I have decided to add a little to Polo Resources. The underlying holdings seem to be moving up in value – and the discount to NAV is now 75%. I bought at c4.3 earlier in the week. Only a small position – 2% portfolio weight added, 3% in total.
This has been a disastrous investment – down 58% from my entry in September 2014. Made worse by the fact the portfolio as a whole has more than doubled since then. Luckily I always viewed it as a bit of a punt so the weight was small and I didn’t add.
So what went wrong ? Natural resources bust at the end of 2015 didn’t help, neither did ongoing fees paid. My original thesis that Signet’s gas would be worth a lot has not panned out, the assets are now known as Regalis petroleum and there has been no progress. They have been written down but there is always the possibility they could come back. Unfortunately Polo don’t break down unlisted holdings in any great detail so I don’t know exactly what is in the NAV / how it is valued. Total privately held assets are valued at $10.54m in June.
What I am much more interested in is the listed component. This now consists of:
- 9.22% Hibiscus Petroleum – worth about $39m at the current market price.
- 19.8% GCM Resources worth about $6m – maybe, not sure about future of coal mining – even in Bangladesh…
- 25% Celamin Resources worth probably a couple of million. Could be worth much more but its all very uncertain.
Polo has a market cap of $14.8m so the value is clear.
Catalysts are simply that hibiscus has risen so far the Polo price doesn’t make sense. Key thing to assess is whether the valuation of Hibiscus makes sense. Apparently co has NAV of 0.51 vs a share price of 1.05. This doesnt seem too overvalued given other more prospective assets not in the NAV.
Interesting presentation is here.
They are only getting $51.54 for their oil so given a spot price of $70 scope for uplift. Unfortunately their 2017 annual report contains this gem:
As part of the acquisition of a 50% interest in the Anasuria Cluster, a contingent consideration is payable to Shell UK, Shell EP and Esso UKfrom 2018 to 2021, if and only when in a calendar year, the annual average oil price (USD Y) exceeds USD75 per bbl, in which case, Shell UK,Shell EP and Esso UK will be paid USD0.15 x (Y-USD75) per bbl of the production from the Anasuria Cluster. The contingent consideration islimited by the production volume and the average oil price for the relevant calendar year.
So I won’t fully get the benefit of any substantial rise in the oil price. There is also a nasty decommissioning liability.
Opex per BOE – $13-23. I wish I knew total cost but seems profitable. They say operating in UK and Malaysia allows them to split costs.
They don’t seem to be sold forward / hedged against falls in the oil price – something I really dont like. I would rather give up upside to manage risk better.
One of the weaknesses with my thesis is my lack of ability to analyse an oil company well. Then again in general they are so driven by the oil price I seriously doubt anyone’s ability to analyse them well. Still, remember, at the current Polo price we are buying at 38% of the value – so we have a good margin of safety, this excludes the value of all the other assets.
The volume in Malaysia is pretty good – so we can be reasonably confident that the price hasn’t been manipulated upwards….
Polo does lack catalysts – management say they are going to continue to invest in asia pac assets. I would hope given the now large discount to NAV and also the fact that there are fewer opportunities than there used to be in this space people will come in to close the gap.
The shareholder base is reasonably diffuse – management only hold 12.5%. Management fees a reasonable $0.6m with options at 25p – highly unlikely to be exercised.
I won’t look for all the discount to close on this one as I don’t think it will. Difficulty in valuing junior miners / constant demands for cash mean that this is not the ideal structure. Target price is probably around 8.5-10p – so almost double the current share price.
As ever comments are appreciated as is guidance on how to making my analysis more rigorous / robust.
