A month ago Pembridge Resources (LSE:PERE) confirmed it had raised £2.27million (gross) at 1.6p and was being re-admitted to the Standard List. Since then the company’s shares have drifted lower and can now be bought at 1.4p on the offer. This price could prove to be a steal, given Pembridge’s focus on base and precious metals and the lengths the company has gone to, to align the interests of the board with shareholders. The only problem, surprisingly enough, is that Pembridge has kept pretty quiet about this!
Pembridge’s disappointing price movement since re-admission is a common occurrence among newly funded investment companies. Sceptical investors need time to weigh up whether or not they are looking at just another run of the mill director fee-paying scheme. For the most part these small-cap companies are shares to avoid. Whatever returns are generated usually get swallowed up in Plc overheads. There are notable exceptions to this generalisation, but for the most part it can be very difficult to identify those with genuine multi-bag potential.
Pembridge could well prove to be exactly one of those.
From a shareholder perspective Pembridge is launching into extremely favourable market conditions. The nascent bull market in base and precious metals is gaining both strength and momentum. The turn began in early 2016, but it’s only been in the last 4 or 5 months that we’ve really started to see some of the junior plays begin to motor. The recent dip should hopefully prove to be a healthy pullback and if it is it won’t be long before we are back off to the races.
The question for investors is whether or not Pembridge is a play worth taking a gamble on?
There is one potentially very strong indicator that suggests it might be. Buried deep on page 79 of July’s Prospectus we find out CEO David Linsley, and the directors “will receive no salary from Admission until such time as the Company completes an acquisition which constitutes a reverse takeover”.
That’s right; Linsley will take no salary until the company secures a deal.
I’ve got to be honest and admit I was wary about this claim. My experience of public markets is how rare it is for directors to put their money where their mouths are and genuinely align their interests with shareholders’. The overwhelming majority of directors are only interested in their fees, so to find a CEO who claims he will not be paid until he secures a deal is a rare occurrence.
So I put the question directly to Linsley. He replied “executive management is not taking salary until we complete a deal. We are not accruing salary or any other sort of benefit. We will only start getting paid once we have delivered on our plan. We are grateful to those who have backed the company and felt it important to reciprocate. The best way to do this was to align our interests with theirs and what better way to do this than to tie our compensation to share price performance?”
Of course, there is always a chance Linsley could stuff any old crap into Pembridge just so that he starts getting paid, so I prodded him a little further.
“What would be the point of putting a poor deal into the company? I realise that investors can be impatient however a good transaction takes time. We are now well funded at a time when funding conditions for junior base and precious metals companies remain tight. We have a team that can deliver plenty of additional value to a project simply by being involved. We are also operating in an environment that rewards success. We’re ambitious and our goal is to build a diversified portfolio of investments that delivers substantial returns. Remember, the Pembridge team also has options that vest ranging between 2p and 8p We have plenty of incentive to drive this business forward, so sitting back is simply out of the question.”
Having been well and truly put back in my place, I swiftly moved the conversation along to talk a bit more about the business:
“The optimal time to have launched Pembridge would have been earlier in the year. At that point we were looking at lots of excellent opportunities, which were really struggling to raise money. The continued strength in base and precious metals this year has alleviated this situation somewhat and has bolstered expectation levels among some operators. Interestingly the recent moves have meant that funding seems to be getting easier as investors are catching on to the opportunity.
However, as positive as the climate is for investing in metal companies, we will not overpay for an asset. The outlook is improving, but we expect bumps along the way. It is extremely important that we pick the right asset as our first deal, which is both appropriately priced and meets our primary goal of being cash flow generative in the near term.
We are currently assessing deals in North America, Africa, South America and Europe and have been able to accelerate our due diligence since securing funds in mid-August.”
I asked if this means investors can expect a deal in the near future. Linsley was definitive in his response:
“No one is more incentivised to complete a deal for Pembridge than I am. This is my sole focus and I have a lot riding on it. I am not in this business to work for free, but the first deal we put into the company has to be the right deal. We really like what we are seeing out there at the moment and we are keen on a number of opportunities. Even so, it would be a huge mistake to rush into something just to satisfy market sentiment and therefore end up with poor terms. As soon as we are able to update shareholders we will, but rest assured we are working hard and our interests are all directly aligned.”
It will probably take more than words to convince a sceptical market that Pembridge can deliver on its plan, but there are signs this company could be one to back. By confirming categorically he is not being paid until he secures a deal, Linsley has laid down one hell of a marker. The tricky part will now be securing a deal that positions Pembridge to take advantage of bullish conditions in the commodity space. There is likely going to be big money to be made here over the coming years and if Linsley gets it right not only will he receive a big pay day but so too will those who backed him.
Disclosure
The author of this piece owns shares in Pembridge Resources.