Fundamental Research Corp.Investment Analysis for Intelligent Investors
Siddharth Rajeev, B.Tech, MBA
Analyst
February 17, 2009
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?2009Fundamental Research Corp.www.researchfrc.comSiddharth Rajeev, B.Tech, MBA
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
Continuum Resources Inc. (TSXV: CNU)–Mails Acquisition Circular–FINAL REPORT
Sector/Industry: Junior Mining www.continuumresources.com
Market Data (as of February 17, 2009)
Current PriceC$0.055
Fair ValueN/A
Rating*N/A
Risk*5 (Highly Spec)
52 Week RangeC$0.01–C$0.20
Shares O/S124.05 mm
Market CapC$6.82mm
Current YieldN/A
P/EN/A
P/B0.86
YoY Return-63.3%
YoY TSX-V-64.2%
*see back of report for rating and risk definitions
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12,0 00,000
12 -Feb-0812-Ju n-0811 -Oct-089-Fe b-09
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Investment Highlights
??In August 2008, the company and FortunaSilver Mines
(TSXV: FVI)announced an acquisition agreement whereby
Fortuna will acquire all the outstanding shares of CNU by
issuing 7million sharesof Fortuna shares (0.0564 shares of
Fortuna for 1share of CNU).
??At current prices, the acquisition isvalued at $7.3 million,
or $0.058per share. CNU shares are currently trading at
$0.055 per share.
??Our previous valuation on CNU (as of January 2008) was
$0.49 per share. Based on the developments sincethen, we
have revised our valuation on the company to $0.12per
share.Although,the acquisition price is lower than our fair
value estimate, if the deal does not go through, we believe
CNU will face liquidity issues.
??If the proposedacquisitionis completed, our valuation on
Fortuna,just based on its working capital (net of debt) and
the San Jose project,is $1.21 per share.FVI shares are
currently trading at $1.04 per share.Note thatFortunaalso
owns theproducing CayllomaAg-Pb-Zn Mine.
??Ifallconditions aremet,the acquisition is expected to be
completedon orabout March 13, 2009.
Key Financial Data
(C$)2008 (9 mo)
Cash53,716
Working Capital(371,145)
Mineral Assets8,253,220
Total Assets8,633,143
LT Debt / Assets2.9%
Net Loss(3,533,997)
Loss per Share(0.03)
Continuum Resources Ltd. (“CNU”) is a Vancouver based junior gold and silver company that is focusing its exploration efforts in
the southern Mexican province ofOaxaca, where they hold over 10properties.
ContinuumResourcesLtd. (TSXV:CNU)–UpdatePage2
?2009FundamentalResearchCorp.www.researchfrc.comSiddharthRajeev, B.Tech, MBA
PLEASEREADTHEIMPORTANTDISCLOSURESATTHEBACKOFTHISREPORT
Saleof
CompanyInAugust 2008, thecompanyandFortunaannouncedanacquisitionagreement whereby
Fortuna willacquire all the outstandingshares of CNUbyissuing7millionsharesof
Fortuna(0.0564sharesof Fortunafor 1shareof CNU).Weestimatethat theproposedall-
sharedeal representedavaluationof $8.96million, or $0.07per share; apremiumof 40%
overCNU’s share price then.At current prices, theacquisitionisvaluedat $7.3million, or
$0.058per share. CNUshares arecurrentlytradingat $0.055 per share.Our previous
valuationonCNU(January2008) was $0.49per share. Basedonthedevelopments since
then,wehaverevisedourvaluationonthecompanyto$0.12pershareasshownbelow.
RevisedPrevious
SanJoseProject$0.12$0.24
OtherProjects$0.00$0.21
WorkingCapital-Debt($0.00)$0.04
NetValue$0.12$0.49
ValuationSummary
*Note–OurvaluationdroppedasweloweredourvaluationontheSanJoseproject (from
$0.24to$0.12pershare(aswehavenowusedmoreconservativeestimatesforthroughput,
delayedcommencement of productionandincreasedthenumberof outstandingshares), and
as thecompanyhas enteredintoanagreement tosellmost of its other projects for only
$85,000(seedetailsonthenextpage).
