The announcement of a new strategy and CEO last month marked a fresh start for gold firm Stratex (LSE:STI) after a turbulent 2017. Despite seemingly strong financials and a recent game-changing partnership deal in Senegal, shares have so far failed to recover from last year’s messy boardroom battle and currently sit at just 0.6p. We spoke to new boss Tim Livesey about how Stratex’s news flow and plans are at odds with its depressed valuation.
New beginnings
Stratex’s problems last year began in May when it proposed buying Australian miner Crusader Resources. In September, a group of shareholders called a general meeting to terminate the acquisition. They also called for Stratex founders and former directors David Hall and Paul Foord to replace then-CEO Marcus Engelbrecht and chairman Peter Addison. Despite Stratex’s management and the Institutional Shareholder Service advising against the resolutions, investors ultimately voted to remove Engelbrecht and terminate the Crusader acquisition.
Dr Bob Foster, Stratex’s founder and CEO until mid-2016, was then rehired in a interim position until Livesey took over last month. Livesey, a geologist involved in the international mining industry for three decades, was warmly welcomed by Stratex investors. Upon the announced of his appointment in February, shares rose by 15pc. Livesey told us that despite last year’s turbulence Stratex’s core offering of quality exploration remains and will continue to do so during his tenure:
‘The requisition took the headlines last year and obviously had a knock on the share price while impacting some investors’ confidence, but the fundamentals are still excellent. We still have a good portfolio of licences out there. Stratex has built up a reputation for adding value to licences. Even if a licence is not something the firm wants to pursue it has been good at getting others to earn in on them, selling them on or joint venturing them. This is why I was so keen to come onboard.’
Partnering up
Although it will continue to look at advanced opportunities, Stratex has also partially reverted to its old strategy of focusing on earlier-stage exploration assets. Over the next year, it will continue to identify projects with confirmed mineralisation where it can quickly add value. It will also fast-track exploration and reduce financial exposure at its Dalafin licence in the Kédougou-Kenieba gold belt, Eastern Senegal. The business made a significant step towards this latter goal on the same day as Livesey’s appointment, announcing an option agreement on Dalafin with IAMGOLD, a key mining player in Senegal.
Stratex has already identified two primary gold prospects at Dalafin called Faré and Madina Bafé. However, it was previously unprepared to commit further funding without the support of a partner. Livesey said this is an example of Stratex maximising shareholder value:
‘As junior explorers advance further into a project the exploration costs increase. There comes the point where they must choose between going out to the market to do it themselves or getting a partner like IAMGOLD to do the work for them. Obviously, if you could guarantee that something would become mine in the future, you would want to keep it to yourself. However, the reality is that exploration is risky and you never know how successful you are going to be. Spreading the risk by partnering with a quality business can often be the best option.’
With IAMGOLD on board, funding Dalafin’s upside is no longer an issue. The firm has the right to acquire an initial 51pc interest in Dalafin by spending $4m over four years, potentially diluting Stratex’s holding to 41.7pc. After this, it can increase its stake by a further 19pc to 70pc by spending another $4m.
Handily, IAMGOLD already has operations in the vicinity. Its significant Boto gold project has a defined indicated and inferred resources of 2.52Moz grading 1.61 g/t Au and is just a few kilometres from Dalafin’s Madina Bafé prospect. As a result, the company will initially focus exploration work on Madina Bafé before potentially expanding to Faré. Livesey tells us IAMGOLD’s existing interest in the area around Dalafin means it has strong local knowledge and is keen to move forward aggressively:
‘IAMGOLD is one of the biggest, most well-respected players in West African gold mining. These guys are exactly who you want to be partnered with because they are a big producer. We know Dalafin will receive a good amount of focus from their technical teams who will move forward quickly. The fact that IAMGOLD already has a large resource nearby means the chances of success are high.’
