Guest Pitch: Sierra Rutile Holdings (SRX:AX)

Potential Bidding War – 45% Upside

The idea was shared by Value9.

This is a very intriguing situation, probably worthy of a novel or at least a compelling series of articles in a major publication. Yet, the setup has been criminally under-covered and maybe the fact that the company in question is an ASX listed nano-cap miner with relatively limited liquidity (US$100k/day) explains some of that. I will try to keep the write-up brief and focus only on the core gist of the setup and investment thesis as I believe the situation is quite timely and unpacking the whole story would take a full book anyways. Timeline of the current saga events is provided at the end of this write-up.

As the name suggests, Sierra Rutile specializes in mining rutile, or titanium dioxide, which is utilized in manufacturing pigments for a wide range of applications including paints, pipes, laminates, and clothing, as well as in producing titanium metal. Until recently, Sierra Rutile contributed to 20% of the world’s natural rutile production by operating the Area 1 asset in Sierra Leone. Area 1 is an aging complex with less than three years of mine life remaining. However, Sierra Rutile also owns a late-stage development asset, Sembehun, which is one of the largest and highest quality rutile deposits in the world. Sembehun’s definitive feasibility study is expected to come out in a few weeks.

SRX has been hit by a stroke of some really bad luck lately – starting with a dispute with the Sierra Leone government that led to significant alterations in the fiscal regime for Area 1, including much higher taxes and royalties. This has instantly made the asset uneconomic, prompting the suspension of mining operations. On the back of these events, the company’s second largest shareholder Perpetual headed for an exit divesting substantially all of its initial 16.5% stake, contributing to a 76% drop in SRX share price since mid-2023. More recently, SRX was hit by an opportunistic, hostile takeover bid at A$0.095/share from a commodity trader PRM Services. PRM quickly amassed an 11.5% stake in Sierra Rutile and also asked for a meeting to overhaul the board. The A$0.095/share bid comes at a very modest premium to recent all time lows.

Despite this rollercoaster of events, I believe that SRX presents an intriguing opportunity at current prices. It looks like we might be on the brink of an imminent bidding war, as suggested by the recent actions of two major shareholders and SRX management. Samuel Terry Asset Management (STAM), a well-respected Australian fund with an impressive long-term track record, and Ecsson Investments, managed by an influential Sierra Leonean family who crucially also own the mining contractor for SRX’s Area 1, have both been purchasing shares post-bid above the offer price. STAM acquired their stake in mid-2023, at around AC$0.22/share, amid rumors of SRX’s potential issues with the government, and increased their ownership from 19.3% to 21% at A$0.101/share right after the bid from PRM was announced. Ecsson, has been accumulating its stake over the past few months, buying shares at up to A$0.145/share. After PRM’s offer, Ecsson increased the stake from 9.6% to 10.7%, buying at A$0.11/share (in line with the current price). Both STAM and Ecsson have also proposed to oust SRX’s chairman and each nominated one director to the board.

SRX management also seems to think we’re about to see either a price bump and/or the emergence of a competing bidder. Management emphasized this in their response to the hostile bid:

srx 1srx 2

Management has been very vocal about the offer substantially undervaluing the company (more on this below); however, they don’t seem to be opposed to selling. Just last month, a week before the hostile bid was made, they hinted at a potential strategic review of the Sembehun project to maximize value for SRX shareholders.

srx 3

Finally, there’s also one additional detail which strengthens my conviction the current offer from PRM isn’t final. The Bidder Statement includes a very peculiar note saying that PRM has secured US$40m funding specifically for the acquisition of SRX and that the buyer doesn’t intend to use this cash for anything else:

srx prm service

US$40m is substantially more than their current offer requires and provides substantial headroom to bump the price – up to around A$0.16/share.

So the investment thesis here is pretty straightforward. The current A$0.095/share bid from PRM Services is an open-market offer (meaning they will place a large order at that price), which is set to launch on April 4 and will expire on May 5. The bet is that during this one month, we’ll either see other competing bids emerging or a price bump from PRM. Even if that doesn’t happen, one will just be able to sell shares to PRM at A$0.095/share or, quite possibly, at a higher price on the open market. Therefore, the downside risk is effectively capped at a maximum of 14%-17%, though it’s likely that the actual loss would be lower.

While pinpointing the exact upside potential here is difficult, a couple of reference points (detailed further in the valuation section below) suggest it’s not too crazy to expect further bids to eventually approach A$0.16-A$0.20/share, compared to the current price of A$0.11/share.

As a sort of a quick disclaimer, I also want to emphasize that the setup here is definitely convoluted and complex. Sierra Leone is a very risky jurisdiction, and much of SRX’s value is tied to a development-stage mining project. Therefore, it’s difficult to be overly confident about any aspect of this setup, including the valuation. However, the idea here is focused solely on betting alongside the major shareholders and management, all of whom apparently see value at current prices. The timeline is also very short and any risks related to government dispute are less likely to pose a threat within this timeframe.

 

So what about the upside potential?

