Explorer Spin-Off Is A Win-Win

Fund manager Adrian Day looks at the two-part transaction that he believes will create two strong, focused companies.

Almadex Minerals Ltd. (V:AMZ, 1.51) announced earlier in the week a 19.9% investment in the company by major Australian miner Newcrest Mining Ltd. (AX:NCM) along with a plant to spin off everything in the company except the El Cobre project. (Newcrest's $19 million investment would also remain in the company.) The investment was done at a premium to the market. It will be recalled that Almadex itself was the result of a spin- off from Almaden Minerals.

Big budget for big property

El Cobre contains several porphyry occurrences and these are known to require lots of drilling. After discovering the first deposit, Almadex has drilled aggressively, both within the initial zone and outside, consistently returning strong results. But after a couple of equity raises, it was clear that Almadex needed a company with deeper pockets to continue the drilling. Rather than optioning-out the project, Almadex chose to have an investor in the company. It believes that the $19 million investment will be sufficient to explore the entire property over two to three years and bring the project to a resource stage. Newcrest has rights to maintain its 19.9% interest in any further raises but has no rights over the project itself.

The transaction is clearly a win for El Cobre.

New exploration company with cash

The spin-off will retain the following:

• several royalties, including on Almaden’s Ixtaca project, as well as a newly created 1.75% royalty on El Cobre
• all of the company’s exploration projects
• cash and bullion (about C$4.5 million) as well as the portfolio of investments in junior companies, plus up to four million shares in Almadex.

By spinning off the projects (and the cash), the company can now make sure these other exploration projects get the attention they deserve. Inside the same company, given the choice of drilling x, y, or z property or drilling more on El Cobre, the choice was easy. Now each segment will have its own CEO and its own funds. A new CEO will be appointed for Almadex. Almaden will also hire an experienced mine-builder to take Ixtaca forward. Now the father-and-son Poliquins can give attention to the rest of the property portfolio, doing what they do best.

So the transaction is clearly a win for the other exploration projects.

The company estimates it will take about three to four months to close the transactions; the spin-out requires shareholder approval. It is possible that the spin-off company will retain the name Almadex ("ex" for exploration), while the company holding El Cobre will have a different name. For now, though, we will refer to Almadex and the spin-off.

Both companies will be cashed-up for activities

It is also likely that the company will undertake a small equity raise to increase the cash in the exploration spin out, to ensure more-than-sufficient cash for its exploration activities. This cash will effectively go to the exploration spin-off, while the raise by Newcrest will effectively be post-spin off and be retained for El Cobre.

Given that this transaction is a win-win, enabling both the advanced El Cobre and the earlier stage exploration projects to receive proper attention, and allow the Poliquins to focus their energies on exploration, which is their skill-set, we think the combined shares will trade much higher over the next year or two. The shares have rallied since the announcement on Monday, from C$1.34; as the shares settle back, as they probably will, Almadex is a buy.

Disclosure: 1) Adrian Day: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: None. I personally am, or members of my immediate household or family are, paid by the following companies mentioned in this article: None. My company has a financial relationship with the following companies mentioned in this article: None. Funds controlled by Adrian Day Asset Management hold shares of the following companies mentioned in this article: Almadex. I determined which companies would be included in this article based on my research and understanding of the sector.