Weak investor sentiment is a value investor’s heaven. Of course, no trade is risk-free.
As a long-term investor in undervalued mining companies, I consider Edenville Energy (soon to be Shuka Resources) to be a solid portfolio pick for H2 2023.
Admittedly, my interest has been piqued by the new involvement of one Jason Brewer — who has generated solid profits for me as CEO at Marula. I covered MARU before the rise, have considered the upcoming NEO IPO, and am perfectly happy to throw a little investment into Edenville given recent good news.
Despite this month’s catalyst, the AIM stock is down by more than 60% over the past year and is changing hands for just 7.5p with a market cap of a mere £2 million.
But what’s behind the recent rise?
Edenville strategic investment
On 1 June, Edenville told investors that it had raised £1,468,000 at 5p per share, comprising £575,000 under the Company’s existing share issuance authorities and a further £893,000 to be completed subject to shareholder approval at a near-term General Meeting.
Q Global Commodities Group, which is also heavily involved in MARU, is subscribing via wholly-owned subsidiary AUO Commercial Brokerage for £879,330 and subject to shareholder approval will become the Company’s major shareholder with a 29.95% interest. Gathoni Muchai Investments — of which Jason Brewer is a Director — is subscribing for £588,670 and will hold a 20.05% interest.
I’ve covered QGC before, but one key factor to note is that the investment firm already has 12 thermal coal mines currently under management.
Upon approval at a soon-to-be-convened GM, QGC and GMI will also each receive warrants allowing them to subscribe for a total of 5,451,691 new ordinary shares in the Company at an exercise price of 25p each, exercisable until 25 May 2024.
These funds will be used ‘to fund its ongoing working capital requirements and on its corporate and mining development activities. These funds will also be applied to ongoing and new review work of potential additional strategically complimentary advanced mining and mine development projects.’
In terms of personnel, Non-Executive Chairman Nick von Schirnding plans to step down — having interviewed him in his capacity as Chair at ARC Minerals, it’s possible that he needs more time to dedicate to exploring copper in Zambia. Brewer is now Executive Director, while long-time working partner and QGC CEO Quinton van der Burgh will join the Board of Directors as Director and Non-Executive Chairman. The company is also looking to ‘enhance’ the board shortly with new members.
All of these changes will be approved at a General Meeting to be convened by early July.
Rukwa Coal Project: flagship
The most recent production numbers come from 11 April. To start with, from 1 January 2023 to 27 March 2023, Edenville sold 948 tonnes of washed coal for £34,500. 594 tonnes were washed in March 2023, of which 512.5 tonnes were washed between 20 March and 31 March.
While the company suffered during the rainy season in early March, the second half of the month saw its wash plant operate at least four hours per day on six occasions. At these times, it averaged over 10tph, matching the company’s target production rate of 2,500 tonnes per month of washed coal. March-May is the long rainy season in the country, so this is a problem for three months in every 12.
With ‘the results and evidence’ suggesting that Rukwa will be in a position to deliver on its initial production targets, I consider the stock oversold. Edenville has already agreed to supply 2,000 tonnes of washed coal per month at a pre-transport price of $98 per tonne (net price $55 per tonne), from June 2023 at the plant gate.
It’s also considering the merits of developing an additional wash plant to Rukwa as potential customers have indicated a demand for an additional 8,000-10,000 tonnes per month of washed coal. With new backers, it now has a reasonable chance of making this happen. It’s also been working over the past year to expand the resource and has identified ‘an additional accessible coal seam.’
CEO Noel Lyons notes that Rukwa has ‘the potential to achieve our initial and contracted base case production target of 2,500 tonnes per month once the rainy season concludes. Confirmation that when the plant is able to operate it is doing so at a rate that will achieve these levels of production is very encouraging.’
Legacy issues to consider
There are six legacy issues that investors should consider. Some settled, others ongoing:
1. Former employee’s claims of unfair dismissal — Tanzanian court rejected the claims in their entirety in early December.
2. Change of name — the company is planning to rechristen itself to Shuka Resources, to better reflect its focus on African mining assets. Lyons considers this ‘transition marks an exciting period of growth and progress for us in the months to come.’
3. 28 March 2023 Rukwa update — tanked the share price after releasing an RNS stating that ‘the Company has been focused on stockpiling run of mine coal to mitigate, as far as practicable, impact from the Tanzanian rainy season. A substantial stockpile of run of mine (“ROM”) coal was accumulated, but this stockpiled ROM coal has proven difficult to wash due to its moisture content. The production of washed coal is therefore expected to be reduced for as long as the rains continue, which could be for several more months.’
4. Rukwa mining licence issues — Edenville remains in discussions with the Tanzanian Mining Commission regarding its Rukwa licence, ‘having been advised by the Commission that the Company had historically failed to perform certain tasks required under its licence and that the licence could technically be in default of these requirements.’ A resolution is in discussion, but there has been no update for several weeks.
5. Upendo Group dispute — a legal quarrel over 10% economic interest in Rukwa. The claim is being ‘robustly defended,’ but has dragged on for some time.
6. Envirom debt — Envirom has previously agreed to pay £180,000 to Edenville after an earlier aborted acquisition process. There is no disagreement that the funds are due, but Edenville has had to issue a statutory demand for the debt, as payment has not been forthcoming.
The bottom line
Setting aside the possibility of a new wash plant for now, it’s worth doing some quick maths.
2,000tpm x $55 per tonne = $110,000 (£88,500) revenue per month.
Market cap £2 million.
I’ll let you do the calculations for the potential 10,000tpm. But at just 2,000tpm — and I accept this is not guaranteed — the company will generate its market cap in revenue in less than two years. This is a producing plant.
Add in Brewer’s operational skill and QGC’s heavy financial involvement — remember both are already heavily involved in Tanzania — and the opportunity looks solid.
Of course, investors should note that given the legacy issues and impact of the rainy seasons, this is not risk-free.
This article has been prepared for information purposes only by Charles Archer. It does not constitute advice, and no party accepts any liability for either accuracy or for investing decisions made using the information provided.
Further, it is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.