Polo Resources – Micro Cap At 75% Discount To NAV

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By Deep Value Investing

I have decided to add a little to Polo Resources.  The underlying holdings seem to be moving up in value – and the discount to NAV is now 75%.  I bought at c4.3 earlier in the week.  Only a small position – 2% portfolio weight added, 3% in total.

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This has been a disastrous investment – down 58% from my entry in September 2014.  Made worse by the fact the portfolio as a whole has more than doubled since then.  Luckily I always viewed it as a bit of a punt so the weight was small and I didn’t add.

So what went wrong ? Natural resources bust at the end of 2015 didn’t help, neither did ongoing fees paid.  My original thesis that Signet’s gas would be worth a lot has not panned out, the assets are now known as Regalis petroleum and there has been no progress.  They have been written down but there is always the possibility they could come back.  Unfortunately Polo don’t break down unlisted holdings in any great detail so I don’t know exactly what is in the NAV / how it is valued.  Total privately held assets are valued at $10.54m in June.

What I am much more interested in is the listed component.  This now consists of:

  • 9.22% Hibiscus Petroleum – worth about $39m at the current market price.
  • 19.8% GCM Resources worth about $6m – maybe, not sure about future of coal mining – even in Bangladesh…
  • 25% Celamin Resources worth probably a couple of million.  Could be worth much more but its all very uncertain.

Polo has a market cap of $14.8m so the value is clear.

Catalysts are simply that hibiscus has risen so far the Polo price doesn’t make sense.  Key thing to assess is whether the valuation of Hibiscus makes sense.  Apparently co has NAV of 0.51 vs a share price of 1.05.  This doesnt seem too overvalued given other more prospective assets not in the NAV.

Interesting presentation is here.

They are only getting $51.54 for their oil so given a spot price of $70 scope for uplift.  Unfortunately their 2017 annual report contains this gem:

As part of the acquisition of a 50% interest in the Anasuria Cluster, a contingent consideration is payable to Shell UK, Shell EP and Esso UK
from 2018 to 2021, if and only when in a calendar year, the annual average oil price (USD Y) exceeds USD75 per bbl, in which case, Shell UK,
Shell EP and Esso UK will be paid USD0.15 x (Y-USD75) per bbl of the production from the Anasuria Cluster. The contingent consideration is
limited by the production volume and the average oil price for the relevant calendar year.

So I won’t fully get the benefit of any substantial rise in the oil price.  There is also a nasty decommissioning liability.

Opex per BOE – $13-23.  I wish I knew total cost but seems profitable.  They say operating in UK and Malaysia allows them to split costs.

They don’t seem to be sold forward / hedged against falls in the oil price – something I really dont like.  I would rather give up upside to manage risk better.

One of the weaknesses with my thesis is my lack of ability to analyse an oil company well.  Then again in general they are so driven by the oil price I seriously doubt anyone’s ability to analyse them well.  Still, remember, at the current Polo price we are buying at 38% of the value – so we have a good margin of safety, this excludes the value of all the other assets.

The volume in Malaysia is pretty good – so we can be reasonably confident that the price hasn’t been manipulated upwards….

Polo does lack catalysts – management say they are going to continue to invest in asia pac assets.  I would hope given the now large discount to NAV and also the fact that there are fewer opportunities than there used to be in this space people will come in to close the gap.

The shareholder base is reasonably diffuse – management only hold 12.5%.  Management fees a reasonable $0.6m with options at 25p – highly unlikely to be exercised.

I won’t look for all the discount to close on this one as I don’t think it will.  Difficulty in valuing junior miners / constant demands for cash mean that this is not the ideal structure.  Target price is probably around 8.5-10p – so almost double the current share price.

As ever comments are appreciated as is guidance on how to  making my analysis more rigorous / robust.

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