Joel’s Resource Report – From zero to hero! #TRX #SXX #ARCM

Joel’s Resource Report – From zero to hero! #TRX #SXX #ARCM

Tissue Regenix (TRX) – cheapest biotech on AIM?!

Disclosure: I’m long TRX.

Calling Tissue Regenix a resource stock is a bit of a stretch. However, they do manufacture soft tissues for the human body, and this is a “resource” of sorts. Tissue Regenix is originally a spin out from Leeds University – here’s a look at their technology:

(Source: Tissue Regenix)

I saw Tissue Regenix present over five years ago at Proactive. At that time, the market cap was over £200 million and the company had no revenues. The potential market for their products was huge but at such a valuation the shares didn’t interest me.

Fast forward to six months ago, the shares had dropped massively to sub-£50 million and the company was generating revenues. I’ve been watching the shares since then and at around 4p, I contacted the company with some questions in late August. Note that Woodford held 20% of the shares.

The company’s answers didn’t convince me that now was the time to invest, so I kept watching. The shares kept dropping until earlier this week Tissue Regenix announced that they would fail a covenant test and were renegotiating their loan facilities. Not ideal! The shares initially dropped 20-30%. Later that day, I nearly fell off my chair when I saw the closing price was down 70%. The market cap was now sub-£10 million:

(Source: google)

At less than a £10 million market cap, even taking into consideration potential balance sheet and funding concerns into consideration, I viewed the shares as materially undervalued. Many unproven biotech stocks with no revenues trade at ten or twenty times this market cap.

The potential market for their products is massive. How many people will need replacement knees/hips in the future? Lots!

Yesterday Tissue Regenix announced amended terms on their loan facility. I view the announcement as positive, but the balance sheet still needs to be strengthened and funds will likely need to be raised.

Since I’m excited by the company’s potential, I think that large dilution should not prevent the share price from multiplying. I also suspect that institutions and individual investors will be queuing up to inject capital as the current depressed valuation. Worst-case scenario: I believe that in a fire sale, Tissue Regenix’s IP could potentially be sold for a great deal more than the current enterprise value.

There is no denying the fact that the shares are risky – it’ll be interesting to see where the company is in 6 – 12 months!

Sirius Minerals (SXX) – phoenix rises?

Sirius Minerals is attempting to develop a massive fertilizer project in Yorkshire, UK. About a year ago, I stated that the Sirius Minerals project was my least favourite potash play due to its complexity and cost  and because the output would be non-standard. Due to funding concerns, the market appears to have agreed with me:

(Source: Google)

I was therefore pleased to see that on Monday the company announced an update on its strategic review.

The reason I believe the update is good news is as follows (hint: red bad, green good):

(Source: Sirius Minerals)

The Good

  • Sirius have reduced capex and communicated a plan to defer raising all of the capital upfront. This gives them more time.
  • NPV and IRR numbers look reasonable.

The Bad

  • This plan is contingent upon Sirius raising circa $600 million. Sirius shareholders could see significant dilution given a market cap of nearly half that.

The Ugly

  • $4bn is a lot of capex! Sirius have already demonstrated an inability to finance their project even with a debt offering at a whopping 15% interest rate.

If I was a shareholder in Sirius, I would be relieved that the company has a strategy to minimise funding requirements. But I continue to believe that there are much better potash projects at attractive valuations which have a higher chance of successful funding – namely, Emmerson.

Arc Minerals (ARCM) – Strategically Astute

Diclosure: I’m long ARCM.

Arc Minerals an AIM listed exploration company with assets in the DRC, Zambia and Slovakia. This week, they made the exciting announcement their 3MOz gold resource in the DRC, Casa, was being sold.

Given that I valued the asset in the $10 – $20 million range, I was expecting a serious cash injection into Arc. Upon reading the RNS, I saw that the upfront payment was only $1.8m, with staged payments after that. This not what any shareholder hoped for.

Despite this disappointment, I believe the decision makes strategic sense for the following reasons:

  1. Casa has been for sale for 18 months and this is presumably the best offer Arc has had.
  2. It avoids fundraising/dilution at a depressed valuation.
  3. It saves the company about $0.5 million in carrying costs.
  4. Nick von Schirnding (Chairman) has indicated that potential major partners do not like any connection to DRC (see this video).
  5. The announcement immediately provoked two unsolicited offers –this could increase the transaction value or terms. I’d be happy to see some gazumping!

Till next week!

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