Why I think they will liquidate, and what they might get. I believe that management will liquidate the company. I really think they have no choice.
They may have thought of actually making a go of developing Bayovar, but after the PEA,
I think that's extremely unlikely. So liquidation is all that's left.
The PEA was a real shocker, at least it was to me. $279m to develop a near-surface,
near-port phosphate deposit? I never dreamed it would be that much, and I doubt
that any of the people who deemed this stock a no-brainer did either. In addition,
$278m in sustaining capital? $251m in tax? $344m in other costs? And that's all
before operating expenses. Good grief.
After all those costs, we have NPV10 of $71m.
Those with some experience watching companies build mines will know that
PEA's are always optimistic. Why wouldn't they be? The people doing the work
are paid by the company. And they want the next company to hire them, so they
don't want a rep for delivering bad news. Of course, they don't want to commit fraud,
either, so they can't be too optimistic.
Anyway, mines almost always cost quite a bit more to develop than the original
plans envisage. What should we - or, more important, what would a potential
acquirer - assume for pre-startup capital costs? I would say that if the PEA says
$279m, we should assume $325m. Oops, there goes half of the NPV10.
The startup costs are far from the only item that can go bad. Any of the other costs
could be substantially higher. Then there's the assumptions about commodity prices.
Doesn't take much of a swing to wipe out a profit as small as Bayovar's PEA is predicting.
Sure, revenues could be higher, and costs could be lower, than those in the PEA.
But an acquirer - and that's what shareholders effectively are - must always think
of the downside and never count on the upside.
So what does Bayovar look like to a company thinking of buying and/or developing
it? (Let's say) $300m in startup costs for $70m in NPV10.
If Gromax is that company, can they get the money? Not a chance. No bank would
lend $300m on those fundamentals. Debentures wouldn't work, either, and PP's
would dilute the stock down to nothing.
That only leaves a sale to another company. I suppose that Gromax could farm
out 90% in return for a complete carry on development, but they'd have to find a
company that would effectively be buying the deposit, and I think that's unlikely,
at least not for 90% of $70m when they have to spend $300m to start collecting.
Stockholders - especially Geren - are also very unlikely to be willing to wait years
on the possibility of a payout. I believe that those stockholders with influence will
demand a liquidation of the company as soon as possible. And Badwi is the man for
job, as he liquidated his prior company just a few months ago. In fact, liquidation was
likely in mind when he was hired, but the decision was made to get the best estimate
they could for Bayovar first.
So what can be gotten from a liquidation?
Let's start with the Balance Sheet from June 30:
.
Assets
Cash plus restricted cash: C$46.4m
Other current assets : $1.0m
N/C restricted investments: $6.5m (will this be realized in liquidation?)
Other non-current assets : $2.9m (ditto)
Liabilities : $15.6m
Net : C$41.2m
I'd take off $4m for subsequent and near-future expenses, so C$37m.
That leaves two assets classes for sale, Argentina and Bayovar. On the Balance
Sheet, they show available-for-sale assets as $13m, which I'm assuming means
all of Argentina. It's all very well to put that on the Balance Sheet, but that's the book
value, which does not necessarily have much relationship to the sale value.
I would say that, right now, they'd be lucky to get $5m.
So a new total of C$42m, or 20 cents/share.
Then what can they get for Bayovar? I don't think they can sell it for anything
substantial to anyone who doesn't already have nearby operations. Will someone
want to pick it up on the super-cheap and just put it in their back pocket, awaiting
better commodity prices? I don't know the industry well enough to even make a guess.
I do know that for each for $5m of sale price, that's 2.5 cents/share for GRO.
What can they get for an extremely dubious $71m of NPV10, requiring enormous
startup outlays? I think it's highly unlikely to be more than $10m.
So there's another 5 cents/share for a total of 25 cents/share. Not what a lot of people
were hoping for, but the downside (at 15.5 cents/share) is protected. The good news is
that their going ahead with Bayovar is such a preposterous idea that I doubt we'll hear
much of it.