Admissions Document Warning Signs: Kodal Minerals

An admissions document is the document that a company releases when it wishes to list on a stock exchange. Reading through an admissions document is its entirety is often a daunting prospect, with most comfortably exceeding 50 pages and usually well over 100 pages. However, the detail within the document is vital to be able to form an accurate view of the company you're looking at. There are sometimes details buried within, that management would rather exclude, but because of regulatory reasons they are obliged to include. Kodal Minerals is an excellent example of an overhyped IPO that I reviewed as a cast iron 'Sell' back in January 2014 at 2.04p. The share price today is just 0.165p (valid 16/06/15), thus the shares have collapsed by well over 90% in less than 18 months.

Point 1: Setting the Scene
To set the scene, I simply copy my comment that I wrote on January 4th 2014.

Kodal Minerals (LSE:KOD) listed on AIM on the 30th December. Kodal is a small mining company operating in Norway, and its admission to trading has been highly successful with the shares are up almost 200% on their admission price. Immediately you probably think that the company's fundamentals are excellent. The reality is that they are not, and this is another company that I would class as being an overvalued AIM mining stock. The rise in Kodal's share price is little to do with the fundamentals of the company, and more down to trading momentum thus the valuation is ridiculous. For that reason I am immediately putting Kodal on a Sell tag. Kodal is currently trading at a share price of 2.04p having listed at just 0.7p which, with 670m shares in issue, means the junior miner is valued at £13.64m. As it stands, this valuation is difficult to justify despite the very bullish comments of broker SP Angel.

From here we can now start to look through a range of concerns that I picked out whilst conducting due diligence on the Kodal Minerals' massive 325 page admissions document. The key points to remember is that at 2.04p Kodal was valued at £13.6m and that at the 0.7p IPO price Kodal was valued at £4.7m, of which about £0.8m was cash. There were plenty of reasons to believe that the £13.6m valuation was excessive.

Concern 1: Asset Purchase Price vs. Implied Valuation
The first and by far the most important concern regarded the valuation. Kodal was essentially a one core project play in Norway and the project they were progressing had only been purchased recently pre-IPO.

In fact, Kodal had only paid around £1.84m for their Norwegian permits and the bulk of this was in shares; these permits were prospective for phosphate. The terms of the transaction can be seen in the image below.

The concern relating to this is obvious; what has happened between December 2013 and January 4th to justify the uplift in the value of the asset from £1.84m to £13.6m or still over £12.8m if you strip the cash out of the market cap. That is essentially an uplift of almost 7x in the space of literally 3 weeks with literally no additional work done on the project. That is tough to justify when simply looking at the facts and would mean that the selling party, Tetra Minerals, were not well informed to sell at such a low price.

To underscore the early stage nature of the project, an environmental impact report commented on the following. CSA said that the project area is heavily wooded, and criss-crossed by walking and cycle trails with the area seemingly an 'outdoor wilderness recreation area'. They stated this had the ability to have a 'major impact on the ability to obtain permissions to mine'.  In such a scenario, the permit would be worthless to a phosphorus miner, and the risk of such a project stumbling on environmental grounds is very much real.

Concern 2: IPO Price & Broker Target Price
This concern is two-fold although they are tightly knitted together. Firstly, let's look at the IPO price; Kodal was listed at 0.70 pence per share. What should a good IPO price be? It should not be too cheap as to severely undervalue the company, but it should not be too high as to deter investors from purchasing shares after the IPO. Well, at 2.04p, Kodal's share price was 191% higher than the IPO price within just a few weeks.

Rest assured, if Kodal was actually worth anywhere near 2.04p on a consensus market view, then the IPO price would have been significantly higher than 0.70p.

However, what was more perplexing and concerning was the behaviour of their financial adviser and broker, SP Angel. One of the more concerning aspects was the simply ludicrous share price figures that were touted by SP Angel. Below is an extract of what they were promoting after Kodal Minerals had listed on AIM, although did say that this was marketing information rather than investment advice.

NB: DCF = Discounted Cash Flow, CAPEX = Capital Expenditure
Quite frankly, I had (and still have) never read such utter rubbish when looking at listed company or associated broker comment. A very early stage asset purchased for £1.84m and a company listed at 0.7p being tied with a DCF valuation of $205m or share price ranges of 4.1p to 4.5p is quite simply delusional. The price ranges being discussed have been constructed by extremely weak reasoning and seemingly arbitrary discount factors. SP Angel eventually settled on a 3.1p target price.

Usually, when there is such an obvious attempt to promote very high target prices, it should act as a major concern to you as an investor.