Valuing SRX is not straightforward, given that its current mining operations have been rendered uneconomic and suspended, while its other asset is still in the pre-construction stage. However, here’s how I think about it.

First of all, the suspension of mining operations and the valuation of Area 1 are now probably irrelevant to the overall value of SRX. The mine had only a few years of operations left, and the industry downcycle made it unprofitable last year, even before the Sierra Leone government initiated the recent fiscal regime change. There is likely still some optionality around a favorable settlement with the government, a restart of operations, and an upturn in the industry cycle, however, the value contribution from this area would likely still not be significant. So I think we can just assume Area 1 is a zero. The real value of SRX, however, lies in its balance sheet and the Sembehun project.

The company has a very clean balance sheet, with the latest NAV at A$0.38/share. The company is debt-free and most of the assets are highly liquid. You can find the current NAV table with comments in the table below. All of the inputs are as of December’23, except the net working capital (cash, inventory and payables/receivables) for which management has recently provided updated figures (as of February 29, per the March 28 press release).

srx nav final 2

A couple of notes to the NAV table – 1) FX exchange used was 1.526x; 2) Despite some individual fluctuations in cash and inventory, total difference in NWC from Dec’23 to February 29 has been minimal; 3) The finished goods inventory is clearly liquid. On March 28, management reported that US$28.8m (out of the US$48.6m) reported above has already been sold with the cash expected to be received soon.

Even if you discount the exploration assets (cost basis of investments made into Sembehun so far) and the remaining consumables inventory by 50%, the net tangible asset value still lands at A$0.27/share. While this might be too conservative, you might also need to account for the ongoing cash burn. SG&A alone was US$13m in 2023, although the company has just fired 25% of workforce. Regardless of how you might play with the numbers, the bottom line will remain unchanged – PRM is now trying to scoop up SRX at a huge discount to net tangible asset value and get the Sembehun + remaining Area 1 optionality for free. Management has also emphasized this in the response to the bid:

srx no value at all

As for Sembehun project and its valuation, there are a couple of points to take into account. First of all, Sembehun is among the largest and highest quality rutile projects in the world. It is expected to deliver 176kt per annum of high-quality natural rutile annually over a mine life exceeding 13 years. An important aspect here is that the project is located just 30km from the Area 1, which will enable SRX to significantly leverage its existing infrastructure and customer relationships while developing/running Sembehun. Therefore, Sembehun can be considered more of a brownfield project, which substantially reduces development risk (to the extent that such a statement can be made about any project in Sierra Leone). The idea here is that this is a premium asset to anyone willing to control a substantial portion of world’s rutile supply. Now regarding the valuation:

  • Pre-feasibility study (PFS) was last updated in 2022. It was done by another company, Iluka Resources, which at the time owned SRX and demerged it shortly afterward. The available details on the PFS are somewhat limited, although, it seems that the project’s NPV at the time was set at US$318m (you can find it in the demerger Information Memorandum, p. 74). Last week, SRX also said the estimated capex for Sembehun was cut by US$36m, from US$337m estimated in the PFS, now to US$301m. Regardless, the NPV figure from the PFS may not carry much significance since it was calculated using an 8% discount rate during a period of higher rutile prices and lower interest rates. Moreover, Iluka might have had an incentive to inflate the numbers in before the demerger.
  • Investment bank Hannam & Partners calculated Sembehun’s NPV at US$65m in May 2023. This is likely the most precise and reasonable estimate we could hope for at this time. It would imply Sembehun is worth another A$0.22/share to SRX.
  • DFS is due to come out mid-April and will include the updated capex, commodity price and NPV sensitivity figures. We will be able to say more about the valuation then. It’s worth noting that management has been sounding very optimistic about it: “The Directors expect when the Sembehun Project DFS outputs are announced in mid-April, that these outputs will demonstrate an attractive NPV for the Sembehun project.”

All in all, I believe there’s substantial value still left at SRX and I wouldn’t be surprised to see incremental bids eventually landing closer to A$0.20+ per share.

 

Currently involved parties and potential bidders

On a quick glance, the most obvious candidates to lob competing bids are Samuel Terry Asset Management and Ecsson Investments. Both are major shareholders already and both have been buying post-bid at higher prices. STAM has deep pockets and a history of making offers for these sort of convoluted/hidden value/special situations in Africa, e.g. two years ago it made an opportunistic takeover attempt at FAR Limited (also covered on SSI here).

