Sunridge Gold: A Potential Play On Appeal Results

| About: Sunridge Gold (SGCNF)

Summary

Sunridge Gold announced a second distribution of $0.03 CAD or $0.022 USD per share.

It is holding another $6 million CAD ($4.5 million USD) pending the resolution of an appeal of a garnishment order related to an arbitration award against Eritrea.

If the appeal is denied, then a third distribution of $0.026 CAD or $0.019 USD per share may occur in mid-2017.

Excluding transaction and holding costs, a price of $0.03 USD per share would have a positive expected return if Sunridge has a greater than 43% chance of winning the case.

Sunridge appears to be a potential speculative play in small amounts at $0.03 USD per share.

Sunridge Gold (OTCPK:SGCNF) has announced its second return of capital distribution to shareholders as it nears the dissolution of the company. Initially only two distributions were planned, but due to some ongoing legal issues involving a garnishment order related to an arbitration award given to a third party (Delizia Limited) against the state of Eritrea, Sunridge is continuing to hold some money in case it is obligated to pay funds to Delizia. Thus, there may be a third return of capital distribution in mid-2017 if Delizia's appeal is unsuccessful.

The Second Distribution

The second distribution is scheduled to be distributed on December 8 to shareholders of record on December 5. Sunridge's share register is scheduled to be closed on December 5 and archived for use in any potential third distribution. Sunridge's second distribution is for $0.03 CAD per share or $0.022 USD per share at current exchange rates. This brings Sunridge's total distributions so far to $0.39 CAD per share or $0.297 USD per share, including the first distribution at the roughly $1.31 CAD to $1.00 USD exchange rate at the time.

The Third Distribution

The tied up money relates to a dispute between Delizia Limited and Eritrea. Delizia alleged that it hadn't been fully paid for equipment that Eritrea purchased, and won a $4.4 million USD foreign arbitration judgment against Eritrea. Delizia was issued an order of garnishment that allowed it to collect the arbitration judgment from debts owing or accruing from Sunridge to Eritrea. Sunridge appealed the order of garnishment and won, but Delizia appealed that decision to the Canadian Federal Court of Appeal, which is where things currently stand. Sunridge mentioned that the appeal is expected to be heard in Q2 2017.

Around $6 million CAD is currently being held pending the resolution of the appeal. If Delizia's appeal is denied, I'd expect Sunridge to distribute another $0.026 CDN or $0.019 USD per share to shareholders.

Sunridge has generally traded for approximately $0.03 USD per share after the announcement of the second distribution, resulting in the potential for a decent profit if Delizia's appeal is denied and Sunridge can distribute the full remaining proceeds to shareholders as part of the third distribution. Currently it appears that the combined second and third distributions could potentially add up to around $0.041 USD per share. With $0.022 USD per share being paid in December, the risk is potentially up to $0.008 USD per share if Delizia wins its appeal versus a potential gain of $0.011 USD per share if Delizia loses its appeal. Thus the expected return is greater than zero if there is a 43+% chance that Delizia loses its appeal.

There are other things to consider like transaction costs of course. As well, although Sunridge mentioned that the appeal was expected for Q2 2017, there is a risk that the overall timeline could be different. The Canadian Federal Court of Appeal decision should end the case, but there is a chance that its decision could be appealed to the Supreme Court of Canada. Given the relatively small number of cases the Supreme Court deals with, it seems unlikely that such an appeal would be considered, but that process could still add a number of months to the timeline to closure.

If Sunridge ends up distributing $6 million CDN ($4.5 million USD) as part of a third distribution, the cumulative distributions will reach approximately $0.416 CAD or $0.316 USD per share. This is slightly better than what I previously estimated.

Conclusion

Sunridge mentioned that it "does not consider it probable that any significant cash will be required to resolve the Delizia matter". As I am not a legal expert, I cannot assess the merits of the case. However, it does appear that decisions are reversed upon appeal only a minority of the time. US data indicates that around 30% of civil case appeals that go to a decision result in a reversal. Only 17% of civil case appeals overall result in a reversal, since a significant number of appeals are withdrawn or have procedural errors. Canadian data may differ, but I think it would be reasonable to assume that Sunridge is more likely than not to prevail in the case. As such, Sunridge may be worth a small speculation, although there is some uncertainty about when the case will be fully resolved. As well, one should note that the record date is coming up, and trades after November 30 may not settle by the record date.

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Disclosure: I am/we are long SGCNF.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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