Aminex - A Precarious Situation

http://aminex-plc.com/


What should have been an African success story, has somewhat turned into into a very precarious situation. Those who have followed the site will know that Aminex was the pick for 2013 - in fact, the share has been the worst performer by a country mile, falling from the 4.22p review price to the 1.92p sell price which amounts to a 54.5% price fall. After much consideration, I decided it was time to bite the bullet and cut the loss - the current position of the company is certainly precarious. The loss represents a strong disappointment for me. The company has decent assets (around 125bcf net recoverable) and is in the right region at the right time, but financing issues, and poor management have meant that the opportunities they had have been reduced. A lack of progress over the Tanzania farm-out and US asset sale, combined with a deteriorating financial position have been the drivers of what has been a very volatile and disappointing share price performance. The shares currently stand at 1.85p. With ~819m shares in issue, the company is capitalised at a greatly reduced £15.15m.

This article is a follow-on from the below post. For full context and information, read this article first:
http://www.theel1tetrader.com/2013/03/aminex-2013-share-pick-update.html

 

Aminex's medium-term movements are largely driven by news flow. However, it is the case that the short-term movements are sentiment driven and thus technically driven. The chart above shows the extreme volatility of Aminex's shares during 2013. They reached up to 5.8p early in the year when the farm-out was 'apparently' extended due to the high-level of interest shown. The fact that the share price now stands at an all-time low is evidence of the delays and disappointments that have plagued the company this year. The problem is that the 'positive signs' the company reported earlier in the Summer have not materialised. Therefore, almost all the shareholders who have purchased shares in the company are staring at a loss and that is a problem in that it will cap any sharp upward moves. That is because many underwater investors will look to realise a smaller loss/profit on any upward move. The technical indicators indicate that the drop may not be over just yet, with the MACD having turned negative, and the RSI trending downwards. The market is certainly not convinced that good news is around the corner and that is reflected in the share price weakness.

The real story though, is in the fundamentals. I remain of the opinion that the assets Aminex has in Tanzania are of real quality, in terms of discovered resource, flow rates, and upside potential. That said, for the funding scenario to be successful, I noted that the US asset sale and farm-out would have to live up to expectations. They have fallen well short. However, it's worth running through the news during 2013 to date and identifying where the positive and negative news (with mixed as green) lies:

- January 2013 - Short-term Financing Agreement Arranged
Aminex signed an $8m loan facility with Argo Capital for short-term working capital and to help repay some liabilities. This is significantly lower than the $15m loan initially touted and considering the loan carried a 12.5% initial interest coupon it's not difficult to see that Argo were reluctant to give the full $15m. The fact that the company apparently has a 'long standing relationship' with Argo is laughable and with the interest coupon rising to 15% within 6 months. Argo was also granted 32m warrants at 5p which seems excessive - you would imagine the interest repayment would be enough! In retrospect it's a very poor deal. The loan is repayable by end of H1 2014, although under the original agreement terms Aminex would have to raise equity by the end of 2013 if the loan is not repaid by that date.

- January 2013 - Stuard Detmer steps down from the board (more likely, forced out)
At the end of January, CEO Detmer left Aminex less than a year and a half after joining. Through subsequent comments by the board, it sounds like he was forced out due to underperformance.

January 2013 - Ruvuma Farm-out extended through to March
"This extension is being made at the request of several interested parties which have already visited the data room." "We are very pleased with the strong interest shown in our Ruvuma PSA"

- March 2013 - Farm-out discussions continue, update to be made in due course

- March 2013 - Preliminary Results for the Year
These showed an increase loss driven by exploration activities, but it also showed a deteriorating US asset performance

- May 2013 - Q1 Interim Management Statement
Bombshell dropped. 'Satisfactory bids' were not received in respect of the farm-out. "Despite interest from a wide range of companies, it has become apparent that the market for relatively early stage farm-outs in frontier areas is less developed than anticipated, even allowing for encouraging discoveries in the same basin and the slowly improving economic climate". Ruvuma PSA close to be re-negotiated with the Tanzanian government to allow for a changing work programme

- May 2013 - Ruvuma PSA Changes Approved

- July 2013 - Ruvuma Appraisal Licence Granted

August 2013 - Aminex sells South Weslaco US Asset
The deal waas for a total of $450,000 in both cash and shares. The deal value itself is not that bad, but the fact it includes shares in Northcote Energy, which carry a lock-in period is not good news. Furthermore, the shares in Northcote were issued at 1.5p/share. Northcote is currently trading at 1.06p/share although ultimately it's the value of the shares at the end that matters.