Theacquisitionpriceislower thanour fair valueestimate.However, webelievethedeal
allowsCNUtoavoidaliquidityproblem.Inadditiontotheir 76%interest intheSanJose
project, FortunaalsoownstheproducingCayllomaAg-Pb-ZnMineinPeru.Attheendof
September 2008, Fortunahad about $41 millionin cash, andgenerated revenues and
operatingcashflowsof$22.5millionand$2.6million, respectively,inthefirst ninemonths
ofFY2008.
Iftheproposedacquisitioniscompleted, ourvaluationonFortuna,just basedonitsworking
capital (net ofdebt)andtheSanJoseproject is$1.21pershare.Notethatthecompanyalso
ownstheproducingCaylloma Ag-Pb-ZnMine whichwe have notincludedinthe
valuationbelow.
FortunaSilverMines
Valuation
SanJoseProject(100%owned)$0.70
CayllomaMine(100%owned)
WorkingCapital-Debt$0.51
FairValue$1.21
FVIsharesarecurrentlytradingat$1.04pershare.
ContinuumResourcesLtd. (TSXV:CNU)–UpdatePage3
?2009FundamentalResearchCorp.www.researchfrc.comSiddharthRajeev, B.Tech, MBA
PLEASEREADTHEIMPORTANTDISCLOSURESATTHEBACKOFTHISREPORT
Saleofassets
andeliminates
convertible
debentures
Mails
Acquisition
Circular
Rating
CNUholds over 10gold/silver projects inthe southern Mexican province of Oaxaca.
Fortuna’s interest in CNU lies inits24% interest in Fortuna’s San Jose Project in Mexico.
ByacquiringCNU,Fortunaaimstoincreaseitsownershipto100%.Inconnectionwiththe
acquisition,CNUdisposedof its wholly-ownedsubsidiary, ContinuumResources S.A. de
C.V.(CNUMexico)andeliminateditsoutstandingconvertibledebentures($0.27million)
throughthefollowingtransactions:
??SaleofCNUMexico–InDecember2008,thecompanyenteredintoanagreementtosell
all oftheissuedandoutstandingsharesofCNUMexicotoAtomicMineralsLtd. (TSXV:
ATL). Inreturn,Atomicwill paythecompanyC$85,000incash. CNUMexicoownssix
blocksof miningclaimsinOaxaca.Theproposedacquisitionisconsideredtobeanon-
arm’s length transaction, asAtomic’s Chief Executive Officer and one of its independent
board members are eachcurrentlydirectors andofficers of CNU.Thetransactionis
subjecttoaduediligencereviewandtheapprovaloftheTSXVentureExchange.
??Eliminatesconvertibledebentures–Thecompanyeliminateditsconvertibledebentures
(valuedat$0.27million)throughthefollowingagreements/transactions:
-Thedebentureholders(DirectorsandofficersandaformerdirectorofCNUsubscribed
for$0.17million)confirmedthattheywouldexercisetheir conversionprivilegeand
tenderthesharesreceivedtoFortunapursuanttotheproposedacquisition.
-In December 2008, CNUsold certain exploration equipment and assigned the
convertibledebenturesecuredonsuchequipment toaprivatecompanyincorporatedin
Saskatchewanfornilconsideration.
SubsequenttothesaleofCNUMexico, thecompany’s primary assets will be its interest
intheSanJosepropertyandanoptiontoacquirethePredilectaproperty, whichis
locatedneartheSanJoseproperty.
OnJanuary27, 2009, the companyannouncedit hadmailedits shareholders acircular
describingtheterms oftheproposedacquisition. Ameetingof theshareholders has been
calledfor February23, 2009,toapprovetheacquisition. Completionof theacquisitionis
alsosubject tocertainotherconditionsincludingcourt approval andacceptanceforfilingby
the TSXVenture Exchange.Ifallconditions aremet,the acquisitionis expectedtobe
completedonoraboutMarch13,2009.
At theendofSeptember2008, CNUhad$0.05millionincash, andaworkingcapitaldeficit
of $0.37million.The workingcapital deficit includes a loanof $0.20millionthat was
grantedtoCNUbyFortuna. Subsequently, Fortuna grantedanadditional loanof $0.10
milliontoCNU.
