9Nov 2016

Regency Mines PLC – A Tale of the Unexpected

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 A Tale of the Unexpected

Déjà vu is a powerful thing, and it can be quite a useful from an investment perspective, if tempered, tolerated and nurtured.

Kipling says we must (to paraphrase) “keep our heads when all around are losing theirs.”  Wise words but the world of AIM requires an even greater discipline, because if one presumes “losing theirs” indicates irrationality, investors in resource stocks on AIM have to deal with that and plenty more besides.

At the bottom of a resource market (and cyclical downturns as we have experienced in the resource sector are probably the most pernicious and financially damaging of all), then we have a whole legion of investors recoiling from having lost so much over the years.  The mere prospect of recovery in a share where your loss is 70%, 80%, 90% or even 99% is irksome.

Take Regency Mines (AIM:RGM) my case in point.  At the top of the last resource cycle the share traded at a (new money post 2016 consolidation) share price of £1.80 (November 2010).  Today the share trades at 0.425p as I write, meaning the capital paper loss for holders from the November 2010 high to the current level is a stupendous 99.8%.  In other words £10,000 invested at the high has become £20 today.

Should Regency Mines recover some of its poise and rise ten fold to 4.25p the holders from 2010 will still face a 97.6% loss of capital.  Thus for holders through the cycle downturn it is an understandably unbearable scenario as their loss is almost complete, and the sight of others buying shares at a miniscule fraction of their entry price nothing but demoralizing.  The prospect of those later buyers securing a major capital return simply pours fuel on the painful fire.

But should current investors with capital to invest be swayed by those who have experienced so much pain?  The answer has to be yes …. but only slightly.  We have experienced one of, if not the, worst resource sector pullback phases in history.  Grand losses, it seems with hindsight, were inevitable virtually across the board.  Regency Mines was far from alone in a sector of capital destruction.

One reason for the particularly high capital loss in Regency Mines is the same reason that draws me now at the bottom of the market to invest so much from a personal perspective.  Regency is, due to management, a hard driven company that has always tried (alongside sister company Red Rock Resources (AIM:RRR) to push ahead and grow.  In 2010 – 2011 as the resource sector turned, a more measured expansion of interests combined with disposals and distribution to shareholders would perhaps have shielded investors from a proportion of the fallout that occurred.  A retrenchment of spending, more aggressive  & timely reduction forward commitments and a more measured approach to dilution would have helped control the decline in each shareholder’s proportionate ownership of the company.  It certainly would have helped avoid certain “last resort” financing measures that of their very nature accelerated the dilution and share price decline.

The reality is that Regency misjudged the length and depth of the downward swing in the cycle.  Most of us involved with the sector at the time did likewise, The business in 2010/11 was structured for further growth and expansion.  There was debt on the balance sheet but no finance in the market to pay this off.  The Company had to work through a long process of survival, paying down debt when possible, whilst still undertaking developmental work to give the market some encouragement that the business was continuing and to some extent making progress.  It has been a tortuous route to stabilisation for Regency and perhaps with hindsight better contingency planning for suddeen sector weakness would have been useful.

But being slow and steady is not the company’s way and the Regency still seeks to grow and drive developments even after that strategic approach has, in the down cycle phase, contributed to the share price declines we have encountered in recent years.  However that is the key here, because the drive that contributed to the declines due to its unsuitability in a falling market is exactly what is needed as the resource sector enters a new growth phase.

In December 2008 Regency was trading at 9p per share (again post 2016 consolidation money).  In July 2007 the share had hit a high of £1.60 a share and holders from July 2007 to December 2008 thus experienced a 94.4% capital loss.

In other words it required quite a commitment to hold or buy Regency Mines in December 2008.  Had you done so and held for just under two years to November 2010 your shares would have been worth £1.80, a 20x increase.

Today of course we all face not just market dynamics but unregulated bulletin boards and social media in general, with all sorts of miscreants trying to prize away your confidence at the bottom of the market.  They were there in 2008 too, but today their presence and impact is far more insipid and widespread.

Notwithstanding the noise, as a private investor, I consider there is a reasonable likelihood of a similar recovery in the share price of Regency.