- August 2013 - Senior Appointments and Corporate Acquisition (and Half Year Report)
As part of a corporate acquisition, Jay Bhattacherjee and Philip Thompson joined Aminex at the senior management level taking the positions of CEO and COO. The deal is interesting in that the acquisition was of private company Canyon Oil and Gas, and that the deal was done in shares. The appointment of the CEO and COO is dependent upon the completion of the acquisition, where they formerly worked. There is a very valid question in that, Why would they risk the value of their company if it was going to collapse? However, former CEO Brian Hall had a position on Canyon's board beforehand. The deal is a vote of confidence in Aminex, but Canyon comes along with some baggage in the form of Moldovan assets - hence there is a slight loss of the Pan-African focus. The deal also requires 80m new shares to be issued, which upon completion will be dilutive and will prop up the market cap by around a tenth (assuming no price fall). Philip has some good credentials to his name having run San Leon Energy  (LSE:SLE) during their period of prosperity. On the other hand, the HY results were poor. The Canyon acquisition deadline has also been extended since, which is disconcerting and may link to the share price. Aminex cannot issue shares below 5p and seeing at the 80m figure is fixed, they would obviously rather take 80m shares at 2p as opposed to 5p. That cannot be done yet until a capital reorganisation takes place, and that requires an EGM (general meeting). It could just be a case of formalities though - the placing price of the shares is not clear.

- October 2013 - Kiliwani North Update
The market learnt that the Tanzania Petroleum Development Corporation (TPDC) would construct the tie-in line from the gas plant to Aminex's KN-1 35bcf recoverable discovery. The gas would be sold at the wellhead through a metering system. The development is clearly good as it shows that the TPDC is supportive, which is what you would expect. However, the metering could mean a slightly lower gas price for Aminex and Aminex now has a spare tie-in pipe in its inventory that it had pre-purchased. That may be able to be sold although it won't have a massive carrying value. First commercial gas from KN-1 remains on track for H1 2015. A gas sales agreement is on track to be completed by year-end.

- November 2013 - Q3 Interim Management Statement
This was released last Tuesday, and made for uncomfortable reading in general. Whilst a limited seismic survey at Ruvuma was underway and the Argo loan was being re-negotiated, the weak financial position was underscored. Numerous references were made to the need to seek 'Interim Funding'.

Based on the above, there is one point I specifically want to pick out. That is the change in tune of the company with regards to the farm-out process. I personally think that it was incredibly rash of the company to state that the farm-out had been extended due to the high level of interest shown. That may well have been the case, but the board will have known that the bids were unsatisfactory at that time. Furthermore, they will have known that at the end of March and through April. Therefore, to leave it till the last minute, and RNS it within a compulsory announcement (the Q1 IMS) is irresponsible in my opinion. Investors have been led up the garden path and the tone of the IMS announcement hints that the company knew about the sub-satisfactory offers well before they actually announced it to the market.

What does the news flow tell investors?

-  Taking a reasoned approach, the January funding announcement shows that the company has previously found it difficult to raise cash. The proposed loan was almost halved and it carried a very generous interest rate and warrant agreement for Argo

- The US assets are not worth anywhere near my earlier expectations, hence why the main properties have not been sold. Furthermore, what is worrying and disappointing is the reluctance of the company to release an updated discounted cash flow report for the US assets. It will likely show that the previous reserves report wildly overestimated the US asset valuation. At the end of the 2012 Annual report, proven US resources gas resources totalled 6.2bcf and oil resources totalled 506,000 barrels (total = 1538 MBOE). Probably US reserves total a further 4872 MBOE.

Workovers have also yielded worse than expected production flows. That said, the company has been unable to reverse a very worrying trend in the US asset production,continued weak gas prices and no exploratory drilling, has contributed to a slashed valuation. I now expect the US assets to fetch no more than £5m seeing as they are increasingly loss making and production flows have failed to increase over workovers. With the achieved Q3 gas price at $3.11/mcf, demand for gas properties in the US remains weak after the advent of fracking. Therefore, asset sales will continue to be based on a multiple current revenues and profits.
- Not enough work has been completed at Ruvuma to justify the high price tag that Aminex put on the assets (back costs + disproportionate future costs). The price tag is likely to have alienated potential farm-in partners. In retrospect it is not difficult to see why the farm-out failed.