Ecsson, which owns SRX’s mine contractor, is clearly a very well informed party and is also very well-connected in Sierra Leone. The rapid establishment of their significant 10.7% stake in SRX since February, purchasing shares at up to A$0.145/share – even as their contract with Area 1 faced termination – is both reassuring and intriguing. I wouldn’t be surprised to see Ecsson taking a swing here, especially if they think they might have better results negotiating with Sierra Leone’s government. Ecsson seems to be involved with some pretty “interesting” and influential characters in Sierra Leone and Africa. For example, the director Ecsson has nominated to SRX’s board is Jan Joubert. He is man with a background resembling that of a movie character (there’s been a nice overview of him in this FT article). It includes running a blood diamond mine in Sierra Leone during a rebellion, training presidential bodyguards to prevent assassinations, participating in wars, etc. Jan Joubert also apparently has a “close relationship” with Yazbeck family, the owners of Ecsson, since 1997. Joubert has been reportedly helping them with “mining ventures in the region”. Furthermore, for a long time Jan Joubert was the CEO of a Koidu diamond mine, owned by Beny Steinmetz. Beny Steinmetz is also a “colorful” character – a billionaire mining mogul, convicted for massive briberies to African governments and real estate fraud in Romania.

Other potential bidders could involve the Chinese investors. Last year, rumors were spreading that Sierra Leone’s government was considering taking away SRX’s mining license and giving it to the Chinese. Although this has not materialized, the underlying narrative was directionally correct. The thing is that Sierra Leone is on the brink of an economic crisis, while the Western world is refusing to bankroll it due to the massive corruption and governance issues, including the questionable presidential elections last year. Thus, the country is now seeking financial aid from China with Sierra Leone’s president meeting with Xi Jinping in February this year. Given that titanium is a strategic metal, extensively used in the defense sector, and considering China’s status as both the largest producer of titanium and also the world’s largest importer of rutile, the eventual involvement of Chinese players here seems within the realm of possibility. While speculative, the notion of a Chinese investors stepping into the scene appears to be a natural fit that could potentially be a win-win for everyone, aligning with the government’s objectives and unlocking shareholder value.

PRM services is a commodity trading house, owned by Craig Dean. Craig Dean is also the CEO of Gerald Metals, which owns an iron mine in Sierra Leone, and is also well-connected in the country.

 

Some other odds and ends

  • The government-initiated change in Area 1’s fiscal regime is set to be applied retroactively from July 2023. This means that, in the absence of a further settlement, SRX will be liable for a payment to cover the increased taxes and royalties/duties for the second half of 2023. This fiscal regime changes affect four areas: royalty on sales, a minimum corporate tax rate (also calculated as a percentage of sales), withholding taxes, and fuel duty. The potential payment for the first two is likely to be around US$4.4m. While there are no detailed figures for the withholding taxes and fuel duty incurred in 2023, management has indicated that the liabilities for them would be “less significant”. Therefore, I estimate that the total payment could be around US$6-7 million, or approximately A$0.02 per share.

srx reotractive

  • SRX has been hit by a couple of litigations from locals. One was settled for around US$1.7m last Autumn. Other two – class action from landowners regarding environmental matters and a disputed claim for crop compensation – remain outstanding. However, the available details and timeline are very limited, while the company (of course) says it has good defense to these claims. While worth mentioning, I consider these to be non-important for the core thesis now.
  • Gerald Group (whose CEO owns PRM Services) has some previous experience of battling with Sierra Leone’s government. It was in dispute with regulators in 2019-2021 over a royalty payment, which even resulted in government cancelling Gerald’s mining license. The conflict was resolved after 2 years with Gerald paying $20m and ceding 10% stake in the project.
  • Another strange character involved is SRX’s director Patrick O’Connor. When PRM initially sought to overhaul SRX’s board, it aimed to remove 4 directors (out of 6) and introduce 4 of its own. However, a few weeks later, PRM amended its statement, indicating it no longer wished to replace one of the four directors, Patrick O’Connor. This change of heart is unusual and noteworthy, while O’Connor’s background adds to the intrigue. He joined SRX in September 2023, amidst ongoing negotiations with the government that began in May 2023. He also serves as the chairman of FAR Limited, where an activist campaign successfully encouraged the initially entrenched board to enhance shareholder value. More important is his role as a director at Metals X. In 2019, Metals X was targeted by APAC Resources, which sought to replace 3 directors. A deal was quickly reached with APAC securing 2 board seats. Then, a month later, all remaining board of Metals X resigned, except Patrick O’Connor.
  • SRX saga has been nicely covered in Money of Mine podcast here, here and here.
  • Jeremy Raper has also made a nice overview of the situation on Twitter.

 

A brief background and timeline

SRX was spun-off from Australian zircon/rutile miner Iluka Resources (A$3bn market cap) in 2022.

One year prior to that, in 2021, SRX was about to suspend its mining operations due to unsustainable financial performance, rising costs and mounting losses. However, on the same year, an agreement with Sierra Leone’s government was reached, the so called third amendment agreement (TAA), which substantially lowered the company’s taxes and royalty payments to regulators. This was partially done to help SRX return to profitability and generate cashflows to fund the Sembehun project. However, after a downcycle of rutile sector in 2023, SRX has gone back to being unprofitable again.