Basedonour revisedvaluationofCNU, ourvaluationonFVI (basedonworking
capitalnetofdebtandtheSanJoseprojectalone),andCNU’sfinancialpositionshould
thedeal not gothrough,werecommendinvestorstendertheirshares, andtherefore,
ourratingandfairvalueisN/A.
ContinuumResourcesLtd. (TSXV:CNU)–UpdatePage4
?2009FundamentalResearchCorp.www.researchfrc.comSiddharthRajeev, B.Tech, MBA
PLEASEREADTHEIMPORTANTDISCLOSURESATTHEBACKOFTHISREPORT
RisksNotethatiftheacquisitionfailstogothrough,CNUwillfaceliquidityproblems.
Thefollowingrisks, thoughnot exhaustive, will causeour estimates todiffer fromactual
results:
??CNUdoesnot haveanyoperatingminesandhence,doesnot generateanyrevenuesor
cashflows.
??CNU’s success is dependent on the management and development of its exploration
projects.
??Thesuccessofdrilling, expansionandincreasingfavorableresourceestimatesarevery
important for the company’s future prospects.
??Thevalueofthecompanydependsheavilyongoldandsilverprices.
??Accesstocapitalandsharedilution.
Continuum Resources Ltd. (TSXV: CNU)–UpdatePage5
?2009Fundamental Research Corp.www.researchfrc.comSiddharth Rajeev, B.Tech, MBA
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
Fundamental Research Corp. Equity Rating Scale:
Buy–Annual expected rate of return exceeds 12% or the expected return is commensurate with risk
Hold–Annual expected rate of return is between 5% and 12%
Sell–Annual expected rate of return is below 5% or theexpected return is not commensurate with risk
Suspended or Rating N/A—Coverage and ratings suspended until more information can be obtained from the company regarding recent events.
Fundamental Research Corp. Risk Rating Scale:
1 (Low Risk)-The company operates in an industry where it has a strong position (for example a monopoly, high market share etc.) or operates in a
regulated industry. The future outlook is stable or positive for the industry. The company generates positive free cash flow and has a history of
profitability. The capital structure is conservative with little or no debt.
2 (Below Average Risk)-The company operates in an industry where the fundamentals and outlook are positive. The industry and company are
relatively less sensitive to systematic risk than companies with a Risk Rating of 3. The company has a history of profitability and has demonstrated
its ability to generate positive free cash flows (though current free cash flow may be negative due to capital investment). The company’s capital
structure is conservative with little to modest use of debt.
3 (Average Risk)-The company operates in an industry that has average sensitivity to systematic risk. The industry may be cyclical. Profits and
cash flow are sensitive toeconomic factors although the company has demonstrated its ability to generate positive earnings and cash flow. Debt use
is in line with industry averages, and coverage ratios are sufficient.
4 (Speculative)-The company has little or no history of generating earnings or cash flow. Debt use is higher. These companies may be in start-up
mode or in a turnaround situation. These companies should be considered speculative.
5 (Highly Speculative)-The company has no history of generating earnings or cash flow. They may operate in a new industry with new, and
unproven products. Products may be at the development stage, testing, or seeking regulatory approval. These companies may run into liquidity
issues, and may rely on external funding. These stocksare considered highly speculative.
Disclaimers and Disclosure
The opinions expressed in this report are the true opinions of the analyst about this company and industry. Any “forward looking statements” are our best estimates
and opinions based upon information that is publicly available and that we believe to be correct, but we have not independently verified with respect to truth or
correctness. There is no guarantee that our forecasts will materialize. Actual results will likely vary. The analyst and Fundamental Research Corp. “FRC” does not
own any shares of the subject company, does not make a market or offer shares for sale of the subject company, and does not have any investment banking business
with the subject company. Fees of less than $30,000 have been paid by CNU to FRC. The purpose of the fee is to subsidize the high costs of research and
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The distribution of FRC’s ratings areas follows: BUY (69%),HOLD (12%), SELL (4%), SUSPEND (15%).
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