The chip and the seagulls

I have had a glance at VKA from time to time over the last 9 months, the lithium / tungsten deal caught my attention, which looked like a reasonable deal for shareholders as the lithium asset seemed to have legs and the deal brought with it exposure to a tungsten asset with good grades – there are not many of those out there.

VKA was looking good also, the purchasers of the gold asset were dragging their feet and the company was sitting on 800koz in a turning market. A purchaser default meant the company was in a position to take back an asset which had a min. value of about $16m, i.e. $20/oz, which is close to the bottom of the valuation range for gold assets with JORCed ounces in the ground. This was stated in VKA’s presentations and one would gather that VKA was then considering this option.

But then it blew up, their spines disappeared, they choked, they dropped the ball. It looks like the company bent over backwards to keep the gold sale live, they let the tungsten asset go, and then they let the lithium go. Now they have say $4.5m cash ($2m at 30 June and US$2.0 or A$2.5m recently), which is say 1.4c/share, and another $3.75 to come, or say 1.2c/share. That's a maximum $7.75m at December 31, 2017, assuming the purchaser pays on time. Less $0.5m in expenses – lets give VKA the benefit of the doubt that they can control expenses and don’t blow the dough on a crappy asset - which leaves max $7.25m or ~2.5c/share.

So, we are trading at 2c/share, 0.6c/share over current cash, with a maximum of 0.5c/share upside if and when the next 1.2c/share of cash comes in. We have one coal asset which looks like it has been lost to some rezoning issue (see every recent quarterly) and another which is in the middle of no-where (see same recent quarterlies). We have a board which has blown a heap of shareholder value - Jack Gardner and Peter McMickan were there when the company was valued at 30c/share in 2011 and have really done nothing since, Ray Whitten was associated with the Auminco acquisition which saw shareholders diluted by about half for what was, in hindsight, a portfolio of virtually nothing. On behalf of the then shareholders, thanks Jack and Peter, glad to have you aboard Ray.

Now this group called GTT wants a seat at the table, they want to kick Jack and Peter out and the remaining director, Ray, gets to stay. So it would seem that the VKA love triangle is fractured, the question is ... has Ray done a deal with GTT and what will GTT bring to VKA. GTT just floated MQR with a seed ‘brine’ asset in the Clayton Valley, a great address but the asset is the brine version of moose pasture with a bit of nearology thrown in, looking at the nice pictures in MQR’s prospectus it looks like a long shot off to the side of where the real action is and any work will likely see MQR’s cash disappear rather quickly with little hope of a return – maybe I’ll eat those words so good luck to them and hope it works out. As things are going so well associates of GTT have just issued an underwritten prospectus for the issue of 8m 0.20c options, or 1/3 the current MQR shares on issue, for 1c, so we can see where this is going, control by stealth as like usual most of the shareholders won’t understand or respond – a classic way to dilute shareholders ‘unintentionally’ for not much if the share price gets moving. For the $80k raised shareholders are paying +25% in costs, which begs the question, what’s the value to the shareholders and why were the options not included with the shares at IPO – very interesting!!!

But I digress, back to the chip and the seagulls. We are all sitting here wondering what is going to happen. We have on one hand the love triangle which has collapsed amid many years of value destruction. We have on the other hand a bunch of ‘sharp’ young guys who are licking their lips over the cash. In getting rid of Jack and Peter then GTT only have the deal with the lawyer, who probably has no idea about resources given the Auminco deal, so they can then put any crap into VKA they want - but maybe I'm being too harsh as GTT at least will bring more dynamism to the table than what we have seen recently, but at whose cost. Jack has just topped up, so with his 29m odd shares he and GTT, with its 38m shares, are virtually neck and neck assuming Jack has some friends. So it looks like Jack needs to find enough additional support to offset Ray’s holding, or he needs to get Ray on side.

Can this happen? Is the love triangle truly smashed? Who knows - does it matter – probably not.

The upside is now limited and the seagulls are squabbling over the chip. For whomever wins finding a home for the cash is risky, the easiest assets are the ones with good data, but these rarely get let go for nothing, unless you are VKA and you let your gold asset go for half price. Counter-intuitively, the most expensive assets are generally the cheapest ones with no data, i.e. MQR's shiny new brine asset - watch that cash disappear if MQR decides to drill test it!!

So, it looks as though the VKA chip is fully valued once you account for time, and probably overvalued once you account for risk (aka ‘track record’ and the unknown asset risk) – regardless of who controls the board.

It looks like the lawyer who brought the coal to the table holds the aces, who will woo him and what will they woo him with – a riddle that’s not too interesting but I guess he has a few new friends at the moment.

As for this seagull – it’s off to find a better looking chip, one which is warmer and crispier, is surrounded by other good looking chips which have more potential - there’s a few of them out there.