Beyond Dalafin, Stratex has an extensive portfolio of early-stage exploration interests. It owns a 30pc stake in Thani Stratex Resources for its projects in Egypt and Djibouti and an 11.6pc holding in Tembo Gold for its project located next to Acacia Mining’s 20Moz Au Bulyanhulu mine. It also has a 7.8pc position in private Australian company Aforo Resources for projects in Burkina Faso. Finally, it owns stakes in several licences in Turkey including 14.9pc in copper-gold project Muratdere that is expected to default to a 1.2pc royalty position shortly.
Bigger picture
In terms of the broader picture, Livesey believes that where the tough gold market of recent years led the industry to suffer a drought of deal-making, the strengthening environment is now creating opportunities for small organisations. He would like to see Stratex secure several well-established development partnerships with major market players:
‘Majors recognise that they need to partner with juniors as IAMGOLD have at Dalafin. If we can secure development partnerships with two or three key players, then we can feed them projects and become the front-line to their pipeline of opportunities. If these majors are already working with a junior and trust them, then they will naturally go to them for future projects. It is about reputation; the big player cannot afford to take on projects that have a bad reputation because the smaller company before them has done something wrong. I have been through this value chain from one end to the other, so I know the sort of things that can go wrong and what the majors are looking.
In anticipation of this, Stratex has announced it will propose a capital reorganisation at its Annual General Meeting later this month. Assuming shareholders vote in favour of this, the company will be left well positioned to pounce should it find an attractive project. Livesey went on to say:
‘We do not want to raise a war chest for the sake of it. We are good custodians of our investors’ money and need to be able to tell them convincingly where we will spend their cash. We must all believe in a project before we can promote it; Stratex is not an old-style pump-and-dump play. If we believe there is a good opportunity for success, then we are happy to commit, but we don’t want to get forced into doing something because we are scrambling for funding.’
With plenty of cash in the bank, Stratex is in no rush, meaning it has the time to be selective to ensure it finds the right deal in any future possible acquisition.
Valuation
It is early days for Stratex’s turnaround. The firm does not have a regular income stream, and a significant amount of its focus currently lies in rebuilding shareholder and market confidence after last year’s turbulence. Even with that in mind, the business looks good value with a current market cap of just £2.9m.
Stratex’s latest balance sheet, released last month, shows an enterprise value of just over £2m. Essentially, this means the market is ascribing a present value of just c.£900,000 to its business. The figure seems out of kilter with the company’s situation, when IAMGOLD has already committed to potentially spending $8m on exploring Dalafin while allowing Stratex to hold on to a decent interest. And that doesn’t even factor in the rest of the firm’s investments, which includes Turkish assets with future production royalties. Add to this the fact that Stratex is set to expand even further, and you’ve got an organisation operating with ambitions well beyond the value attributed to it. What’s more, Stratex had no debt as of the end of 2017.
Quite clearly, this discount is related to last year’s boardroom turbulence and shareholder revolt. Despite a raft of news flow indicating progress, Stratex’s share price has so far failed to recover ground lost, with shares sitting at just 0.6p. As Livesey puts it:
‘I think Stratex is greatly undervalued, particularly when you think that if some companies had a deal like the one we have with IAMGOLD, then that would be all they would need to get completely re-rated in the stock market. The low valuation can be put down to a lingering hangover from last year and is not justified. We tried to do something the shareholders didn’t like, we took that on board, we didn’t do the deal, and we have realigned back to where most shareholders wanted us to be. We are now focusing on delivering what shareholders want and need to develop some new projects, partnerships, and acquisitions. The next 12 months are going to be very, very active.’
Warming up
Stratex has some way to go, but it has taken numerous steps in the right direction over the last two months. If it continues in this vein, the shares could look attractively priced. The bottom line is that the firm has suffered because of lingering concerns following the recent upheaval; now this has been resolved attention should switch back to its fundamental value. As just 0.6p a share, now looks like as good a time as any to get in before the market starts to warm back up to the firm’s strong prospects.
Author: Daniel Flynn
Disclosure: The author does not hold positions in any of the stocks mentioned above
