In the past several months we have had three cash rich stocks I recommended involved in very profitable mergers or acquisitions - PDM, SWD, and RYG. Phoscan presented below will be another in this "cash rich" series (FOS was sent in June to paid Ticker Trax subscribers).
Phoscan Chemical Corp. (TSX: T.FOS, Stock Forum) (29 cents)
www.phoscan.ca
Shares Outstanding: 152 million
Net Cash and Investments April 30th: $54 million = 35.5 cents per share
Cash & Securities: $40.3 million / Short Term Investments: $14.2 million / Debt: $700k
Phoscan is one of the dullest (but wealthiest) microcap public companies in Canada – and they are in one of the most enviable positions of any small stock on the TSX, TSXV, or the CSE. While I am not a big fan of their share structure (a lot of stock outstanding), I AM a big fan of that balance sheet.
It remains a huge challenge for small companies to raise capital so this means Phoscan is not only in the driver’s seat when it comes to finding a great merger or acquisition target, but there should be a LOT of companies interested in getting access to that cash (which will generate high quality "deal-flow").
In mid-2008 FOS peaked at $2.50 but then collapsed with the financial crisis. There was a moderate recovery in early 2011 but otherwise it has been range bound for almost four years!
The company spent $96 million on their Martison Phosphate project in Northern Ontario but finally made the decision to write it off in January 2015 - they took a Q1/2015 loss of $95 million. In May 2008 they had completed a preliminary feasibility study on the project but for the past several years, the traditional potash market (including phosphates) has really struggled.
To continue sinking money into Martinson would have made NO sense. In this investment environment it would have simply become a huge waste of time and money. They made the right decision in taking the tax loss to preserve that large war-chest of cash.
In October 2014, Phoscan received approval from the TSX to purchase up to 10 million of its own shares. By April 30th 2015, they had purchased 3.9 of the 10 million shares (they have until October 20th to purchase the balance – if they wish). To date they have purchased and cancelled 20.3 million shares at an average price of 28 cents.
When financials were released April 30th, Phoscan stated something critically important – that they were actively “originating and evaluating opportunities to acquire and/or invest in assets and businesses, with the goal of increasing shareholder value”.
Prior to April 30th 2015, the risk remained that Phoscan would turn the Martison project into a money pit and/or continue slogging away as they drew management wages and director fees.
Once a formal statement was made that they were taking a $95 million write-down on Martison, it demonstrated that the company was serious about rebuilding shareholder value – likely through acquisition or merger.
Relevant / Important Excerpts from their April 30th Financials
Due to current general market conditions, the market capitalization of the company and uncertainty in determining future cash flows, management has impaired the value of the Martison phosphate project as at Jan. 31, 2015. The company has recorded a write-down to zero of costs incurred for the prefeasibility study and feasibility study stages.
Cash, short-term investments and marketable securities were $55.0-million at Jan. 31, 2015, versus $56.2-million at Jan. 31, 2014, and working capital was $54.9-million versus $57.1-million. The decreases were primarily due to $1.1-million of repurchases of the company's common shares under the normal course issuer bid.
We would be looking for an attractive takeover or merger scenario where the share price moved well beyond the net cash value of 35 cents. The upside potential would be totally dependent upon the quality of the target and the terms of any deal.
Liquidity has been very good at 29 and 30 cents so to mitigate downside risk over the summer, that is the number you want to work around. The primary unknown variable is the timing of a deal.
You want to view this speculation as both “capital preservation” and “capital appreciation”.Speculating purely on discounted cash – and plenty of it.
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Disclosure (shares always purchased in the open market):
Danny Deadlock owns 100,000 shares of FOS.
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