The timeline of the current saga:

  • October 11: Media report appeared indicating that the Sierra Leone government was planning to cancel the mining license of Sierra Rutile “in order to give it to the Chinese.” The report mentioned that the government threatened to cancel Sierra Rutile’s tax concessions after the company had warned it might “pull out of the country.” It also said that the government was thinking about cancelling SRX’s mining license and “give it to the Chinese”. Shortly after the report, SRX confirmed that discussions with the government were ongoing but did not mention any specific details. Later, SRX said that these discussions started in May 2023.
  • December 14: SRX provided a business update, noting that production in Q4 was lower than anticipated due to fuel shortages in the country amid a civil unrest, which was expected to lead to higher unit costs. Q4 production guidance was revised to 111kt-113kt vs 115k-120k previously. SRX stated that market demand remains soft as indicated by no contracted bulk rutile sales for Q1’24.
  • January 29: SRX announced plans to suspend Area 1 operations after the Sierra Leone government stated intentions to revoke the special fiscal regime previously applied to the company. SRX stated that “reverting to the previous fiscal arrangements would make continuing operations in Area 1 uneconomic”.
  • February 28: PRM Services disclosed it had accumulated an 8.2% stake in SRX. On the same day, Ecsson Investments also announced it had become a substantial shareholder of the company with a 6.6% stake.
  • March 11: SRX suspended mining and processing activities at Area 1 due to uncertainty surrounding the fiscal regime and weak market conditions. Concurrently, the company “commenced a process of engagement with the Government of Sierra Leone” and noted plans to pursue a 25% workforce reduction. SRX stated that “full closure of mining operations at Area 1” will be considered if an agreement with the government on an appropriate fiscal regime cannot be reached. Management hinted it might launch a strategic review for Sembehun projects should Area 1 operations move to full closure.
  • March 20: SRX received an unconditional on-market takeover bid from PRM Services (owns 11.5%) at A$0.095/share in cash. The offer will commence on April 4 and expire on May 5.
  • March 20: Perpetual announced it had disposed of its stake in SRX. The firm had owned 16.5% of SRX’s shares before gradually selling down its stake in December (to 14.3%), January (12.5%) and February (5.2%). Perpetual sold the majority of the remaining 5% stake in March at c. A$0.095/share.
  • March 21: PRM Services sent a notice to the company, requesting a shareholder meeting to replace four of SRX’s directors (including the chairman) with its appointees.
  • March 21: On the same day, SRX provided an update on the discussions with the Sierra Leone government, stating that the negotiations are still ongoing and reiterating that Area 1 operations would be restarted only if an agreement on the fiscal regime was reached. If negotiations failed, the dispute would proceed to an arbitration in the UK. Interestingly, Sierra Leone’s government claimed that SRX’s suspension of Area 1 operations was unlawful.
  • March 22: SRX received another notice, this time from STAM, which stated intentions to replace company’s chairman during the coming shareholder meeting.
  • March 22: STAM disclosed that, shortly after the acquisition proposal, it has raised its stake in the company from 19.4% to 21% at an average price of A$0.10157/share. On the same day, Ecsson Investments also increased its stake from 9.6% to 10.7% at A$0.11/share.
  • March 27: PRM revoked its resolution to remove one of SRX’s directors (Patrick O’Connor). Concurrently, SRX announced that Ecsson Investments also nominated a new director to SRX’s board – Jan Joubert.
  • March 28: SRX announced a US$36m reduction in the capex estimate for Sembehun.
  • March 28: SRX management recommended equity holders to take no action regarding the A$0.095/share takeover bid from PRM Services, stating that the offer is inadequate and opportunistically timed given expected key catalysts, including Sembehun DFS to come out mid-April.
  • April 2: SRX announced that ASIC has allowed the company an additional 5 days to provide the target’s statement to ASIC, ASX, and SRX’s equity holders from the usual 14 days after the offer announcement.

41 Comments

41 thoughts on “Guest Pitch: Sierra Rutile Holdings (SRX:AX)”

  1. A+ write up and a great situation, I have a substantial position at 0.12. Hard downside estimate, and cheap equity make it easier to work out how much to stake. Really like the situation albeit complex, think it deserves a spot in the portfolio section.

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  2. Thanks for this idea.

    Any idea why, at times SRX trades at an increment of 0.001 e.g., 0.123 when the share price is above 0.10? My understanding is that on the ASX for shares at or above 0.10 the bid increment is 0.005, and only when below 0.10 can increments be 0.001. Therefore shares should trade at 0.115, 0.12, 0.125 etc. and not 0.123 as IB shows. Indeed, I can’t even put a bid in at an 0.001 increment.

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  3. SRX released Sembehun’s definitive feasibility study. Interestingly, NPV8 came at $408m, which is above the $318m figure in PFS from 2022. Mine of life increased to 14 years, while capex was reduced by 11% from the PFS figures. Management is arguing PRM’s offer comes at 94% discount to Sembehun’s value, while disregarding Area 1 and exploration potential.

    This US$408m NPV is obviously materially above the US$65m NPV assessed by Hannam & Partners in May 2023. However, as slide 13 of the presentation shows, it is extremely sensitive to all kinds of assumptions. For example, using a 12% discount rate instead would cut it to US$264m, whereas 10% decrease in assumed rutile pricing or ore grade, would cut this NPV almost by half.

