Large asset sale
An interesting opportunity was recently highlighted by Jeremy Raper on Twitter. Strata Investment is a small Australian royalty and mining investment company. SRT currently trades at 52% discount to the estimated A$0.53/share NAV, comprised of certain royalty assets valued at A$0.37/share, public/private equity investments held on the books at A$0.14/share, and net cash of A$0.02/share.
The company’s key asset is 2% NSR royalty on everything mined in Motheo mine area in Botswana. This area is owned and developed by Sandfire Resources, an Australian A$4bn mining heavyweight. The most advanced open pit in Motheo, named A4, is scheduled to deliver its first ore by September 2024. The potential cash flow from the A4 royalty alone, discounted at conservative 7%, is valued at approximately A$0.17 per SRT share, representing 70% of Strata’s current market cap. The attractiveness of Motheo mine area is enhanced by Sandfire’s significant investment in a new processing facility, indicating a strong commitment to the area’s long-term development.
SRT’s management has recently been hinting a potential sale of its royalty assets and has even suggested that some kind of announcement regarding shareholder value enhancement could be forthcoming shortly. Monetization of the royalty assets would trigger revaluation of the stock and narrow the gap to the estimated NAV.
Note: The ‘Ideas Elsewhere’ section is intended to highlight interesting event-driven investment ideas by other authors. These ideas are not my own, and I am simply summarizing them to bring the attention of SSI subscribers. I might not actively follow the developments of these ideas, so there might be limited updates or follow-ups in the comments section.
Is a discount rate of 7% for mining royalty assets considered “conservative” or “aggressive”?
Do we have comps for similar transactions?
If I understand correctly, not just the A4 asset, but all of the A$0.37/share (royalty assets) in NAV is valued with discount rates close to 7%?
no, just the A4 (proven) asset I used a 7%. if you look at a variety of other royalty cos, they tend to use much lower DRs than 7% (for proven, producing resources, etc). if you look at what Gold Royalty paid for the copper stream sold by Adriatic at the Vares mine, for example, the implied discount rate (in my calc) was more like 3-4%. obviously this number varies based on asset location; royalty asset mix; operator quality; mine life; a bunch of other factors.
SRT to make a large acquisition greater than its own market cap.
• Strata Investment Holdings Plc (SRT) to acquire the parent company of SCP Resource
Finance LP and SCP Resource Finance GP Inc. (collectively, SCP), originally established as
Sprott Capital Partners prior to a management-led buyout in May 2023
• SCP is a leading independent investment dealer specialising in the global mining sector.
• Total purchase price is on debt free cash free basis of US$21.25 million to be settled through
the issue of new equity in Strata calculated on a 4-month backward looking average of net
tangible assets (NTA) as at closing.
• The purchase price will be augmented by a cash adjustment estimated to be US$8-10 million
on close to be paid for through issue of new equity in SRT at closing.
• SRT plans to raise up to US$10 million to support the transaction at the same value as the
acquisition.
The equity issuance price is about A$0.264 per share.
Strata Investment Holdings plc (“Strata”, or “Company”) (ASX: SRT), advises that, as of 31
July 2024, the unaudited Net Tangible Asset (“NTA”) backing of Strata is AUD 0.2491 per
share after tax.
The NTA for end of June, May and April are 0.2569, 0.2762, 0.2740, respectively.
Long form agreement is expected to be signed by Sep 30, and re-quotation is expected by Jan 2025.
So the stock will be suspended for about 4-5 month.
The acquisition will be valued at 5X EBIT (excluding US$8-10 million of SCP cash) , and paid in four installments (2X EBIT on closing, and 1X EBIT each each on first, third, and fifth anniversary with SRT shares at four-month average (prior to closing) net tangible assets (NTA) .
Looks reasonable. More like a reverse merger with long-term earn-outs, and SCP management can be in control seat in five years.
https://x.com/puppyeh1/status/1827876918655635743
Maybe we have to wait for more details from the company.
Based on the limited info from the announcement, I think the US$8-10 million cash adjustment is in addition to the US$21.25 million debt-free cash-free headline number, and will be paid in shares too, and also priced at NTA.
Yes, SRT will raise US$10 million at highly diluted price, but the cash raised will be retained instead of being paid out to SCP owner.
In fact, SRT intends to raise the US$10 million partially by selling convertible notes to SCP (and I am guessing they would set the conversion price at NTA).
The goal is to result in US$20 million additional cash after the deal, as stated in the announcement.
