Image for Shree: Tasmania will certainly never see a cent in royalties ...

*Pic: Bryan Green, former Deputy Premier; now Opposition Leader, and Shree’s Sanjay Loyalka ... Pic from here

Every analyst has a different approach to establishing the value of a company.

Junior analysts in large institutions often receive directions from above to provide favorable coverage, particularly when the target pays significant corporate fees to the broking firm or research house.  Illegal?  Probably.  Unethical?  Yes.

More commonly, analysis is based on publicly available information.  In this world, the spreadsheet is king, and a company will be given a sell, buy or hold recommendation based nearly entirely on numerical data.  If time permits, a chat with key staff or even a company visit might be used to shore up financial conclusions, but not always.

As an analyst for a tiny, insignificant financial company, my approach differs again.

Obviously, crunching the numbers is important, but there are thousands of investment grade companies out there.

So I apply a second filter, which I call the survival test.  Does the company have reliance on a single individual, product or source of funding?  Is there a need for external support if the business plan falls short of expectation?  If yes, the risks increase greatly, and I generally won’t touch it. 

An example might be the late ABC Learning Centres – a company fawned over by most analysts based purely on the growth trajectory.  Yet the entire childcare industry exists solely thanks to Government rebates, so it failed my test miserably.  (I listed ABC Learning in my ‘top ten sells’ for 2007 in the Canberra Times when the share price was still above $8.00).

Finally, I apply an ethical screen.  That’s partly due to personal philosophy – but more a wish for clients to invest in businesses likely to survive and thrive for generations to come.  There are no profits on a dead planet, and a similar future awaits listed companies who don’t adopt sustainable, yet profitable business models.

Of those three tests – financial, survival and ethical – Shree Minerals fails all.  Miserably.

I won’t dwell on the ethical problems posed by a company digging a quarry in the Tarkine other than to refer to current and former ownership, which closely links those associated with Pike River Coal, directors of which walked away from responsibility for 29 tragic deaths in 2010.  As for the survival test, I only pose one question:  When Shree runs into trouble, who will rescue the company?

So let’s look at the numbers.

A starting point for many analysts is market capitalization, which is simply the number of shares on issue multiplied by the current share price.  With around 121 million shares on issue and the last sale price at 15 cents, that gives us a market capitalization of just $18 million.  Few brokers will look at a company worth less than $100 million.

But even that $18 million number is misleading.  Yes, the last sale price was 15 cents, but anybody hoping to sell at that level will be disappointed.  As it stands, there are only two buyers in the market; somebody bidding for $1,000 worth of shares at 10 cents, and another looking to spend $750.  Other than that, there is no interest.  Zilch.

If we accept modern portfolio theory, the market is never wrong.  I don’t believe that for an instant, and neither do the many institutional investors who aren’t convinced by Tasmanian media headlines such as ‘mine could last decades’  But perhaps the market is spot on this time in valuing Shree at next to nothing.

It seems the chief executive (and biggest shareholder) Sanjay Loyalka is good at some things, and not so good at others. 

He’s paid pretty well (around $500,000 in the last couple of years), but he’s also handy passing the hat around.  Shree’s biggest source of income since listing on the ASX hasn’t been from mining, but asking shareholders for more cash.

That’s going to continue, just like the last quarter when Sanjay raised $2 million to keep the business afloat by flogging some shares to an unknown party.  In fact Shree got started by getting investors to give $3 million to Sanjay and his mates after they picked up the Tasmanian tenements for a peppercorn amount, and then valued them at $15 million.

Some readers may be familiar with a term known as the quick ratio; basically a number derived from dividing a company’s liquid assets by its short-term liabilities.  It’s not a perfect measure, but it does provide an indication of the ability to pay debts quickly, and can be used as a measure of solvency.

The last published balance sheet for Shree was for 31 December 2013, when there was around $3.9 million in the bank and $6.3 million in unpaid bills.  Those numbers would make any lender nervous, which explains why Shree is tapping shareholders for cash rather than pursuing debt funding.

Since then, it’s all been downhill.  There appears to be a transport bottleneck (not reported to shareholders) limiting the shipment of ore to the Burnie port.  The quality of Shree’s product isn’t up to scratch, so cash receipts are below budget.  As there’s no hay left in the barn, Shree isn’t paying any royalties for our iron ore (yes, it’s our iron ore, not Shree’s), and they’ve nearly drawn the overdraft to capacity.  By the end of June, they will either be trading insolvent, of Sanjay will have tapped some investors for more cash .  Either way, it’s not sustainable.

The balance sheet is also pretty ugly.  Extrapolating the increasing loss from operations into the future, it’s not hard to put the value of Shree’s tenements at close to nil.  That makes the company worthless, with little chance any residual obligations will ever be paid.

A couple of analysts don’t agree with my conclusions.  But Shree paid for them to produce a research report. 

I hope they get paid, as others probably won’t.  Tasmania will certainly never see a cent in royalties.

(This is an extract of a report produced by Wills Financial Group Pty Ltd, AFSL 339136 ( Facebook here ) and may not be reproduced without the permission of the authors)


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• PB, in Comments: Shree Minerals has already requested that the State Government defer royalty payments from the project.  ( here ) In addition, the State Government has failed to clarify specific details regarding the bond and remediation conditions of the Shree Minerals’ mine lease. This is of critical significance given that neither the State or Federal Governments were informed by Shree Minerals during the assessment process that two of its directors, Sanjay Loyalka and Arun Kumar Jagatramka, were on the board of Pike River Limited at the time of the mine disaster which killed 29 men in NZ on 19 November 2010. As a result of the disaster, Pike River Coal Ltd became the subject of a NZ Royal Commission which resulted in fines and charges, some of which remain outstanding. It has been reported that the company was ordered by the NZ Government to pay $3.4m in reparation and fined $760,000 over nine charges. Pike River Coal Ltd went into receivership after paying only $5,000 of the $110,000 owed to the family members of the deceased miners.