    So it’s difficult to say how meaningful this NPV is as an indicator of project’s value in the eyes of potential buyers. However, management’s position is clear and any offer would have to come at a massive premium to PRM’s bid and current prices in order to have a chance of success.

    Another interesting thing noted in the report is that the existing infrastructure of Area 1’s Mineral Separation Plant (MS) and Port facilities, has “a potential replacement value well excess of US$100M”, i.e. multiple times above the current equity value. Add the balance sheet value and whatever value ascribed to Sembehun on top of that and the numbers can get real crazy. Yet, obviously, the stock will always warrant a sizeable discount due to the location the assets are in.

    https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02795311-6A1202563

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  4. Looking at the recent announcements it seems like there is a bit going on with board changes and the like. I’m looking forward to an update.
    Thanks

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  5. The board fight is old news and I’ve addressed it in the write-up. However, a few developments have emerged over the week. It looks like the situation is heating up and there are multiple backroom dealings and talks ongoing on between the potential suitors and the company.

    Reminder of the previous situation:
    – PRM aimed to remove 3 directors and add 4 of their own nominees.
    – STAM sought to oust the chair and appointed one nominee.
    – Ecsson planned to appoint one director.

    Recent changes:
    – Firstly, Ecsson has raised their stake from 10.7% to 11.9%, purchasing shares at around A$0.133. The fact the mine contractor just keeps buying shares way above the offer price is a big positive here in my view.
    – One director from SRX, who was on PRM’s removal list, has resigned. In response, PRM has chosen another different director to the list and continues to target the removal of three board members.
    – PRM has reduced the number of its appointed nominees from the previous 4 to just 1.
    – PRM has announced their support for STAM’s nominee but has decided not to back Ecsson’s nominee. This is pretty strange and I’m not really sure what to think of it.
    – The AGM will be held on May 16. PRM’s offer expires on May 5.

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    • The PRM filing yesterday on their latest board-fight plans seems to have roughly coincided with someone dumping almost 3M shares in a single trade, presumably on a dark or institutional market. Maybe just a coincidence.

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  6. Mano Mining and its contract with SRX (Sierra Rutile)
    Who is Mano Mining?
    Mano Mining is a company that has zero mining experience of any scale and its first
    contract was Sierra Rutile mining contract.
    Any change in views given these allegations? Note, I am removing the “http etc”. to avoid the lag caused by moderation review of web links. manominingaffair.com/wp-content/uploads/2024/04/Mano-Mining-Affair-1.pdf

    How, if at all does this change your view of the situation? At first read, and given PRM set aside ~0.16 per share for the takeover I don’t see why PRM wouldn’t up their bid and buy out the majority of the shares.

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  7. Some crazy stuff is happening at SRX.



    PRM extended their A$0.095/share offer from May 5 to July 31. Additionally, they’ve withdrawn the nomination of three directors and scaled back the plan to remove 4 directors. Now PRM focuses solely on ousting SRX’s CEO/Managing Director.

    STAM has fully sold down its stake in SRX. Most of it (20%) in a private off-market deal to Gemcorp Commodities. The sale was done at A$0.15/share – substantially above the market price. Gemcorp is a commodities trader, which seems potentially connected to Russian money. Gemcorp’s CEO/founder was previously a CEO of VTB Capital – the recently collapsed Russian bank. Gemcorp is likely well funded. The website says it has invested $6bn since inception in 2014. https://www.gemcorp.net/team

    Besides Gemcorp, another new player has entered the scene. Lenoil Group has acquired 5.39% stake and quickly raised it to 7.5%. Lenoil is Sierra Leonean company, which operates 24 gas stations in the country. https://www.leonoil.sl/

    Amidst these shifts, there are some concerning rumors swirling around SRX’s mine contractor Mano Mining/Ecsson (which recently increased its stake to 11.9%). The accusations are that Mano/Eccson’s intent is to sabotage takeover attempts to maintain its contract. Allegedly, Mano/Ecsson still receives payments from SRX under the contract (although the mine operations have been halted) and is using that cash to buy SRX shares. You can view the anonymous report here (the same as shared by G98 in the comment above). http://manominingaffair.com/ Worth noting, the website does look pretty shady and it’s not clear who’s behind it.

    I have no idea what’s going to happen next. The clear negative is that STAM has pulled out. On the other hand, the emergence of new, financially motivated players like Gemcorp, willing to invest at premium prices, suggests that the stakes for controlling SRX are rising and we might see a competing bid soon. Gemcorp was willing to buy a 20% stake at A$0.15/share, so any future offers would have to top that. The risk is that all these parties (Gemcorp, Ecsson/Mano, Lenoil, PRM) might strike a backroom deal and shortchange the minority shareholders. But given their mixed backgrounds and possibly different incentives, that doesn’t look too likely at the moment.

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  8. Two news items for SRX.