So SRT is basically acquiring US$4.25 million of annual EBIT + US$20 million cash for a consideration of US$41 million, which consists of:
US$31 million worth of new shares priced at NTA, and another US$10 million worth of dilution via a combination of equity (highly diluted) and convertible notes (less diluted) offering.
I think the incentives are aligned. SCP management is bringing in US$10-20 million of new cash ($8-10 million corporate cash + payment for acquiring convertible notes) and agreeing to receive shares in four installments over five years. So they are not cashing out, and are invested in the future success of SRT.
I assume the last three installments are linked to future EBIT performance? Otherwise it would be strange to be structured this way.
P.S., There is some confusion/discrepancy in the text:
In the Capital Raising section of the announcement, the amount to be raised is stated as $10 million (which in the context of an ASX company must mean A$), but in the Highlights section upfront in the announcement the target is stated clearly as $US 10 million.
I assume US$10 million is the correct number.
March 24 Update on progress of SCP acquisition: ASX in-principle approvals have been obtained, and negotiation of a long form sale agreement has been resumed.
After signing the agreement, they also need to gain approval from relevant Canadian authorities, schedule a shareholder meeting, etc. The original timetable expects about 3-4 months between the signing of a long-form agreement and the closing (previously expected by Jan 2025).
So we are now expecting closing by Aug/Sep 2025.
End-of Feb Net Tangible Asset (NTA) after tax was A$0.2987/share (AUDUSD=0.6204) vs A$0.3060 (AUDUSD= 0.6762) at the time of trade suspension (end Aug), a depreciation of ~10% in USD terms.
“Further to the announcement updating shareholders on the status of the Acquisition released on 20 January 2025, Strata hereby confirms that, based on the information provided by Strata and the facts known at the time of ASX’s determination:
a) subject to the appointment of a lead manager for the proposed capital raising to be undertaken as part of the Acquisition on terms acceptable to ASX, , ASX has confirmed in-principle that it is not aware of any reasons that would cause Strata not to have a structure and operations suitable for a listed entity for the purposes of Listing Rule 1.1 condition 1 or that would cause ASX to exercise its discretion to refuse re-admission to the official list under Listing Rule 1.19; and
b) ASX has provided a number of in-principle confirmations and waivers sought by Strata to facilitate the Acquisition and its re-admission to the official list.
Accordingly, Strata has now re-commenced negotiations and finalisation of the long form sale agreement with Holdco which will give effect to the Acquisition and, following that, will apply for approval of the Acquisition from the applicable Canadian securities regulators, including the Canadian Investment Regulatory Organization and the Ontario Securities Commission and then undertake the formal ASX re-admission process.
The parties remain committed to completing the Acquisition, and are hopeful of doing so as soon as possible. The Company will provide further updates on the Acquisition as material developments occur”
Any guess when this is going back to market?
No further update from company since the 2025/03/24 update.
NAV after tax as of 2025/06/30 was AUD 28.63 cents/share.
I asked IR that question in June. Below was the reply:
“Unfortunately, we are not in a position to provide a definitive date when SRT will resume trading. Management continues to vigorously engage with regulators including the ASX on the transaction. Obviously, everyone hopes for a positive resolution and soon.”
On 8 Sep, SCP informed Strata that it is terminating the merger agreement.
Is it bad or good news? I don’t know.
@puppyeh previously suggested on X that Strata overpaid for the deal.
If the liquidation thesis is again on the table after breaking the deal, then good news.
Strata Investment Holdings PLC (ASX: SRT) (Strata or the Company) advises that it has
received a formal notice from 1000433639 Ontario Inc. (Holdco) purporting to terminate the
binding letter agreement into entered between the Company and Holdco dated 22 August
2024 (Letter Agreement).
The Company denies the grounds upon which Holdco has purported to terminate the Letter
Agreement and is considering all of its legal rights and options under the Letter Agreement,
including commencing a legal claim to seek damages and/or specific performance of the
transaction contemplated under the binding Letter Agreement.
SRT used the rally in Cobre Ltd (CBE) stock price this year to trim its CBE stake from 20% to 17%.
At least it shows that SRT is still operating, despite having gone dark for more than a year.
Still no news, are Strata still tied up in knots? Is there a deadline for this to be resolved?
Yeah, complete deadlock. The target (SCP) tried to walk away last year and Strata is trying to legally force them to close.
Realistically, they have until August to sort this out. That’s the 2-year mark from their original suspension. If they aren’t trading by then, the ASX will likely delist them.