Polo Resources Merge with Caledon Coal, Good Deal?

Polo Resources

coal and uranium investment vehicle

- Polo’s NAV, using Polo’s cash and liquid holdings excluding Caledon, their NAV at current stands at approximately £154m which gives a share price of approx 6.6p

risk involved in their GCM holding which makes up near £36m of their NAV.

- Polo currently has approximately £18m in cash which equates to 0.8p for every Polo share

- planned merger with Australian focused coal producer Caledon Resources. offered 11.4 Polo shares per Caledon share puts the takeover value for Caledon at a price of 61p/£128m.

- Polo in the process of selling their Extract stake, even only got the current worth of their Extract holding of £100m (which is unlikely as with the rights issue price last year having been at $7.75 – 50c above the current share price - it is very unlikely that Dattel’s would sell for below this), this would equate to adding another 4.35p to Polo’s cash worth giving them a total cash worth of 5.15p or 58.71p.


Main issues that Polo has had over the last year or so that has led to continued large discount to NAV is that investors felt there was a lot of uncertainty. For example, the questions that remain were who exactly are Polo, are they an investment company?
What is Dattel’s plans for the company?
What are they going to do with the Extract stake?
Are they still interested in purchasing GCM?
What are the director’s plans for finally bringing value to shareholders via the share price? What are Dattel’s plans for Caledon?
When will Polo start earning some actual cash flow?

And trust me when I say it, there are many more questions that investors asked.

Good for shareholders is now some of these questions are being answered,
first there was news that Polo plan to sell their Extract stake,
plans to list on the TSX, both moves that appeared to be aimed at trying to close the gap between the share price and NAV.
Real motive behind these moves has come to light, and that is the planned merger with Caledon (which answers the question of plans for Caledon).

how the purchase of Caledon is good for Polo’s shareholders?
Well it is simple, it answers the remaining main questions I mentioned above that was holding Polo back, and that is what are Dattel’s plans for the company?
When will they start earning some cash flow?
And how will the management bring value to shareholders?

This move answers all these questions, though has it been done at a good price?

To answer this we need to look at how this move will affect Polo,
to start how much will it cost Polo?

the rate is 2.4bn new polo shares, though as Polo already own 26.1% of Caledon it is actually 1.8bn shares. Thus as Polo already has 2.3bn shares in circulation it means that they valuing the Caledon purchase at 75% of their worth.

Depend on peoples opinion of the coal price, also the management team be able to fully utilise Caledon’s coal assets, which it has to be said have exceptional potential, the current management have not been able to realise this potential.

Caledon’s main assets – 1) Cook mine

measured resource of 86.1mt’s with a total prospective resource total of 406mt.

troubled history since it came into production with the mine continually missing production forecasts, and due to the low coal price, is loss making.

2010 production target of 700,000 tonnes coal, if the plans are a success and the coal price holds steady (or even risers further) then the mine should be profitable again.

2) Minyango is Caledon’s potential coal deposit 倉庫 and has a measured resource of 51.6mt with a total prospective resource of 341.6mt.

potential to be a company maker as current estimates show that the deposit not only has the potential to yield 4.5mtpa, potential to be of an exceptional coal make up and quality, and thus to be a low cost mine, to quote from their website:

‘Coal quality analysis indicates a potential product mix ranging from a low sulphur coking and thermal split to 100% semi-soft coking coal or an unwashed coking coal.’

deposit has the potential to produce excellent quality coal for energy production.

Some notes for investors about the deal

Caledon has £18m in loan note payments coming up this year and Polo has agreed to lend Caledon the money to pay for these. What this means it that when the deal goes through the new company will have near zero loan notes (thus near no debt), but will also have £18m less cash.
As Polo is listed in the UK on Aim, Canada on the TSX and Germany on the Frankfurt exchange, and Caledon is listed in the UK on Aim and Australia on the ASX, it means that combined the new company will be listed on four exchanges.
Though this deal does not really change much about who Caledon are, it makes a big change to Polo, who will no longer predominantly be an investment vehicle, thus the risks to investing in Polo will change substantially.
Annoyingly for Polo investors this deal leads to more questions, for example what are their plans for the GCM stake and the Peabody JV? Also why did they list on the TSX? being listed on a total of four exchanges will not be cheap, so surely it has more of a purpose than just to try to boost Polo’s share price short term?
Enormous amount of shares in circulation for a company of Polo’s size, thus if they do not conduct a share consolidation it could quite easily hold back the new groups share price.

Conclusion

Of course some could argue that Caledon are getting the better deal, as they are basically getting a potential £120m rights issue (more than their value) at a premium to the current share price (which is something that I suspect many can attest very rarely happens), as well as a stake in GCM and even the Peabody JV, and their company substantially de-risked via securing its financial security, all for what has to be said a very good price. But then again some could argue that it is Polo getting the better deal as they could argue that Caledon do not need that much money right now, and in the future if the coal price continues to rise and everything went to plan, then their share price would be higher thus if they did need money in the future it would mean less dilution.

But truth be told both arguments fall a little flat when the benefits to both sets of shareholders of the deal are taken into account. Thus in conclusion this takeover does seem a good fit, as Polo has the money and the excellent management team, whilst Caledon has the assets that need the money for their value to be unlocked. Thus it seems that this takeover truly does have the potential to be of benefit to both Polo and Caledon shareholders if it goes through and for this reason Polo still warrant a place in the value section of ‘Grays Stocks to Watch’. Just a note, if the takeover/merger does go through (there is no guarantee of this yet), the chances are Polo will be removed from the value section of ‘Grays Stocks to Watch’ and placed in the growth or company changing news section as they will emerge a completely different company after the merger.