Concern 3: Links between SP Angel and Kodal Minerals
It would be reasonable to think that SP Angel stood to benefit financially from success at Kodal Minerals not only through potential equity raise fees, but also for other reasons simply because of their seemingly extraordinary belief in Kodal as offering strong upside without having actually done anything. After all, they seemed - in the previous quote - to suggest that buying up any asset privately and then listing it should lead to an immediate massive uplift in value.

It turned out that, aside from their role as broker and financial adviser, SP Angel had a number of other direct/indirect ties with Kodal Minerals...

- SP Angel directly hold 5.22% of the company's shares
- Partner of SP Angel, David Facey holds 3.21%
- Partner of SP Angel, Robert Wooldridge holds 7.47% and is a director of Kodal
- Partner of SP Angel, John Mackay holds 7.47%
- Consultant at SP Angel and Co-Founder of SP Angel, Emin Eyi holds 4.5% and is also a director of Kodal

You have to question how impartial their price targets and analysis is when they've got connections throughout the company (the total 'connected' holding exceeds 25% of Kodal Minerals). This was another concern that the admissions document threw up PLUS SP Angel and Kodal Minerals shared the same Mayfair address.

Concern 4: Bemusing Options Conditions with Tetra Minerals
We discussed earlier that the company selling the Norway asset to Kodal Minerals was called Tetra Minerals. Although the headline transaction value was £1.84m, there was an options package that had some very interesting conditions.

What is so surprising? The exercise price of the options is very high at 10p (vs. 0.7p IPO price), and the total value of the options at that level is over £71m. The thresholds that need to be reached are also very high and the directors of Kodal believe the chance of them 'becoming exercisable in the near to medium term to be remote'. The condition seems completely disproportionate, but chances are that it won't get reached, even in the long-term so it's a useless condition in my opinion.

In January 2014 I wrote that "in the minuscule chance that Kodal find a giant deposit, the exercise requirement is met, and the 10p level is breached, the options represent considerable dilution as they would more than double the current shares in issue."

Concern 5: Resource valuation vs. Comparator company
The resource is a significant component of deriving a valuation. To check the phosphorus part of the valuation, I did a comparison with TSX listed GB Minerals (who operate in Guinea-Bissau), in January 2014, as below:

Data valid as of 04/01/14
I commented: "This confirmed my initial thoughts, that the actual resource value whilst in the ground, is low, despite the phosphorus concentrate being very high grade (note that only in-situ grades are shown above). The concentrate grade of GB Minerals' resource is 33.1% so quite a bit lower than Kodal's, although the resource levels more than make up the difference. That said, you should attribute a higher £/t value than 0.31 to Kodal's resource due to the grade - even so, the valuation isn't large. Given that GB is only valued at £3.30m (£13.11m when adding back net debt), the current valuation of Kodal is far too high. GB has been listed for long enough so that the market can derive a fair valuation - Kodal has not.

The CAPEX requirements are slightly different. Kodal has estimated £75m pre-production for a 1.6Mtpa operation, compared to GB who have estimated around £95m for a 1Mtpa operation, so Kodal wins in this respect. However, the £75m figure seems to be of low confidence, with only a plus/minus 40% accuracy rate due to the lack of data such as whether power is available through the Norwegian national grid."

Concern 6: Unconvincing Management

Kodal's management weren't too keen to unveil the company's past. Deep within the admissions document, it is revealed that previously the company was called Clearphos Limited and that the name change occurred in light of the acquisition of Kodal. Clearphos held a 74% stake in Clear Phosphate Minerals which was an exploration company in South Africa. To cut to the chase, the exploration
licence in South Africa wasn't granted and the business was subsequently closed. Not exactly what you would call a successful venture.

Looking into Kodal's management, it was a mixed bag. Whilst there is plenty of experience among the board, it's not necessarily all the right experience. For example, the Chairman David Jones is a former CEO of FTSE 100 company, National Grid (LSE:NG.). CEO Luke Bryan, is the former COO/CEO of North River Resources (LSE:NRRP). However, during his period at the company, the share price declined from 6p to around 0.55p when he resigned from his post. This is a very crude way of measuring performance, but a share price chart can tell a lot about the key management of a company. It is worth bearing in mind the major mining market decline. Emin Eyi is also Managing Director of Tri-Star Resources, another mining junior. Over his period there, the share price has declined from 0.8p to 0.27p currently. Then you have the issue of a large number of the SP Angel connections as mentioned earlier. It's difficult to argue that the management team inspired much in the way of confidence, based on their past performances.