The resource markets are strengthening, and with the incoming tide all boats rise, and Regency Mines will be impacted by that tidal effect.

The management of Regency Mines has been consistent in approach over the years.  This is a source of chagrin to many, but is actually what I need to see here as management drives strategy and strategic consistency is key.

The company is well known and almost universally disliked.  Again, a contrarian’s paradise, as most of the selling is already done if nobody likes you any more.

Finally the company has interests that can deliver engagement with the investor audience.  Over 5 years of vicious pullback have caused many companies to walk away from strategic interests yet Regency still has Motzfeldt and Mambare in the hard rock mineral category, two interests that could certainly deliver investor engagement.

Motzfeldt is a Niobium-Tantalum and Rare Earth Element (REE) project in Southern Greenland and is 100% owned by Regency.  The project has a JORC compliant Inferred Resource of Niobium, Tantalum, Zirconium and REEs and if you applied an in-situ valuation to the minerals already captured by the Inferred Resource you would have a value skirting with US$100bn.  On the upside this resource comes from only part of the licence ground.  On the downside in-situ valuations are an amusing benchmark but not much else as you have to consider the costs of taking a resource through the development stages and the costs of physically mining the products.

However playing along with the theme considering the current shares in issue (318m) and taking just 1/1000th or 0.1% of the resource in-situ value (circa US$100m) and using the current US$1.28/£ conversion rate, means a figure of 24.6p per share or some 58x the current share price.  Benchmarking can be interesting sometimes but what makes Motzfeldt more intriguing now than for a while, is the easing of restrictions in Greenland on the mining of Uranium, which is found with this type of deposit and would have prevented the project from moving into a development programme.

Regency also has a 50% holding in the Mambare Nickel-Cobalt project in Papua New Guinea where there is a JORC compliant resource of 162.5m tonnes of 0.94% nickel and 0.09% cobalt.  Run the calculations again and you derive an in-situ value of circa US$20billion.  On the upside this resource comes from circa 3% of the licence area (with the central plateau still to be tested and this may well be a main driver in overall grade and tonnage) and clearly has upside potential. Also technologies for processing laterites are gaining ground and may well make a real difference for projects such as Mambare.  On the downside the lateritic nature of the deposit, combined with the usual issues of development challenges mean that Mambare in-situ is just a benchmark but not again the fundamental value of this project, more an indicator as to size and scale.

Given the distaste for any hard rock project in recent years the prospect of pushing ahead seriously with either Motzfeldt or Mambare was very limited although there is every sensible reason to be believe that both projects, on which many millions of dollars have been spent to date, will re-emerge when the relevant commodities become en-vogue once more.

In the meantime Regency has been seeking oil and gas, and principally has a stake in the famous Horse Hill development in Surrey.  This project represented a significant proportion of the target price in Regency’s broker report prepared in June 2016 where an upside target of 31p per share was set (albeit with around 20% less shares in issue then versus today). And we are told to watch developments here that could further increase the attractiveness of this project. We’ll see of course!

So three main projects, all with a story that could and probably will engage the market at some point in the not too distant future.

And all this is why I have invested circa £100,000 by the time my second instalment of the recent placing goes through shortly.

I imagine there will be considerable criticism for this short piece, because it is largely wasteful to write chapter and verse nowadays when few really care about details and inevitably the article brevity leads to even more questions than answers.

There is no love for Regency Mines, and instead pure vitriol and bitterness.  Much of this is naturally understandable and some is miscreant generated for economic purposes.  These characteristics denote my personal hunting ground at sector lows and are needed to indicate the stocks with the most significant upside potential.  Even Kipling was on message again with his poem continuing “and lose, and start at your beginnings, and never breathe a word about your loss”….

As ever time will determine who is right.  I expect to make at least a million pounds from my investment.  I might not.  I might lose it all.  But I promise that if a million pound profit emerges I won’t be knocking on the doors of those who attacked me for my investment here today.  Much as the basher won’t sympathise with the investors they deter through their vitriolic stock suppression leading to lost opportunity.

Life moves on.  And with a million quid, it moves just a little bit smoother…..

Author: Paul Johnson

“The views expressed are the author’s own and all readers should do their own research and seek appropriate financial and regulated stockbroker advice.”

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