Postives
a) Mathematically attractive - 6 rights for 1 share with 2 free warrants. The rights are priced at just 10 sen. Hence at 80 sen, if you bought 10,000 shares = RM8,000 ... you'd end up with 70,000 shares plus 20,000 warrants. Technically an ex-all price should be around 15-17 sen. Should it trade at that price?
Bearing in mind that the new owners (Hap Seng) has literally revamped the company by reducing its par value to 10 sen. Plus it is now profitable with the gold mine having just started ops. So, you have literally a fresh start for the counter ... little or no debt with fresh capital coming from all shareholders. The exercise could raise RM223.39m cash which is approximately the market cap currently. No baggage, established and professionally proven new owners, an uncertain sector (gold mines) but the early steps already indicated that the extraction cost can be controlled and is proving to be profitable already within just a few months. Later on we can expect better economies of scale and expertise to enhance margins further.
Hence it would take very little for the share price to go above 20 sen ex-all basis, and in all likelihood the free warrants should be convertible at par value of 10 sen, which would lend a price range of between 9-13 sen for the warrants alone.
b) Strategic - There is a lot of room for upside owing to the fact that most banks do not lend to mining concerns. Hence you would have come across a lot of mines' proposals but no bank funding. It would take an entity with the clout and capital strength to venture comfortably to extract value in the mines located in Malaysia.
I have criticised before how short sighted the local banks and Malaysian financial planners were by not adopting and making mining a strategic choice for promotion. KL could have been the capital for raising funds for the mining sector in Southeast Asia if we have a more concerted effort together. The Ring of Fire (go google it) runs right along most Southeast Asian countries including Malaysia. Yes, the mines may not be the really big ones but we keep losing the fight to Indonesia with plenty of state pension funds and long term investors keen to invest in that sector in Indonesia.
Hence it is safe to say Hap Seng would have managed to negotiate a very good value driven deal to absorb the mines and take over Borneo Oil as capital funding is sorely lacking. This is where the kicker comes in. While not much information can be obtained on details of the mines, it is rumoured to be highly attractive terms of short, medium and long term returns.
c) A Giant In the Making - Owing to the above structural reasons, there is a solid chance that Borneo Oil will be a mining giant in Southeast Asia. Because, once proven to be able to operate profitably, it can continue to snap up smaller mines via share issuance. Before you know it, some other listed companies may try to play catch up. Why do you think that decent small mines from Malaysia generally have to list in Australia or Canada, there is no support for capital funding, government promotion and tax breaks, etc... its all oil and gas oil and gas. Borneo Oil is actually showing how it can be done, without bank funding.
Plus they are not just talking about it, they are themselves putting in more than RM100m cash into it (after paying for controlling shares in Borneo Oil).
d) Valuation - No baggage, profitable in a turnaround, massive cleanup in par value reduction recently, 10 sen par with good outlook, professionally proven owners, an undervalued sector that is ripe for harvesting in a coordinated fashion ... plus an inventive rights and free warrants exercise. I put forth a fair value range before going ex of RM1.00-RM1.25.
Negatives
a) As in any mining concern, commodity price fluctuations are part and parcel of being in that business. If prices suddenly get depressed for an extended, mines will have to close temporarily to reduce cost. However, it all depends on the cost of the mining leases that they obtained. If it was deep value then they will only make less money in depressed markets. As explained above, owing to the structure of the industry locally, it is highly likely that the mining leases came at very attractive levels.
NOTE: The above opinion is not an invitation to buy or sell. It serves as a blogging activity of my investing thoughts and ideas, this does not represent an investment advisory service as I charge no subscription or management fees (donations are welcomed though). I may already have positions in the stock mentioned above. The content on this site is provided as general information only and should not be taken as investment advice. All site content, shall not be construed as a recommendation to buy or sell any security or financial instrument. The ideas expressed are solely the opinions of the author. Any action that you take as a result of information, analysis, or commentary on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.
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The Edge:
Borneo Oil Bhd has proposed a 1-for-6 renounceable rights issue of up to 2.374 billion shares at an indicative issue price of 10 sen per share, together with 1-for-2 free detachable warrants (warrants C) of up to 1.187 billion warrants, at an entitlement date to be determined later.
In a filing with Bursa Malaysia this evening, Borneo oil said it intend to raise a minimum gross proceeds of RM223.39 million, the bulk of which will be channeled into the exploration of gold and limestone mining activities, working capital for fast food operations, future investments and repayment of bank borrowings.
Borneo Oil said its substantial shareholders – Victoria Ltd (25.48%) and Hap Seng Insurance Services Sdn Bhd (16.72%) have pledged to subscribe in full for their respective entitlements, while the public portion of the right Issue will be underwritten by RHB Investment Bank Bhd.
The issuance of the rights issue and free warrants are expected to enlarge Borneo Oil’s issued capital to 3.956 billion shares from 372.319 million shares currently.
Borneo Oil is the exclusive sub-contractor for the exploration and mining of alluvial and lode gold in three districts in Pahang — Mukim Batu Yon, Lipis; Hutan Simpan Hulu Jelai, Lipis; and Hutan Simpan Bukit Ibam, Rompin — covering a total of 1,565.1ha.
The group also operates a 389.743-acre limestone mining operation in Ulu Segama, Lahad Datu, Sabah.
“In the longer term, the company harbours ambitions to become a major player in the gold mining industry domestically and regionally, with the ultimate objective of constantly expanding and strengthening its business base in order to always maximise returns for loyal shareholders.
“The board of directors is confident that, with the addition of the gold mining business starting to come to fruition, these positive developments augur well for the financial performance of Borneo Oil in both the foreseeable and long-term future,” Borneo Oil said in a media statement, adding that it expects to complete the transaction by the third quarter of this year (3Q15).
The indicative issue price of 10 sen per rights share represents a discount of approximately 41.11% to its theoretical ex-price of 16.98 sen per share, which was based on the five-day weighted average market price of 79.8 sen that was calculated up to April 21, 2015.
“For illustrative purpose only, the gross proceeds that is expected to be raised upon full exercise of the warrants C based on the indicative exercise price of 10 sen per share is approximately RM111.70 million under the minimum scenario and approximately RM118.69 million under the maximum scenario,” the group said.
Borneo Oil added that the gross proceeds to be raised from the exercise of the warrants C will be used as additional working capital.
rikki
On behalf of the Board of Directors of Bornoil, RHB Investment Bank Berhad wishes to announce that the Company proposes to undertake a renounceable rights issue of up to 2,373,841,596 new ordinary shares of RM0.10 each in Bornoil ("Bornoil Share(s)") ("Rights Share(s)") at an indicative issue price of RM0.10 per Rights Share on the basis of six (6) Rights Shares for every one (1) existing Bornoil Share held, together with up to 1,186,920,798 free detachable warrants in Bornoil ("Warrant(s) C") on the basis of one (1) free Warrant C for every two (2) Rights Shares subscribed for, on an entitlement date to be determined later ("Proposed Rights Issue with Warrants").
Based on your example above, free warrants should be 30,000 units instead of 20,000 units.
2015-04-28 11:05