Ex-CEO Stuard Detmer noted that: "Most of the license is "covered" by 2D, however it ranges from not much better than 10x10km to a better grid of 3x4km of largely parallel profiles in the area where we see the most potential. Much of the older seismic is of mixed quality though we did acquire some 480km [small compared to the entire licence area] of good quality 2D in 2007. We would almost certainly be shooting more seismic before drilling more wells."

Therefore, the certainty of the resource estimates put on the assets must be fairly low. Therefore, to be fair, after the seismic is complete, the resource estimates may rise, or they may fall. The latter would severely dampen farm-out efforts whereas the former would help to push one through. Furthermore, the Tanzanian legislation has been extremely slow to be finalised. The TPDC has published a new PSA model very recently, which sets out more strict terms. Specifically, companies operating in 'deep water' areas will have to pay a higher royalty fee compared to before (that covers some of the Nyuni licence). Furthermore, there are new charges; a $2.5m signature bonus payment and a payment of at least $5m when production starts. Whether these will affect existing PSA's remains to be seen, as do the other details. If it does affect existing PSA's, the latter payment would have negative consequences. On that thought trail, it will also be interesting to see whether the TPDC exercises its 20% back-in right to KN-1 upon production starting, especially since they are operating the pipeline. That would dilute down Aminex's holding although for now, that is out of the picture.

- But, new management have taken a slice of the action. As I alluded to earlier, that is a vote of confidence, although the acquisition that binds them to the company has been extended so it is not confirmed. Should they take on the job (highly likely) they will certainly have their work cut out.

Anyway, that's the news announcements out of the way. Now onto my main concern - the financials.

Financials

The figures below are from the August HY report:
- Total loss from operating activities of £1.44m
- Net Payables of £1.78m
- Cash and Equivalents of £0.35m
- Current Loans and borrowings of £5.04m
-> Total indebtedness at at end June 2013 = circa £6.50m (this figure will have risen since as a result of interest accrual and contracting of seismic providers for Ruvuma).

Assuming that they do manage to sell the US assets, and do manage to get £5m (which I deem unlikely seeing as the South Weslaco sale incurred an impairment of just short of $1m), that still leaves the company in debt of £1.5m and given that the total loss from operating in H1 was £1.44m, a cash raising is imminent. However, Aminex are in discussions to extend the Argo loan if possible. Therefore stripping that out of the equation would leave a cash balance of around £3.5m with £5m of debts. However, seeing as H2 is drawing to a close, assume expenditure of a lowly £500k so cash of £3m. Let's assume that the takeover of Canyon also completes. Aminex notes that development costs to date, receivables and cash at Canyon all amounts to around £1.25m. Therefore let's say (generously) that Canyon have £500k of cash that could be incoming upon a takeover. The cash balance rises to £3.5m in the case that Argo extend their loan, or debts of £1m in the case they do not. For the purpose of this, let's follow through assuming Argo do extend their loan so we use the £3.5m figure.

The company admitted that in its recent Interim Management Statement. Seeing as they are seeking 'Interim Funding' that will take the form of either debt of equity, and any equity is unlikely to be through a strategic partner that they mention (they noted that to form part of the long-term funding). For this next part we assume that a farm-out is now off the cards until seismic is completed (as stated by the Joint Venture).

So now that the seismic is underway, let's assume they intend to complete 30% of the survey for the time being, until financing is secured. The total cost of the survey was said to be roughly £8m, so 30% is therefore £2.4m. At a 75% working interest that is £1.8m. That would reduce the cash balance back down to £1.7m. If 50% of the survey is to be completed, the cost rises to £3m, and the cash balance drops down to £0.5m. Completing the whole survey would leave the company needing to take up further debt or equity. For now, let's once again assume they only complete 30% of the seismic so the cash balance would be circa £1.7m.

So let's go a step further and say they manage to stump up £5m from a strategic investor or from further debt, in order to complete the seismic and for working capital. £5m in equity at a generous price of 3p (so yes, that assumes a strategic investor who is willing to take a stake at a 50%+ premium) would require 167m new shares to be issued, which combined with the Canyon takeover would boost the number of shares in issue to over 1 billion. However, the cash balance would rise up to £6.7m. In this scenario they would complete the entire seismic coverage at a cost of £6m which would leave them with £0.7m in cash and either £5m in debt or £11m in debt. As per the Nyuni licence commitments, a well, which we now know will be Fanjove, needs to be spudded before April 2014. The cost of that well is likely to be in excess of £6m to all partners. At the current 70% level that means that Aminex needs to stump up a further £4.2m before April. Of course, the well may not be drilled in time, but then further discussions would have to be had with the TPDC - after all, this would be yet another occasion on which Aminex would fail to meet licence obligations. A silver lining for Nyuni would be if they could bring in a partner. Given the success in the block to date, they are unlikely to receive any back costs, but may be able to get a pro-rata part of that well funded. With regards to Ruvuma, the hope would be that the seismic firms up or increases the expected resource which would allow for back costs to be paid. A resource re-evaluation will need to take place beforehand though - if Aminex is too slow the work programme will start to be compressed back into late 2015/2016.

