Ovoca Gold - Call to Return Cash to Shareholders

http://www.ovocagold.com/
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I first looked at Ovoca in September 2012 when the company's share price stood at 11.50p. Over half a year has passed, and the share price has been stagnant, currently standing at 11.88p. The company currently has a market capitalisation of £10.37m through having roughly 87m shares in issue. Over the past six months, I have developed serious doubts over the intentions of the company and the board with there seemingly being no clear plans in place for shareholders to assess. Assuming the financial state of the company is accurate, the shares are ludicrously undervalued, but the reality is that Ovoca are not helping themselves. External pressures need to be applied.

This article is a follow-on from the below post. For full context and information, read this article first:
http://www.theel1tetrader.com/2012/09/ovoca-gold-golden-opportunity.html

To cut to the chase, I have been less than impressed by the company since the first review. There has been little visible progress. Over the period the share price has seen levels below 10p/share and as high as over 15p/share. The price movement is shown below:


Due to the illiquid nature of the stock, technical analysis is not really useful on predicting future movement. However, the few news releases that have been issued are interesting (particularly the latest holdings RNS).

The first news statement following the review concerned the disposal of Ovoca's Olcha gold-silver deposit. The licence was effectively being sold to recently introduced FTSE100 giant Polymetal International (LSE:POLY). In return for the licence, Ovoca would gain 775,000 shares in Polymetal which stood at a total value of £8.4m on 10th December 2012. The issue here is that the company has not announced that it has sold these shares, and the value of them has decreased significantly since December from around 1090p to a current price of 757p equating to around a 31% drop. The likely result is a depreciation in the £8.4m towards around £5.85m. Furthermore, as shown below, Polymetal's technical position continues to look bearish so holding onto their shares may not be a particularly wise move.


One of the main issues I have with Ovoca is the very poor communication by the board to shareholders. The disposal was the only corporate update over the period, which once again questions the objectives of the board - they could be doing much more to help the share price appreciate. Finding details about forward plans of the company is very difficult and combined with the company being Russian, the perception of the company from an external point of view is not good at all. Admittedly it would be harsh to base such a judgement on just a six month period, but my initial review pointed to the same issue for the prior 12-month period at the time.

The subsequent holdings RNS is perhaps the next most interesting news statement for a considerable period of time. Activist shareholder group Damille Investments had acquired a 5.5% interest in Ovoca shares. Damille are well known for acquiring stakes in various underperforming companies before trying to shake up the board and implement changes for the benefit of shareholders. The investment company is planned to be wound up in March 2014 as outlined in the company's initial documents.

One recent example of this is 3Legs Resources (LSE:3LEG). Damille held a ~14% stake in 3LEG and called for the removal of two-thirds of the companies directors following similarly disappointing share price movement and a lack of progress. Since its listing 3Legs resources (an Eastern European Oil and Gas company) has seen its share price remain in the doldrums and little progress be made despite also having a fairly hefty cash balance. 3Legs is currently planning a cash preservation phase whilst also trying to unlock reserves at it's Polish assets. Quite accurately, 3Legs EGM notice included:

"Damille will focus on winding down operations of the Company and returning cash to shareholders, as it has done before in a number of similar situations."

Despite 3Legs disagreement with the Damille plans, it is about time that such activist groups do try and force through value realising moves on behalf of shareholders. 3Legs has failed to inspire any shareholder interest, and the lack of transparency means that the best outcome for shareholders probably is to see a return of cash before it is whittled away. I see a very similar situation for Ovoca and if Damille announces a similar scheme for the company I would urge shareholders to take the opportunity to support them. Whilst at first, Ovoca seemed a decent investment, the last six months have demonstrated the little attention that the company has given to shareholders. The following points are lifted (and updated) from the Interim report in 2012:

Courtesy of sermarr erGuiri on flickr
- Cash, cash equivalents and 'available for sale financial assets' at June 30th stood at $36.6m. Adding in the current value of the Polymetal shares minus around £3m in operating costs leaves an estimated ~£26m
- Pre-tax loss of 2.1m Euros
- Receivables-Payables surplus of around 600k Euros

Considering the lowly ~£10m market cap the reasons for returning cash to shareholders is clear for all to see. There is no reason why the company should need to retain that level of funds and an even better scenario would see Ovoca sell its remaining Russian licences and turn into an investment company bar a few million pounds for investments. A share buyback scheme for a company like Ovoca is a waste of money considering the few shares in issue - a special one-off dividend would be preferable to this.

In essence, Ovoca has (so far) failed to inspire a sustainable share price rise and coupled with non-existent operational updates (even with it being winter in Russia), it is likely that an external pressure in the form of Damille will be needed in order to realise any gains. Regardless, the company trades at a ridiculous discount to its cash/investments balance due to little shareholder interest and scepticism over the accounts of the company. I would certainly not be switching Ovoca back to a neutral rating at present considering this discount, but if Damille do propose a value realisation scheme then it would be appropriate (considering the history of the company) for shareholders to back it. If this is pursued by Damille then there are potentially large gains to be had here. Rather than just sitting on Ovoca's balance sheet, cash needs to be returned to shareholders.

UPDATE: 19/09/13 - I have moved Ovoca from Buy to No Rating at 10.75p for a 6.5% loss in light of Damille winding down its operations. I see no attraction in holding the stocks now as there is no clear impetus from management for how shareholder value can be created

4 comments:

  1. Very intersting that Damille are getting involved and maybe a good time to get a look in. HUGE cash balance is appetising.

    CraigJ

    ReplyDelete
  2. Agreed as getting fed up with BOD

    Get them out

    ReplyDelete
  3. Scanned the financial report and seems little evidence of tampering. Might get some next week as their cash balance far exceeds the market cap. Seems too good an oportunity to miss even if its a small speculative punt.

    John

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  4. great article. regarding cash, did u take into account their contingent liability of approx. 11mn euros?
    as of now (early sep 2013), I see net cash around gbp 12.5mn (by applying pro rata annual expenses of approx. 2.5mn euros).
    that's net cash per share of 14.1p
    Remy W

    ReplyDelete