Canadian company invests in Limpopo project

Well well, it’s amazing what you find when you go digging. This week produced no significant announcements by South African companies of M&A activity; so I went digging.

The press release by Aberdeen International looked interesting. Aberdeen, a Canadian listed global investment and merchant banking company, focused on small cap companies in the resource sector, announced its investment in African Thunder Platinum which, in July, acquired the South African platinum assets of troubled Platinum Australia; a 69.75% stake in Smokey Hills mine and a 49% interest in the Kalahari Platinum project joint venture. I did wonder what made this an attractive proposition for Aberdeen shareholders given Smokey Hills’ non-existent production track record.

The Smokey Hills project is located on the eastern limb of the Bushveld Igneous Complex in the Limpopo province, roughly 300km north of Johannesburg. Platinum Australia bought into the project in 2007 with the aim of owning an 80% stake, the balance being held by Corridor Mining Resources (15%), a company owned by the Limpopo provincial government and 5% by the local community.

Limpopo project

Operations commenced a year later, initially as an open cut with the intention to progress to a shallow underground mine. The life of the mine was put at seven years. Operations in 2009 focused on the development of six main access adits and the improvement in the platinum price made for projected healthy margins. Then 2010 dawned and things went south for the project; power interruptions, the cancellation of the underground mining contract, numerous industrial actions, a deteriorating market, increased debt and the issuing of a notice by the Department of Mineral Resources ordering the group to cease operations for allegedly failing to comply with social and labour plans.

The company was placed under administration in December 2012 but not before it funded the buy-out of Corridor Mining Resources. Jubilee Platinum looked to be the White Knight in late 2012 but discussions of a merger were terminated by mutual agreement in March this year.

Now this is where it really gets interesting. In July, Great Lakes Capital Management, a Canadian private equity firm, through a subsidiary African Thunder Platinum announced it had acquired the South African assets from the Deed Administrator. The consideration to be paid consisted of $1.05 million in cash and the issue of shares equivalent to a 15.5% in African Thunder with the shares distributed to secured creditor Macquarie Bank (13.5%) and unsecured creditors (2%).

Three months later Aberdeen, with a market cap of $17 million, appears on the scene making an initial investment of $4.67 million into African Thunder and committing up to $15 million of which a maximum of $7.5 million would be invested before year-end. To fund the acquisition Aberdeen sold 2.85 million shares in Rio Alto Mining and has completed a non-brokered private placement of 10 million shares at $0.20 per unit with each unit consisting of one common share and a full warrant entitling the holder to acquire a share at a price of $0.30 for a period of five years. This translates into $2 million now and a capital raise of $5 million over the next five years. On this capital raising exercise the company’s CEO and President David Stein made the following comment “…provides Aberdeen with the ability to take advantage of depressed market conditions… to focus on more advanced, less risky projects in mining friendly jurisdictions…”

While all this seems straightforward enough, on Tuesday Meson Capital Partners, whose fund and affiliates own approximately a 9% stake in Aberdeen, objected in a letter sent to Aberdeen and the Toronto Stock Exchange challenging the “pending dilutive private placement”. In his letter Meson Capital President Ryan Morris noted that the units low price of $0.20 is roughly half the $0.398 net asset value per share Aberdeen determined it to be in July.

Limpopo project

Using the Black-Scholes methodology, Morris valued the warrants at $0.09 reflecting a 55% discount at which the shares were being offered. In addition he claims Meson Capital had proposed, the day after the private placement was announced, to buy the units at $0.20 with each unit consisting of a share and half a warrant.

And the clanger is the fact that there was not adequate disclosure as to who was behind African Thunder, which Meson notes appears to be a related party to the company, a fact not disclosed when the transaction was announced. A google search shows that five of the seven Aberdeen directors are also directors of African Thunder.

So it would appear that Platinum Australia and Smokey Hills are not yet out of the woods. Since Aberdeen is essentially the funder of the Great Lakes acquisition this may not get the go-ahead required. Clearly it is not only South African minority shareholders who are standing up and embracing their rights.