Since I last wrote about Abacus Mining & Exploration (OTCPK:ABCFF), much has happened. On April 2, KGHM Polska, one of the world's biggest mining companies, exercised the right to increase its interest from 51% to 80% in a JV project by paying Abacus roughly $30 million due to a robust feasibility study. This left Abacus with a 20% interest. Later that day, Abacus announced it will initiate a strategic review, which would look at the various financing options and the sale of the company.
As the chart below illustrates, the news was not initially welcomed by investors as some speculators expected an immediate buyout of Abacus by KGHM. This led to a steep, short-lived material decline in the stock, as the "fast money" ran for the exit. An outright buyout at the time was not realistic since KGHM's board was facing a vote and rumors were circulating that the Polish treasury, a major shareholder, wanted the CEO replaced (the CEO was re-elected recently).
Click to enlarge images.
The stock recovered in a couple of weeks; however, the unfortunate precipitous decline in the junior mining market, illustrated in the chart below, took with it both the good and the bad. Starting in early May the stock joined its peers, bringing some to question the merits of the investment.
TSX Venture Composite:
Primarily, investors began to question the value of Abacus' 20% interest in the JV project. Given that KGHM paid roughly $30 million for 29%, the remaining 20% is worth about $20.7 million (when using the same valuation). In my opinion, this perspective is simply wrong.
Abacus sold the 29% for $30 million due to an agreement between the two companies signed in 2010; long prior to the December 2011 bankable feasibility study, which provides some reliable metrics to evaluate the project. Therefore, the remaining 20% should be valued using the bankable feasibility study, which determined a base-case scenario NPV of $416 million (using extremely conservative assumptions of $2.50/lbs of copper and $1,085/oz of gold). This would value the 20% interest at $83 million; add the $30 million in cash that the company is currently holding and the company is conservatively worth $113 million, or roughly $0.53 per share.
In addition, the above conservative scenario ignores a valuable element of the agreement, which requires KGHM to arrange the financing for Abacus proportionate share of the mine construction cost at commercially acceptable terms. This essentially removes all the funding risk from the company --- something most juniors would love to have.
As an example, say Abacus can borrow at 15% (an optimistic estimate given today's market) to finance its proportionate share of the mine construction cost of about $130 million (net of the $30 million paid for the 29%). The annual interest cost would amount to $19.5 million. On the other hand, say a giant like KGHM can borrow at 4% and finance the proportionate share of $130 million for Abacus at an annual interest cost of $5.2 million. The difference of $14 million per year (and currently 40% of the market cap of the company) would be the value of this option, which makes it a very valuable asset.
Lastly, on Aug. 22, the company announced that effective Sept. 1, KGHM will replace Abacus as the operator of the project and Jim Excell, currently the CEO of Abacus, will assume the position of CFO of the JV company (in addition to his current role as CEO). Abacus also indicated that the strategic review process identified several options and that those are currently being reviewed. As the press release indicated, "The company plans to bring this process to the next step in the fall and will notify shareholders of developments or decisions at that time."
The news release is open to interpretation. However, one can reasonably conclude that the strategic review has been completed and a decision on selling the company, signing an off-take agreement, or proceeding with construction will be taken in the fall.