    1) Lenoil has increased its stake in SRX to just over 10% (from 7.5% previously). Continued accumulation of shares by Lenoil is a big positive for the bidding war thesis.
    https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02803986-6A1206415

    2) Things seem to have started moving with Sierra Leone government and the parties have started talking. Negotiations seem to be ongoing since beginning of May. SRX intends to restarted Area 1 operations after the notice from the government that operations must be restarted by the end of May (otherwise it would be a legal breach, which SRX denies). However, SRX is currently operating under the assumption that the previously agreed fiscal regime for Area 1 (i.e. the Third Amendment Agreement) still applies. Area 1 asset has a limited value anyways as the whole investment thesis centers around Sembehun, but resolution with Sierra Leone government on Area 1 would be a positive signal for any other mining assets in the country, including Sembehun. It would also remove legal overhang for anyone interested in buying out SRX.
    https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02804529-6A1206597

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    • Agree with your take. The resumed talks with GoSL is a good sign and resolution on the fiscal regime would only improve the setup.

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    • Thanks for this link, much appreciated. It is interesting that he’s called into question the validity of the on market bid extension. Goes to show how many rules and regulations you need to be aware of and why retail investors regularly get rinsed while the institutions generally underperform…. Step right up! Everyone’s a loser!

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    • The linked youtube discussion mostly focuses on two points already covered in the write-up’s comments: the extension of a takeover bid by PRM Services at A$0.095/share and STAM exiting its stake.

      In late April, PRM announced an extension to its A$0.095/share offer but later admitted to not following proper procedures. Shortly after this announcement, SRX’s stock dropped by roughly 20% as the market likely questioned the validity of the extension. PRM’s offer serves as a downside protection mechanism if no higher offers emerge. It seems that the offer is still there. Recent filings, discussed in newer comments, affirm that “SRX Sierra Rutile is currently the subject of an on-market takeover bid from PRM.” Shares have now returned to pre-extension levels.

      As discussed in the comments, STAM sold its shares in a private off-market deal to Gemcorp Commodities. The sale was done at A$0.15/share, substantially above the prevailing market price. The reasons for this decision remain unclear.

      I don’t think that STAM’s disposal changes the bidding war thesis as multiple other parties (such as Lenoil) have been entering/increasing positions in SRX while PRM’s offer still seems to be valid.

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  9. The AGM has concluded, highlighting a clear division between PRM and the other major shareholders. Shareholders rejected PRM’s nominee, Wara Serry-Kamal, but approved Ecsson/Mano Mining’s nominee, Jan Joubert, for a board seat. No directors were removed.

    PRM has escalated the fight by appealing to the Australian Takeover Panel. It claims that Lenoil, Ecsson/Mano and Gemcorp (hold 45% combined) have been acting in concert and collectively acquired shares to sway SRX into restarting Area 1 and influence the AGM voting. PRM has asked the Panel to restrain the parties from acquiring more shares enforce them to divest the SRX shares held in excess of 20%. The panel is reviewing the claim.

    Despite the tensions, there has been no competing bid, nor has PRM raised its initial offer yet. However, the situation remains very dynamic. The parties are continuing to accumulate shares, while PRM’s offer is set to expire on July 31. I’m keen to see how all of this will unfold. Currently, SRX is trading at A$0.125 per share.

    The major shareholders:
    – PRM – 11.5%
    – Leonoil – 12.5%
    – Gemcorp – 20%
    – Mano Minning – 12%

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  10. Leonoil has once again increased its stake in SRX – from 13.53% to 14.86%. They’ve been buying at A$0.13-A$0.135/share vs the stock now at A$0.14/share.

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  11. As expected, the Takeovers Panel brushed off PRM’s request to stop Lenoil, Ecsson/Mano, and Gemcorp from buying more shares and to make them sell off a big chunk of their existing stakes.

    “The Panel found that there was insufficient evidence to prove these entities were associates or that their actions had an unacceptable control effect on Sierra Rutile. Consequently, the Panel saw no reasonable prospect of declaring unacceptable circumstances and decided not to proceed with the case.”

    https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02817903-6A1211773

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  12. Leonoil continues accumulating SRX shares and has increased the stake from 14.9% to 16.2%. The incremental purchases were done at A$0.135 per SRX share.

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  13. Further buying from major shareholders – Ecsson/Mano Mining (SRX’s contractor) has just increased the stake from 11.9% to 13.03%. It has been buying at A$0.125-A$0.135/share.
    https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02821168-6A1213111

    Other than that, PRM’s attempt to remove SRX’s Managing Director/CEO has failed. Only 17% of the votes were cast in favor of this proposal at the AGM.
    https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02820901-6A1212986

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  14. at this point further buying by Leo/Mano is (in my view) more proof that there is no further bid likely from PRM. it is clear this has devolved into a stalemate, given Leo/mano have no desire to either buy SRX themselves (much has been written publicly about this) and there is no longer any avenue for PRM to progress their bid (without paying up massively – something they prob would have tried by now).

    meanwhile the asset continues to burn gobs of cash at current rutile prices. this seems a bad risk/reward now, to me.