There are of course a number of financing options, but what this imaginary, but plausible scenario demonstrates is that Aminex is likely to need a large equity injection or to take on more debt. The problem with both is that shareholders suffer and the latter is extremely dangerous when considering the company as a going concern. The obstacle to taking on more debt is that they don't have enough in secured cash flows to back them against. Depending upon the gas price achieved, Kiliwani-1 is likely to produce net revenues of between £4.8m and £7.5m (based on Bounty Oil's figures), but when talking about financing debt it's the cash flow back to the ground that matters. It also means that Aminex would give up a significant portion of its discovery as the 35bcf recoverable figure will not last many years at a 20mmscfd rate. With Argo taking a 15% interest coupon, the cost of using a conventional debt method would be very expensive. If Aminex wants to wriggle out of the current situation, it needs an unconventional financing method.

It's also important to recognise that the scenario above includes a lot of debatable assumptions, including:
- £5m is achieved for Shoats Creek and Alta Loma (dependent upon the level of interest this could be less or more)
- Argo agree to extend their loan repayment date
- The takeover of Canyon is completed successfully
- Equity financing and affordable debt financing is available to the company
- A strategic investor is happy to take a stake at a large premium (3p)
The point to take is that for the company to fund the next 6-10 months requires a lot of careful management, and for some very generous conditions to be fulfilled. It's by no means impossible, but it's exceedingly risky and if there are any delays the whole timeline is risked. Any sub-par farm-out would see value lost.

Looking further ahead and at the Nyuni assets, the company recently noted that one of Ophir's leads extends into the Eastern offshore portion of the PSA. The company has therefore been able to switch the PSA requirements so that they will shoot seismic over that area beforehand. Ironically, deep offshore areas are cheaper to seismic and are typically 60% of the cost. However, it's the initial cost of mobilising a vessel to the area that is expensive. Aminex noted in the IMS that they will be unable to drill the well unless a larger partner takes a stake in the licence. I think the point to make is that Bounty Oil (ASX listed) would also be unable to fund such a drill, even at their minor 10% interest. Deep water wells usually cost north of £50m so unless Aminex gets their share paid for, deep water drilling will not be undertaken for the foreseeable future.

Another problem the way I see it is that the farm-out and asset sale situation gets worse as the share price and financial situation declines. Companies look to pay the lowest acceptable price - that is business. The financial state of the company puts it in a very poor negotiating position. Further, why would a company farm-into a PSA if there was a material risk that the partners could not pay. That applies to Bounty/Aminex at Nyuni and Solo Oil/Aminex at Ruvuma. The re-opening of deep water licence rounds in Tanzania will also not help Aminex's cause. That was a point I picked up on during the initial review - use the time gap to present the acreage as a fast route into the domestic gas play. That has now reversed.

With that all said, dependent upon the capability of the new management, Aminex could improve its financial state, but that would likely come with the caveat of deferring operations in Tanzania. Time is not something that Aminex has on its side. If they can though, there is probably material share price upside - the current level is low, but it is low for a very valid reason. As good as the assets may be, there is a significant risk that can arise from a whole series of directions. Without cash a seismic survey cannot be completed and time is lost, but without a survey a farm-out cannot be undertaken, but with cash raising comes the risk of dilution or higher levels of debt. With a £15m market cap, given the amount of cash needed, either of those options are very dangerous and if misused will counter-act the upside from the assets. The position of the company is precarious. I think it's difficult for any investor to reasonably argue otherwise. The new management will need a whole pack of cards up their sleeves to lead Aminex to prosperity. I'm not convinced they do, hence the move from Buy to No Rating at 1.92p. Standing still and deferring most expenditure is not an option - the debt won't disappear and there are obligations to meet. Now that the seismic survey has commenced, the company has to move very fast and step very carefully.

