Why Chatham management has invested again

Why Chatham management has invested again 

Aorere Resources (the founder of CRP) and the CRP directors have recently made a substantial further investment because we think it’s a logical thing to do. In particular:

1.     Chatham shares are already priced at an all-time low based on the market’s assumption that Chatham will either not get the marine consent (the environmental permit) on a second attempt or not be able to raise the funding to reapply. We disagree.

2.     We are confident of a successful outcome for the environmental permitting process next time, due to a number of factors that we explain below

3.     We retain the core attributes that enabled our company to make such significant progress since being granted a prospecting permit in early 2010.

4.     Chatham is already diversified as we already have five marine applications offshore Namibia, a developing relationship with other key players (including locals) in that market, and we are presently undertaking due diligence on other phosphate assets in multiple offshore locations. Qualifying projects will be acquired using equity later in 2015.

5.     Further, we are already entering the phosphate trading market using our existing management team and industry contacts, we have no need or desire to wait for our own Chatham deposit to be developed. This range of initiatives at various market levels is expected to generate cash flows in the shorter term

6.     We are well advanced with listing on the TSX.V by means of RTO, which will appeal to our existing USA based shareholders, and which will facilitate fundraising in that, the largest mineral-resources focused marketplace.

7.     Oceanica, our “sister” marine phosphate company (based offshore Mexico) is about to achieve its final permit which will take away our perceived first-mover risk

The first and most important point for us is that we believe that the Chatham shares are already priced on an assumption that Chatham will either not get the marine consent (the environmental permit) on the second attempt or not be able to raise the funding to reapply.

The logic supporting this statement runs as follows:

The market capitalisation of Chatham immediately before the decision on 11 February was $41.9 million. The day after the decision it was $3.1m, the week after $3.6m and the average for the next 20 trading days was $3.7 million.

In those dark times the view of some major investors was incredibly negative – we had visibly struggled to fund the project to the EPA finish line, had no remaining cash reserves to speak of on the day of the decision and had then, against the odds, been turned down. Many of the investors who had contributed the ~$6 million we raised in the final months of 2014 bailed out in quite big volumes. Nevertheless the market capitalisation of the company was pegged, for an extended period, at $3.7 million. We believe that that value reflected the company attributes that we discuss in more detail below.

Our present market capitalisation is $2.45 million, after recently raising $713,000 in a rights issue, resulting in an implied enterprise value of $1.63 million (compared with $3.7m in the dark days post decision). Even ignoring the progress that Chatham has made in the last four months that valuation difference is an anomaly.

It’s hard to see how our valuation could go any lower unless Chatham management (who are now the largest shareholders having oversubscribed to the recent rights issue) decided to abandon the project and we all have far too much invested in terms of cash, reputation, and other marine-phosphate project relationships to walk away. 

The obvious question is why has the CRP market suddenly become so weak? We don’t really know but we believe a possible catalyst for this has been the selling of shareholders (unrelated to us) facing liquidity issues and possibly offshore investors losing confidence in the New Zealand regulatory regime. That combined with our well telegraphed present programme to place the shortfall at .6 of a cent are two reasons to keep the market down. We had a parallel situation a few months ago when we were raising the final funding for the marine consent costs. That financing was at 12 cents and the moment it was completed the stock recovered to around the 20 cent level where it remained until February 11, 2015.

Our second point is that we are confident of a successful outcome for the environmental permitting process next time, due to a number of factors including:

·       An expected change in the rules of the game (we are presently providing guidance at various levels on the Marine Consent procedure, including but not restricted to interpretation of the EEZ Act)

·       We were turned down on quite limited and unexpected grounds that can be dealt with more robustly on resubmission, (high profile fishing industry and Iwi concerns were mutually agreed to be groundless)

·       We are confident of much wider and tangibly expressed support from relevant government agencies, the farming sector, and other stakeholders

·       We fully understand the rules of the game and expect the EPA to have learned from the Chatham and earlier TTR debacle

Our third selling point is that we retain the core attributes that enabled our company to make such significant progress since being granted a prospecting permit in early 2010. These include:

·       Our proven ability to fund the company from its inception ($33.5 million in five years starting from a zero base),

·       Our 20 year mining permit ,

·       Our internationally recognised project team,

·       Our intellectual property,

·       Our on-going partnership with Boskalis Offshore B.V.

Our fourth compelling set of arguments is that Chatham is already diversified as we already have five marine applications offshore Namibia, a developing relationship with other key players (including locals) in that market, and we are presently undertaking due diligence on other phosphate assets in multiple offshore locations. Qualifying projects will be acquired using equity later in 2015.

Further, we are already entering the phosphate trading market using our existing management team and industry contacts, we have no need or desire to wait for our own Chatham deposit to be developed. This range of initiatives at various market levels is expected to generate cash flows in the shorter term.

The sixth selling point is to re-iterate our imminent listing on the TSX.V by means of RTO, which will appeal to our existing USA based shareholders, and which will facilitate fundraising in that, the largest mineral-resources focused marketplace.

Another significant factor of relevance is the likelihood is that Oceanica, our “sister” marine phosphate company (based offshore Mexico) is about to achieve its final permit.

When this occurs it should remove our perceived first-mover risk. We use the word “sister” because we share investors, a director, contractors and some market development concepts. A win for that company will do wonders for us among the international investors we keep in touch with.

Summary

Entry into Chatham at 0.6 cents a shares values the company (post placement) at $2.76 million or an enterprise value of $1.4 million.  That’s two million less than our market capitalisation in April 2010, when we had no management team as such, no relationship with Boskalis, no 20-year mining permit, no idea about how to apply for a marine consent, significantly less knowledge about the deposit, no direct involvement or expertise in the phosphate market, and only $250k in the bank.

We think the company is now significantly undervalued even just looking at its historical market capitalisation. Even without the environmental permit (or the certainly of gaining it) Chatham’s market capitalisation has exceeded $40 million for almost all of the period September 2012 to February 2015

Relative to historical external valuations variously carried out by Simmons Corporate Finance, McDouall Stuart Securities, and London based Edison Research the present market valuation is absurdly anomalous given the company’s present attributes including its diversification strategy and improved chances of getting the environmental permit next time.