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  15. “Sierra Rutile Holdings Limited has agreed to a takeover offer from Gemcorp, with a bid of A$0.16 per share, marking a substantial 28.3% premium over the company’s 3-month average share price. The deal values the company at A$67.9 million and has been unanimously recommended by SRX’s directors, who urge shareholders to accept the cash offer unless a superior proposal emerges. “

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  16. congrats on the outcome – i was wrong! glad it worked out for the best!

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  17. Wonderful news! You could argue the offer still undervalues SRX, considering it comes in below cash value and at a massive discount to Sembehun’s NPV8 (US$408m, as per the recent DFS study), which management was highlighting when battling PRM’s offer a few months ago. Despite all that, it looks like this deal is pretty much in the bag. The offer will be structured as an off-market takeover bid with a condition of 51% shareholder acceptance. Gemcorp owns 20%. If PRM’s previous allegations of Gemcorp, Eccsson, and Lenoil acting in concert were correct, they already have a total of 48% combined. Notice the significant emphasis of the “unanimous director approval” in Gemcorp’s deal announcement:

    “SRX Directors unanimously recommend each holder of SRX shares ACCEPT THE OFFER and have indicated that they will ACCEPT THE OFFER in respect of all SRX Shares they own or control, in both instances, in the absence of a Superior Proposal.”

    One of these directors is Jan Joubert, Eccson/Mano Mining’s appointee, who was recently elected to the board. This kind of confirms that Eccson will approve this deal. Lenoil likely will too.

    The chance of PRM making a competing bid is therefore basically nonexistent. Gemcorp appears well-financed and has stated they will fund the deal with their own cash and available facilities. I think it’s a done deal. I will be gradually exiting my position at A$0.155/share.

    This has been a wild ride, one of the more interesting and eventful ones lately. Congrats to everyone who participated!

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    • It is interesting that it traded at 0.16 today (2-July-24); that implies that some market participants still believe there is an angle which will result in a higher bid coming to fruition…

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      • I won’t read too much into the $0.16 trades. The minimum increment for bid/ask is $0.005, and there may be some folks who have to hit the $0.16 asks to cover their short positions.
        Anyway, when can we expect the deal to close? 3-4 months?
        If one can get bids filled $0.155, it’s a 3.2% spread, which is ok return if the timeline is shortened to 2-3 months and risk of broken deal is very low.

      • Sierra Rutile Holdings Limited (ASX: SRX) (SRX or the Company) has received an unsolicited proposal
        from Leonoil Company Limited (Leonoil) advising that it intends to make a conditional off-market
        takeover bid for all of the issued and outstanding ordinary shares in SRX which Leonoil does not already own for A$0.18 cash per share, with no minimum acceptance condition (Leonoil Proposal).

        (Of course, I sold the previous trading day for 0.16)

        ““SRX Directors unanimously recommend each holder of SRX shares ACCEPT THE OFFER and have indicated that they will ACCEPT THE OFFER in respect of all SRX Shares they own or control, in both instances, in the absence of a Superior Proposal.”

        One of these directors is Jan Joubert, Eccson/Mano Mining’s appointee, who was recently elected to the board. This kind of confirms that Eccson will approve this deal. Lenoil likely will too. ”

        Does Leonoil have board representation?

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  18. Is there a way of avoiding the per-share IB commissions on these low prices Aussie stocks?

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    • I believe IB charges 0.08% of Trade Value (minimum AUD 6.00 per order ) for Aussie stocks. Can be even lower if one opts for tiered pricing and trades very large volumes per month.

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  19. Turns out I was wrong, and Gemcorp and Lenoil were not acting as a group. This changes the situation completely. Following Gemcorp’s offer, Lenoil increased its stake in SRX several times, from 16.2% to 19.85%. Today, it lobbed a competing takeover proposal at A$0.18/share, a 12.5% premium to Gemcorp’s A$0.16/share bid. The competing offer will also be structured as an off-market bid (tender offer), with similar terms to Gemcorp’s, except it will not have any minimum acceptance conditions. Gemcorp’s bid includes 51% acceptance threshold. SRX hasn’t made a full response yet, but noted that Lenoil’s proposal “may reasonably be expected to become Superior Proposal”. Gemcorp has only 3 business days to respond.

    We now have two (or three, including PRM) bidders for an asset that’s clearly undervalued at these prices. This situation has become pretty interesting again and could turn into a full-fledged bidding war. SRX trades at A$0.185/share, just 0.5ct above the highest bid. Lenoil’s proposal, with no minimum acceptance condition, has minimal risks involved and is pretty much equivalent to cash. This allows you to bet on this bidding war with almost no downside.

    Excluding Sembehun’s assets, SRX’s NAV as of February 29 was around A$0.25/share, most of which was working capital. The company has probably burned a bit of cash since then, but that’s likely immaterial to the situation. A$0.25/share is just the balance sheet value. On top of that, you have Sembehun, which could be worth somewhere around A$0.22/share (according to the NPV calculated by Hannam & Partners) or multiple times more, according to SRX’s management. Additionally, there’s the recently restarted Area 1, which is currently burning cash but has optionality on the inflection of rutile prices. There’s plenty of room for higher offers. It doesn’t seem far-fetched to envision the final price landing somewhere in the mid-20ct range after a few more counter-bids.

