By Peter @Newton Bell, September 30, 2016
In my first article on Aton Resources (TSXV: AAN), I introduced the company and described how evidence of rich historical mining activity guides their exploration activities in the Egyptian desert today. My second article provided more details on their concession and what is coming next for Aton Resources. This third article digs into the challenges facing the company.
While the geological potential of the Abu Marawat concession is apparent, there are several challenges to consider. They include large past G&A expenses, geo-political risk, and share count. In some ways, I think it is fair to say that management has shown an ability to accept the things they cannot change, change the things they can, and the wisdom to know the difference.
Aton Resources is not a new company and, given their junior status, Aton’s previous G&A expenses were high. To this, CEO Mr. Mark Campbell said "we have had some problems with people getting paid too much in the past." Apparently things have gone in the other direction now, as Mr. Campbell is now the lowest-paid person in the company. He had some interesting things to say regarding executive compensation for junior mining companies and you can read all of his comments in a forthcoming release of the transcript of our conversation on CEO.CA soon.
There have been substantial changes to the team at Aton in the last year and these changes seem to be for the best. I found that Mr. Campbell has built a comprehensive team of professionals. There have been appropriate additions to the management team, the board of directors, and the advisory board. Mr. Campbell also told me that the operational team is high-quality and low-cost: they hire young Egyptians and provide training to help them develop a career in the mining industry, but still have supervision by old hands.
In terms of geo-political risk, “Egypt” is a loaded term. The country faces strong negative sentiment based on perceptions of political instability and corruption, but this is not so clear to me. Mr. Campbell has been living and working in Egypt for decades and reports that the company's property is quiet and peaceful. They do not use convoys of security around the camp or local corporate offices. Mark walks to work in the morning in busy, downtown Cairo.
I don't know whether the country is a safe place to invest, in general, but I would point out that there is major infrastructure located on and around Aton’s Abu Marawat concession. This infrastructure includes high-voltage electricity lines, a four-lane paved highway, a railway, and even a water pipeline approximately 32 km. from the Hamama camp. Aton is not located in a remote or dangerous area of the Egyptian desert; rather, it is located in the middle of what may soon become an important mining region for the country.
Another dimension of geo-political risk in Egypt are the taxes for mining. In short, they seem to have been designed for oil and gas, not metals. That may be changing.
The Government currently taxes profits from mining at 50% after the company recovers exploration and development costs. This tax regime works well for oil and gas because the costs associated with finding and building a conventional oil well are more like a one-time cost than with metals. Mining a metal deposit is more involved geologically and generally requires significant, ongoing expenses to identify where the metals are and how best to mine them. Put on your ‘wonk’ hat, this is important.
Egypt’s inappropriate tax policy may be a big reason why mining, ex-oil contributes less than 1% to Egyptian GDP. The Government is keen to see mining of metals contribute up to 5% of Egyptian GDP in the near future and apparently recognizes that a new tax code will be essential for achieving that goal.
I admit that I felt sticker shock when I first saw the marginal tax rate for mining in Egypt (50%!), but have become more curious as I learned more. Did you know that Centamin has effectively paid no tax since it started production in 2009? The profit share hasn’t started yet (it is expected to start in 2017) and the company pays no taxes or duties until 2025. That boggles my mind, and it makes me suspect that Aton has an opportunity to work with the Egyptian Government to redesign the taxes for mutual benefit.
The third challenge I see is Aton’s share count. They did a 5:1 share consolidation in 2015, but still have approximately 100M shares out today. I will let Mr. Campbell address this point at length below:
“We have several major shareholders. We have two private businessmen from Estonia who hold about 38% between them. We have a group called New Pacific, a Canadian company, that has a 12.4% stake. The total insiders own about 59% of the company, that includes directors and officers, which is about 10%. When you look at New Pacific and the Estonians, they participated to a large extent in the last capital raise of two million. In terms of the Estonians, they have always match-funded all financings and they want to maintain their position. They have indicated that, as we move forward, they will continue to be supportive and that's good. That's very important. Of course, we would like to bring in more people. We would like to expand the shareholder base and that's what we're looking to do now. We closed that financing. They have a four-month hold, but they've had that before and they've never sold any shares. We have very loyal shareholders, by and large.”
Past problems with past G&A expenses, geo-political risk, and share-structure seem to be priced into the stock. Aton’s market capitalization is approximately C$9M today. For comparison, the company has spent over $10M at the Abu Marawat concession and has established an initial resource estimate of approximately 400,000 ounces of gold equivalent at the Abu Marawat gold deposit. An analyst might value the company at C$12M based solely on the Abu Marawat project (using a multiple of C$30 for enterprise value to number of ounces of gold), but this assigns no value to the wide array of other targets on the company’s large property. These other targets are the most exciting parts of Aton today.
The company is moving to establish an initial resource at the Hamama West zone, where they reported high-grade drill results from the near-surface oxide-cap. After reporting these drill results in mid-July 2016, trading volumes picked up and the share price ran up significantly by early August (a triple from peak-trough). The stock price has since faded back down and this suggests to me that the company is currently an attractive value-play with exploration-upside.
In the near term, I will be watching Aton for news releases with additional drill results and even an initial resource estimate for Hamama West. This will be a significant news items that may draw attention to the company from across the global gold mining industry. I will also be watching for the results of the ongoing geophysical studies and the implications of these results for other targets across the concession.
Aton had a working capital deficiency of $2,079,577 as of June 30, 2016. This situation caused some controversy on CEO.CA, but has since improved with a subsequent $2 million financing. In fact, the apparent distress reflected in those quarterly financial statements marked the most recent low of Aton’s share price. It bears repeating the market aphorism: “Markets don’t make lows on good news”.
A recent picture of the company’s financial information is provided below:
- 30-day VWAP: $0.093
- Average trading volume: 130,000
- Shares outstanding: 112M (141M fully diluted)
- Market cap: $10M
- Treasury: $30,000 (at the end of June, 2016)
- Working Capital: -$2M (at the end of June, 2016)
- Website: www.atonresources.com
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This is the third in a series of articles that I have prepared on Aton Resources for the CEO.CA community. Stay tuned for a transcript of my interview with Mark Campbell and Blaine Monaghan, recorded just days after Blaine’s appointment as Vice President of Investor Relations for Aton.
This is not investment advice. Do your own due diligence. I hold shares in the company.
