Purchase (Liquidation): Khan Resources (KRI)
Likely return on this is very small but thought it was worth taking a position...
I was reading this article on Bloomberg on Mongolia and it mentioned the mining license dispute with Khan Resources (CSE: KRI) that was finally settled by the Mongolian government. Now that the company has received the settlement, it will be liquidating itself and distributing its holdings to shareholders. I was evaluating it and following it for about a month before taking the plunge now.
Based on some liquidation value calculations I did a while back--basically discounting assets and applying estimates of liabilities for liquidation--I arrived at a liquidation value of C$0.93 (calculation at bottom but final payment likely much lower). However, the company finally issued a press release on Sept 13 2016, estimating final liquidation value between $0.86 and $0.93. Shareholder vote will be held on Nov 10 2016 (record date Oct 4 2016). They will pay out $0.85 right away after the vote so the risk of capital being tied up is zero.
If you buy at $0.86, you are looking at around 0% to 8.14% return (excluding transaction costs and taxes). If you think you will receive around the midpoint of management's estimate, you are looking at around 3.49% return. (It's not easy to buy at $0.86 but it can be done; If you buy at $0.87, you will earn about 1% less with a potential for a loss of -1.15%.
Purchase Price: $0.86
Discounted Book Value (from Q3 2016, filed Aug 19 2016) [note: excl future Netherlands transaction])
(all in thousands)
Cash $87,164.00
Investments (@50%) $161.00
[listed Plateau Uranium, penny stock with low volume but likely can be sold over a period]
DEDUCT: Total Liabilities -$950.00
DEDUCT: cash from sale of Bermuda -$2,361.44
[Aug 17 2016 Bermuda sale transaction sold for less than cash. Management acknowledges it. -- subsequent event after June period, Aug31: USD/CAD rate of 1.3050; was 1.2942 in last financial statements]
DEDUCT: Future corporate expenses until wind-down (estimate) -$1,500.00
[wild guess]
ADD: Inflow from employee options exercised $1,070.50
[refer to note 9 in Q3 financials for detailed option breakdown and average exercise price]
Net assets discounted $83,584.06
Shares Outstanding (Aug 24 2016 according to Khan website)
87,816,482
90,166,482 [fully diluted (incl assumption options exercised)]
Estimated liquidation value $0.93 [note: this was before company released its estimates; I expect final payment to be less than this]
Side note 1: Cancelling mining permits, often under dubious reasons of not meeting environmental or some related conditions, is one way foreign countries seize assets from investors (usually after a lot of hard discovery work has been done and a resource like gold or oil has been discovered and proven). Some may recall how the Russian government strong-armed BP, one of the largest oil & gas companies in the world, over environmental permit issues. Well, it's even worse for smaller companies. Mongolia basically took away the rights of Khan Resources and basically bankrupted the company (although there was a settlement in the end--too late for prior shareholders though). They also had a very serious dispute with Ivanhoe Mines (Turquoise Hill Resources) and Rio Tinto over the massive gold/copper deposit Oyu Tolgoi.
Side note 2: I never even knew there was a new exchange in Canada but KRI trades on the upstart Canadian Securities Exchange.
I was reading this article on Bloomberg on Mongolia and it mentioned the mining license dispute with Khan Resources (CSE: KRI) that was finally settled by the Mongolian government. Now that the company has received the settlement, it will be liquidating itself and distributing its holdings to shareholders. I was evaluating it and following it for about a month before taking the plunge now.
Based on some liquidation value calculations I did a while back--basically discounting assets and applying estimates of liabilities for liquidation--I arrived at a liquidation value of C$0.93 (calculation at bottom but final payment likely much lower). However, the company finally issued a press release on Sept 13 2016, estimating final liquidation value between $0.86 and $0.93. Shareholder vote will be held on Nov 10 2016 (record date Oct 4 2016). They will pay out $0.85 right away after the vote so the risk of capital being tied up is zero.
If you buy at $0.86, you are looking at around 0% to 8.14% return (excluding transaction costs and taxes). If you think you will receive around the midpoint of management's estimate, you are looking at around 3.49% return. (It's not easy to buy at $0.86 but it can be done; If you buy at $0.87, you will earn about 1% less with a potential for a loss of -1.15%.
Purchase Price: $0.86
Discounted Book Value (from Q3 2016, filed Aug 19 2016) [note: excl future Netherlands transaction])
(all in thousands)
Cash $87,164.00
Investments (@50%) $161.00
[listed Plateau Uranium, penny stock with low volume but likely can be sold over a period]
DEDUCT: Total Liabilities -$950.00
DEDUCT: cash from sale of Bermuda -$2,361.44
[Aug 17 2016 Bermuda sale transaction sold for less than cash. Management acknowledges it. -- subsequent event after June period, Aug31: USD/CAD rate of 1.3050; was 1.2942 in last financial statements]
DEDUCT: Future corporate expenses until wind-down (estimate) -$1,500.00
[wild guess]
ADD: Inflow from employee options exercised $1,070.50
[refer to note 9 in Q3 financials for detailed option breakdown and average exercise price]
Net assets discounted $83,584.06
Shares Outstanding (Aug 24 2016 according to Khan website)
87,816,482
90,166,482 [fully diluted (incl assumption options exercised)]
Estimated liquidation value $0.93 [note: this was before company released its estimates; I expect final payment to be less than this]
Side note 1: Cancelling mining permits, often under dubious reasons of not meeting environmental or some related conditions, is one way foreign countries seize assets from investors (usually after a lot of hard discovery work has been done and a resource like gold or oil has been discovered and proven). Some may recall how the Russian government strong-armed BP, one of the largest oil & gas companies in the world, over environmental permit issues. Well, it's even worse for smaller companies. Mongolia basically took away the rights of Khan Resources and basically bankrupted the company (although there was a settlement in the end--too late for prior shareholders though). They also had a very serious dispute with Ivanhoe Mines (Turquoise Hill Resources) and Rio Tinto over the massive gold/copper deposit Oyu Tolgoi.
Side note 2: I never even knew there was a new exchange in Canada but KRI trades on the upstart Canadian Securities Exchange.
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