    Gemcorp owns 20% of SRX and, unlike other parties in this saga, it didn’t gradually build up its stake on the open market (which would have been cheaper but more risky and time-consuming). Instead, it acquired its entire 20% stake privately at A$0.15/share (at solid premium to prevailing market prices) and then made the takeover bid just 1ct above that. This clearly indicates that Gemcorp sees significant value in SRX and was likely prepared for the possibility of a bidding war. Gemcorp is highly focused on Africa and has very deep pockets. In April, it was raising $1bn for investments in the continent with plans to invest $10bn there over the next decade.
    https://www.theafricareport.com/343835/gemcorp-abu-dhabi-office-to-raise-1bn-for-africa-debt-investment/
    https://x.com/TheAfricaReport/status/1778460752518758717

    I doubt A$0.18/share is Lenoil’s final bid either. When two major shareholders with blocking stakes are battling for an asset, it often ends in a stalemate. It’s rare to see one of them so eager that they drop the minimum acceptance threshold just to grab any shares they can. According to a Western Australia article, Sierra Leonean petrol barons are determined to keep SRX out of Gemcorp’s hands. Given how aggressive Lenoil has been lately, including rapidly increasing its stake to 20% over the recent weeks, I don’t think they’ll back down easily if/after Gemcorp raises.
    https://thewest.com.au/business/mining/sierra-leonean-petrol-barons-make-76m-move-to-pry-sierra-rutile-from-gemcorps-clutches-c-15355702

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    • Does the Lenoil bid has an expiration date? Under what conditions can Lenoil withdraw/end the bid?

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      • Limited details are available so far, but it’s essentially a standard off-market bid with no minimum acceptance threshold. SRX board still has to approve it after Gemcorp’s response. Lenoil’s offer comes at a low teens premium. Given this hint below, it seems likely they will approve the competing offer if Gemcorp doesn’t raise:

        “SRX has notified Gemcorp of the Lenoil Proposal. The Board considers that the Lenoil Proposal may reasonably be expected to become a Superior Proposal, as defined by the Gemcorp BIA.”

        The conditions are standard – no material adverse change, no regulatory issues that would impact the proposal, etc.

        Since Lenoil dropped the minimum acceptance threshold, it’s also quite possible they would go hostile if management rejected the proposal.

        Here’s the link:

        https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02827809-6A1215707

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      • In a standard off-market bid, I understand that a broker for the bidder will place a standing buy order on the market, to allow us to sell to the bidder at any time.
        Since we will consider the Lenoil bid as a floor and a free option (while we wait for the bidding war to escalate ), I am trying to understand some technical specifics.
        Even an unconditional off-market bid will eventually end, right?
        So, when the bidder eventually pulls the bid, will they give the market at lest 1 trading day advanced notice?
        Suppose they decide to stop taking shares starting 08/15/2024 , can they announce the decision after the market closes on 08/14/2024, so that anyone who hasn’t tendered will not have any chance to tender at the last minute/day?

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      • I think what you’re describing is an on-market bid (buyer placing a live order on the market). Off-market bid is akin to a tender offer in the US.

        “An off-market takeover bid is a procedure under Chapter 6 of the Corporations Act under which a bidder makes individual offers directly to all target securityholders to acquire their securities.

        Target securityholders are free to decide whether or not to accept the bidder’s offer – if they accept then the bidder acquires their target securities.

        If the target board recommends that target securityholders accept the bidder’s offer from the outset, the off-market takeover bid is considered ‘friendly’. As an off-market takeover bid is driven by the bidder and does not require target consent or co-operation, it can also be used for a ‘hostile’ acquisition of a target.

        Interestingly, hostile off-market takeover bids are more common than friendly off-market takeover bids, and in most cases an off-market takeover bid that starts as a hostile bid is only successful if it is ultimately recommended by the target board.

        An off-market takeover bid consists of sending offers contained in a bidder’s statement to target securityholders, a response by the target in its own target’s statement, and target securityholders lodging acceptance forms and receiving cash or scrip (or a combination thereof) as consideration from the bidder in exchange for their target securities.”

        https://www.minterellison.com/articles/how-an-off-market-takeover-bid-works

      • @Danx thanks!
        My bad. What was I thinking?
        So what’s the advantage of an UNCONDITIONAL off-market cash bid vs an on-market bid?
        I thought the advantage of an off-market bid is that the bidder can attach acceptance conditions and use shares as considerations?
        But Lenoil’s current offer terms doesn’t seem to require the use of an off-market bid, unless they’re considering at some point (after negotiation with board) to change the bid to one with an acceptance threshold (but with higher offer price).

  20. Trading halt on SRX, last traded 0.19 at 4:10pm (local time) 18/07/24

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