully diluted (includes the issue of stock to Geodex), and a $0.53 stock price. In other words, by Q4 2012 Northcliff could be trading in the $1.50-$2.50 range if these assumptions are confirmed.
There is, however, a hitch associated with this arbitrage strategy of buying Geodex by June 25. The TSX in its persistent search for non-excellence has decided to impose a four month hold on the Northcliff stock issuance, even though Geodex has spent over $13 million bringing Sisson from its status as the failure of a long ago exploration cycle to a point where it had to bring on board the heavy hitters from Hunter Dickinson Inc to spend the $17 million plus needed to upgrade the PEA Geodex produced in 2009 to a feasibility study HDI can use to pursue debt financing. So the Northcliff stock that will end up in the accounts of Geodex shareholders will have a legend restricting resale until October 21, 2012. Northcliff wanted the stock to be free trading immediately because it lacks a retail shareholder base. Not every Geodex shareholder will want to hold onto the Northcliff stock, while others will want to beef up their Northcliff positions which will be as if their original Geodex position underwent a roughly 7:1 rollback. This new liquidity between now and the publication of a feasibility study would make Northcliff a stronger company with a broader audience if the Sisson feasibility study meets expectations, and will likely lead to the stock trading at a higher price. Instead, the TSX in its fathomless stupidity has created a needless timebomb where 4 months later 16 million shares suddenly come onto the market.
These shares will be owned by Geodex shareholders who will have suffered a decline in the value of the Geodex positions because Sisson was the primary asset supporting the price of Geodex, and then be stuck for four months with a worthless Northcliff position in their account. Furthermore, should some catastrophe in the meantime strike that might make the sale of the Northcliff shares desirable, only existing Northcliff shareholders will be able to sell. This 4 month hold restriction would make sense if the paper were issued to a private entity such as HDI which sometimes flips an option into a public company it controls while clipping a minority interest in the asset which it then sells to the public company at a later date when other people's risk capital has made the "asset" worth something. But the Geodex situation is completely different. Now we have the problem that in 4 months the very pissed off owners of 16,003,700 Northcliff who paid very good money for those shares will be looking to sell, especially if Northcliff's stock price has since then risen because it has delivered a positive feasibility study. Who and what does this 4 month hold benefit? If it were not more likely that the TSX officials who handled this transaction are dolts who should be fired, I would suspect them of outright malice against the public and the TMX Group's own listings.
On the other hand, the supposed rogues at the bottom generally get their guidance from the top, and so I would suggest to KRO readers that there is some serious dysfunctionality within the upper echelons of the TMX Group, which is branching into areas of the stock market where it has a serious conflict of interest with its role as regulator of its listings. For example, look at Equicom, whose "On the Radar" program appears to be a stock promotion business run by the TMX Group. A stock exchange should serve no more purpose than to operate as a utility for the transparent presentation of an electronic order book, the efficient and fair execution of trades on a first come first serve basis, the establishment and enforcement of listing and disclosure requirements, and the approval of designated transactions. A stock exchange should not be going into competition with the private sector in providing marketing services to its listings, marketing services whose appropriateness another branch of the exchange has the power to investigate and rule on. Through divisions like Equicom the TMX Group has the potential to mutate into a coercion system that abuses its captive listings, diverts corporate capital into uncompetitive services, and harms the interest of shareholders in these public companies. The willingness of the TMX Group to accomodate the hookup of high frequency and algorithmic trading to its electronic order book is an additional sign that upper management has lost sight of its core constituancy, namely the investing public. None of the listings dare complain about abuses they have experienced, because the TMX Group has an infinite ability to nitpick about a company's disclosures and come up with a "problem" that requires an embarassing retraction and refiling. It also has the ability to keep a transaction approval at the bottom of the to do pile, thus potentially retaliating against any "disobedient" listing by leaving it in limbo while a funding window opens up. And it also appears to have the ability to impose restrictions that fly in the face of common sense and harm the interests of its listings as well as the investing public. I do not know if there is any back story behind this Northcliff/Geodex decision, but the way the situation looks it sure is open to speculation, which is sad, because the TMX Group has done a tremendous job boosting the credibility of its resource sector Canadian listings as a destination for risk capital.
Since I am going by the assumption that the resource sector market may remain bad for another 4 months, I myself am not worried about having yet another illiquid stock in my high risk portfolio, for this creates an extra 4 month window to accumulate Northcliff because HDI will not put much effort into the promoting the story to get a higher stock price that the explosion of the Geodex timebomb might clobber. Of greater short term relevance is the question of the future of Geodex. Management will have $1.2 million working capital, but does not have the promotional clout to avoid the dilutional treadmill with the current share structure of 110 million issued and 116 million fully diluted. So management is contemplating a rollback for which it will need to get approval at the AGM in a couple months. It is committed to exploration in the south-central part of New Brunswick where its team has considerable experience. Of its three main New Brunswick projects the Dungarvon tungsten-moly prospect is the most important. It is a former Kidd Creek boulder chasing exercise into which another junior drilled several holes in 2007 at locations and angles that perplex Geodex management. Geodex drilled a hole last year which yielded a tungsten sniff that has them thinking they may be on the edge of a major system from which the high grade tungsten boulders derived. Their goal this summer is to map and prospect the property in greater detail in the hopes of generating a target that qualifies as a Big Anomaly deserving of a "hail mary pass" drill program this fall. Their objective would be to discover a smaller tonnage but higher grade version of Sisson they could delineate over the next couple years without inflicting a rollback on their shareholders. Should Northcliff proceed with the development of Sisson as a major tungsten mine, complete with APT processing plant that has surplus capacity, it would be a natural bidder to take out Geodex and its Dungarvon project. Now such a Big Anomaly might only be worth $100 million, but if we consider that in about a week the post Northcliff distribution Geodex will have a market cap less than $5 million, and enough money in the treasury to make or break Dungarvon, that would be a potential 2,000% gain. Mark Fields and his team do not yet have the datasets in place to make Dungarvon plausible as a Big Anomaly play, but they will be working very hard on it, and this will be a reason the stock does not go to zero after June 25.
*JK owns shares of Geodex, and will own Northcliff shares after the spinout