17 comments:

  1. I sense a cash call!!!!!!!!!!!

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  2. A sobering report El1te. By the sounds of it the management have wasted a very good set of assets and got into a right pickle. Good to see you are not afraid to change your opinion !

    CraigJ

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  3. Gd reasoning. thanks for the update

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  4. The IMS states that the formal Sale and Purchase agreement for Canyon just requires approval by shareholders at an EGM likely being held before year end.

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    1. Hi there,
      To be precise the IMS says that the takeover is "conditional only on certain matters" that require EGM approval. Aminex's nominal value/par value for its shares currently stands at 5p. As far as I'm aware, that means that no shares can be issued below 5p in any circumstances, unless the par value is changed. If the takeover includes the shares being place around 2p (which i presume it does - why would Jay and Philip want to take a stake at 5p vs 2p), then I expect that one of the certain matters would be a change in the par value of the shares. I will try to clarify whether it is the case that during an acquisition shares can't be placed below the nominal value, or if that is an exception.
      El1te

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    2. Thank you for your response and I have to say most will miss your excellent reports.

      Does it seem to you that agreement with Messrs Bhattacherjee and Thompson is already a done deal ? BH (and the rest of us poor souls) will certainly be in hot water if it falls down.

      If their servicies are secured, I think there is room for considerable optimism. I say this because surely by now as intelligent people, they must be aware of all the detailed information about AEX, warts and all ?

      In an ideal world the £5m loan is extended at an economic rate.

      We do achieve finance for our exploration and drilling programmes.

      We keep our heads above water throughout the year until the pipeline arrives.

      If we get through to that stage, who knows where AEX may end up ?

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    3. I would say that the Canyon acquisition is more likely to go through than not, but only they know the answer to that question. They certainly phrase it as though it's a done deal. You would imagine they know the task they are facing and are best placed to assess it, but they have openly said they will be looking for 'interim financing'. Will have to wait and see on the last points!
      El1te

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  5. Hi Elite,

    It is good to see that you don't get personally attached with a share.
    I am unable to sell it, I am heavily invested in this and has very high average. Further, it is diffcult to buy and sell on ISE anyway. Hoping in 2 weeks time we get some +ve RNS about gas sale agreement. Do you have any thoughts on that?

    Also I was wondering if you have any thoughts on TRP?

    Thanks for your time.

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    1. Hi there,
      The price for the gas is what is important. A good range would be $3.50/mcf up, average would be $3-3.5/mcf and a poor range would be sub $3/mcf in my opinion. Difficult to tell what the price will be seeing as it is being metered at the wellhead
      Can't say I've looked into TRP much to be able to comment upon it
      Hope that helps,
      El1te

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  6. Hi El1te,

    Spot on AEX, very good call.
    Now, do you see it has potental if they sign GSA above 3$?

    Thanks

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    1. Hi there,

      Still too early to say in my opinion. The market cap will re-adjust closer to £20m upon completion of the deal assuming that the placing is fully subscribed and the open offer fully subscribed. Therefore, a lot would rest upon the seismic results. The results will need to be good, or it is effectively chucking £5m+ of good money after bad. I'm not at all convinced the open offer will be taken up fully given the share price in relation to 1p

      Technically a breach of 1p would be very bearish, so need to see how that goes. All in all, today's announcement does nothing to make this a buy in my opinion. It remains the case that there is going to be a cash shortfall over the next couple of years, and this is 'kicking the can down the road'. There are wells at Nyuni to drill, wells at Ntorya to drill and wells elsewhere in the Ruvuma basin, and the kiliwani profits from at least the first year, will be diverted towards the debt repayments.

      Still lacking clarity in my opinion. I hope that helps,
      El1te

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  7. Hi Elite,

    Any thoughts on AEX, what could be a possible entry point for AEX from technical point of view if somebody is looking to buy? Any thoughts?

    Thanks

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  8. El1te i would suggest whether you agree this is a sell after the recent price spike (contrary to the above comment). They will surely be looking to a placing now to bridge them to next year when cash flows and the argo loan needs to be repaid. (Management have stated they dont currently know how they will bridge the gap but are working on it!)

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  9. Will be interesting to know your point of view El1ie

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  10. It is better if I reply by email to prevent posts becoming too lengthy and also because I check it more often - theel1tetrader@outlook.com

    Best,
    El1te

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  11. most of the small exploration companies are run for the benefit of the directors and a few of their family . rns are published after the directors have either disposed or purchased stock depending on wheter the news is good or bad .the regulation on the actions of these directors is nil hence their ability to hijack the shareholders value to themselves

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