Concern 7: Cash Deployment Plans
On a brighter note, Kodal stated that they have sufficient cash for at least 12 months of operation, but that they will require 'substantial additional capital' beyond this. £770k was raised during the admission, although this figure drops to £708k when factoring in the cash cost to Tetra minus the residual cash balance. Net payables on the balance sheet amounted to £108k. I say that is a brighter note, but it's not really. The reason being that there wasn't much money planned to be spent in 2014 and that meant upside catalysts were few and far between.

The joke was that, in 2014, more money was set to be spent on working capital and overheads, than on the actual project itself. £385k had been sidelined for costs versus £300k for project expenditure.

Kodal highlights why reading through the entire admissions document is a must for any investors looking at an IPO. There is often a lot that can be uncovered from the details within. The dismal share price performance of over -90% since, has validated these concerns.


  1. The comment above is total rubbish. Kodal's key project, like many others, fell in value alongside the phosphate and iron ore prices. Management are working hard for shareholders to create value and are not helped by this sort of petty comment which tries to show conspiracy where there is none. The analyst's valuation methodology looked correct at the time of the IPO but the market for mining shares has come down, partly due to comments like this causing investors to sell the sector.

    1. Hmmm. Strong language from someone hiding his identity.

    2. The problem is that the points you raise don't hold up under scrutiny. Indeed, I made the points above clear at the time of the IPO. Firstly, regarding your points:
      - It's a very early stage exploration project with a clear phosphate focus (iron ore to a lesser extent). The phosphate price has not significantly changed since the review so that doesn't hold at all. The iron ore price is unlikely to be highly material to the project either given the in-situ grade. It has, as you say, collapsed in price.
      - The valuation was clearly absurd at the time of the IPO. I'd be interested to hear why you believe that you can readily purchase an asset in the private sector and then a few weeks later list the company and that same asset should be worth a multiple Y times higher
      - There categorically was a cash issue as per point 7. Just a few days later they raised £1.25m at 1.25p, which was a massive discount! Clearly the company sought to take advantage of the buoyant market to raise extra cash. The share price rather suggests that the money has not been used to create tangible shareholder value; admittedly, in part due to the weak sector environment
      - The management has seen some departures including Guy Eastaugh and Emin Eyi

      The unofficial broker comment remains totally ridiculous and you'd struggle to find many broker representatives seriously recommending a DCF valuation for such an early stage (barely developed) project. Using arbitrary (and finger in the air) divisors such as the 10 used, is just embarassing. Indeed, a much better way (and they'll have known that) would have been to set up a comparison between Kodal's project and other similar deposits.

      Bottom line is that, at north of 2p, the company were 'delighted' to dilute shareholders at 1.25p a few days later and the market has been duly unimpressed, as shown by the share price tumble continuing thereafter. Nor has there been any reasonable show of support from the directors buying meaningful stakes.

      One thing is for sure, when a share price falls over 90% from the peak, it's not the market that had 'got it wrong.' It's the company that has failed to perform in any reasonable way and that's certainly not just down to a byproduct commodity price movement. The price movement has been substantially worse than the overall small cap miner sector.

  2. Hi El1te - Excellent analysis as usual.
    Admission documents tend to be a mine of information especially about the business model and marketing information. But I have to say that 90% is just padding and regulatory claptrap.
    What does annoy me is that this is not a level playing field. The AIM rules say that companies have to make available the admission document to the public on the first day of dealing. But the institutions and promoters freely distribute it ahead of the first day to those in the inner circle. You would think that most companies would make the doc available on their website at least a few days before the first day, but they don't.
    I am all for light regulation to encourage the entrepreneurial spirit, but there is no effective policing of the AIM market to stop and penalise blatant abuse.
    Regards, Ram

    1. Thanks for the comment.

      I would definitely agree that some of the content (particularly management speak) needs to be taken with a pinch of salt. In the case of Kodal, its actually some of the more boring regilarory requirements that revealed interesting information such as previous ventures (and related party transactions in other cases). That perhaps provides the directors with less wriggle room in the event that they don't have the purest intentions!

      For Kodal, of all the points, it was definitely the cash deployment plans that was particularly disappointing to read about. For a new IPO to spend more on G&A than project development (with cash raises a certainty st the time), is far from impressive. Why list in the first place if the management are going to struggle to create shareholder value.

      I'd agree regarding the release timings of admissions documents. It should be available comfortably in advance of the listing, but it's usually not for speed/regulatory reasons.

      Thankfully, IPOs are dire quality (from an investment perspective) as Kodal are few an far between. That said, most leave a lot to be desired!

  3. Very informative article El1te on a topic that could easily be overlooked by investors.