Deep Value Investments Blog 
Hi Rob- Yes Hibiscus is the bright spark in the portfolio at present, Celamin and GCM are possible binary plays which they have large holdings in and Celamin had that favourable judgement re its assets recently. They also hold US14.3m in cash, albeit they use this to top up Celamin etc and dont seem to have ever considered a buyback, which would of course be supportive. I have been in here since (when M Tang bought his large stake at 40p per share) but have added recently so just in profit at the current 5.4p. I am happy to hold at that level and hope they get some of their Hibiscus money off the table and possibly buyback some shares. Lets see. Stb. Steve
I dont think the $14.3m they hold is cash 30th June says $4m, 13.4m current assets but that isn’t quite the same thing…
Yes- sorry- my spreadsheet here needs a little work on it….. Cash was over $20m a couple of years ago and they have been adding to some holdings with mixed results – Hibiscus at 18c (now 103) but many of the other inv decisions havent worked out so well, as you know.
Hi Rob,
You’ve said this was previously a punt, and to quote your own statements “One of the weaknesses with my thesis is my lack of ability to analyse an oil company well”
So, not sure why you’re apparently throwing more into this? Most of your positions seem to be based on good reason, if not always correct in hindsight, but this seems off?
I don’t need to analyse an oil company well if it is cheap enough. Market price should likely be around what it is worth.
If I can buy something trading at $1 for $0.50c I will probably be OK. The value of their Hibiscus holding is over double the market cap excluding other assets.
This gap is far too wide for a listed asset. Given other assets I am prepared to put a bit more in.
Very long term holding of mine! been a steady earner if my memory serves me right .
Why? Were you short?
Message from Phronimos Capital,
I dont hold this as I think management is bent. Good someone is trying to do something about it though….
The concerned shareholders may be on the verge of requisitioning a shareholder meeting.
From the most recent RNS… “Subsequent to the publication of Phronimos Capital’s (“Phronimos”) letter to the Board of Directors of Polo Resources (“Polo” or the “Company”), on February 13th, we have heard from numerous other Polo shareholders supportive of our cause and, consequently, the concerned shareholder group has grown significantly. We believe there will be broad shareholder support for a substantial cash distribution or share buyback if the proposal to return capital were put to a vote at a requisitioned meeting of the shareholders of Polo. Fellow Polo shareholders supportive of a significant share buyback or distribution are encouraged to contact us at sjohn@phronimoscap.com”
Phronimos transmitted a follow-up letter to the Polo Board of Directors today. The full text of the letter can be found below or at: http://www.phronimoscap.com/news
March 13, 2019
Polo Resources Limited
Craigmuir Chambers, P O Box 71
Road Town, VG1110
British Virgin Islands
To the Board of Directors:
We are disappointed with Polo’s response to the proposals put forth in our letter dated January 28th, 2019. We write to you again so that the Board and the Company’s shareholders fully understand our viewpoint and the reasons for our concern. We firmly believe the underlying value in Polo is significantly higher than the current share price and that the stubborn adherence to the Board’s current investment policy is detrimental to the interests of shareholders as a whole. The market’s lack of faith in the stated investment policy is evidenced by the greater than 70% discount of Polo’s share price to its Net Asset Value (“NAV”) per share. The persistently large discount of Polo’s share price to net asset value precludes shareholders from realizing anything remotely close to its fair value through open-market transactions. The status-quo, which has resulted in significant realized and unrealized losses for past and present shareholders of Polo, is unacceptable. Consequently, we request that the Board:
1. Provide fellow concerned shareholder Nicholas Greenwood with the register of members within five business days. As you are aware, Section 100 of the BVI Business Companies Act grants shareholders a statutory right to inspect and make copies of the register of members. The Company has denied Mr. Greenwood’s request to exercise his statutory right, citing “data privacy” concerns. The right to inspect shareholder lists for the purpose of communicating with shareholders with regards to a proper purpose, being in this case the exercise of shareholder rights in the form of gathering support for a potential requisition of a shareholder meeting, is enshrined in company law. We urge the Board to respect this right.
2. Provide an explanation and/or the remuneration committee minutes regarding the appropriateness of Chairman Michael Tang’s total compensation (including the 2018 share option grant of 20 million shares at a greater than 70% discount to NAV.) We note that Chairman Tang’s consulting fees of ~USD 1 million per year from Polo Resources and its investee company GCM Resources is many multiples above the norm. According to BDO’s AIM Directors Remuneration Report 2018, the median average total salary for CEOs of AIM constituents was approximately GBP 150,000. The QCA Remuneration Committee Guide for Small and Mid-Size Quoted Companies states:
“Companies should communicate their decisions and supporting rationale clearly to shareholders and other stakeholders, most importantly through the report of the remuneration committee chairman. A company will face severe criticism if it rewards failure. Just as important is to ensure that mediocre performance is not rewarded as if it were good performance. It is fair that executives are offered the opportunity for higher levels of remuneration if they produce good results and excellent long-term sustainable value creation. Companies should avoid paying their executive directors more than is necessary to remunerate and motivate them. … No board should allow any executive director to be, or to consider himself or herself to be, irreplaceable: amongst other governance challenges that will inevitably arise, this may lead to demands for excessive remuneration.”
Furthermore, we note that in 2018, the Company issued share based payments granting Chairman Tang the option to purchase 20,000,000 shares at a greater than 70% discount to NAV. We believe the valuation methodology chosen by the Company significantly understates the fair value of the grant. The choice of a particular valuation method to determine fair value is not “fair and reasonable” if it does not take into account information material to the value of the corporation. With regards to investment companies (like Polo) in particular, the Net Asset Value per share is of paramount importance in determining “fair value.” Had the NAV per share been used to determine the fair value of the share based payment, we calculate the value of the grant to be ~USD 2.9 million (or ~USD 1 million annually considering that the options vest in equal instalments over a three year period.) Summing up the 2018 consulting fees and the share based payments using NAV as the fair value in pricing the options, total annual compensation for Chairman Tang was approximately USD 2 million (or GBP 1.5 million.) Even if we were to exclude Chairman Tang’s ~USD 400,000 salary from Polo’s investee company, GCM Resources, his total annual compensation of approximately USD 1.6 million (or GBP 1.2 million) is significantly above the median average total remuneration of GBP 248,000 for CEOs of companies trading on the AIM (as cited in BDO’s AIM Directors Remuneration Report 2018). As we stated in our previous letter, we do not begrudge management teams being adequately compensated when they have helped to create shareholder value. However, Chairman Tang’s significantly above market compensation (approximately 5-6 times the median) stands in stark contrast to the historical returns of Polo’s shareholders, who have witnessed c.80% decline in the share price and received no dividends or return of capital since his appointment in May 2013.
3. Engage in a thoughtful dialogue regarding potential financing to help unlock value for shareholders. Subsequent to the publication of Phronimos’ letter to the Board of Directors on February 14th, we have heard from other Polo shareholders supportive of our proposals, and, consequently, the concerned shareholder group has grown significantly. Furthermore, we have also heard from other investors willing to provide non-dilutive financing to help unlock value for Polo shareholders.
4. Provide shareholders with the time frame deemed necessary by the Board to evaluate any shareholder value unlocking proposals currently being contemplated.
We strongly urge the Board to respond to our requests and concerns without further delays.
Sincerely,
Sam John, CFA
Managing Member of Phronimos Capital, LLC
Investor Contact: Sam John (sjohn@phronimoscap.com/+1 (424) 781-7871/www.phronimoscap.com)
SOURCE: Phronimos Capital, LLC
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Good luck Rob- They would need to sell something to make a dividend payment of course (a part of their Hibiscus holding is the obvious move or some GCM on one of their regular spikes) and the remuneration of Tang does seem pretty excessive so some active engagement from holders cant be a bad thing.
I believe Phronimos have 14% of holders on side (I have added my small holding to their list) and give the prominence of private investors they should be able to call an EGM shortly, especially if they get the full shareholder list.
No doubt they will reply early next week so we will get some news from POL soon.