Investor's Champion Blog
Provides refreshingly forthright, independent comment on predominantly small cap companies and specialist investment funds. Informed opinion, based on first-hand research, but pulls no punches in exposing management weaknesses.

RAB Special Situations –the hidden value (or hope springs eternal)

I had another insight into the hidden value in many of RAB Capital’s investments recently through a quick read of the offering document of Zeehan Zinc, an Australian (Tasmanian) mining minnow that is seeking to raise c£10m and be admitted to AIM this month.

Up until 30th June 2006, Zeehan had clearly been struggling. For the year ended 30th June 2006 the group incurred a net loss of AUS$3m and as at 30th June there were net liabilities of AUS$2.8m-insolvent in my book! Operating cash outflow in the year ended June 2006 was AUS$1.9m. This was a business in need of support-and fast.

Who better to go and see than RAB Capital, a big supporter of the junior miners.

RAB rode to the rescue and on 2nd August 2006, RAB Special Situations (Master) Fund Ltd (via Credit Suisse Nominees) subscribed for 9,760,000 shares at a price of A$0.25 per share for a total subscription of £1,000,000, securing 14% of the share capital. At the same time a total of £4m was injected to support the business.

Naturally, there were conditions attached to the RAB subscription agreement. If at any time up to Admission (Admission is the key to hitting the first jackpot) the Company issues shares at an issue price lower than the subscription price paid by RAB, the company must offer to issue to RAB the same class of shares in the share capital of the Company, at no cost to RAB enabling RAB to maintain its percentage portion of the aggregate total issued shares of the company, immediately prior to the issue of the lower price shares.

The next target is obviously to drive on to AIM admission and seek further funding from other, less astute punters, (including some of the larger London institutions) to support the development of the business. After all, the £4m really only satisfaied short term requirements.

Since August 2006 the Company has grown in value (although I don’t know how as nothing really appears to have happened) and the group seeks admission to AIM at a price equivalent to cAUS$0.65/ share-that’s not a bad return for RAB for a short term bridging loan!

However, the key is now to get this issue away and the best way of achieving this is for RAB to support it. By lending a little extra support it will also encourage others to come on board as well and effectively lock in its return (in the short term at least). Who knows there might even be positive news on the operating front soon!

I might be wrong but I assume that prior to AIM flotation RAB’s investment remained accounted for at cost. On float there would be immediate uplift in the valuation which will be to the benefit of the various RAB funds and consequently help lift the management fees and the performance fees, all to RAB’s benefit.

As I see it, this happens without anything actually being achieved in the underlying Zeehan business. I agree that RAB help provide some much needed capital at a vital time, however, should investors really be supporting the AIM issue at the equivalent of AUS$0.65/share, when there is no real difference in the value of the business since August.

From a corporate finance perspective (and for me RAB is there in a corpoprate finance capacity), the real beauty of the commodities game is that hope lingers on and rings the same bells for generations of investors/speculators. The same piece of land has probably featured in many a miner’s dreams.

In the case of Zeehan, ore exploration and extraction was undertaken in 1980 by a member of the current management team and prior to that back in the late 1800s and early 1900’s base metal mining was undertaken in the region.

The next step for RAB is surely to be able to make a slow and dignified exit over time, without anyone really noticing that they have gone. Not easy when you hold over 10% of the share capital. There is bound to be some kind of lock in, but no doubt this allows a degree of flexibility.

I wonder how many more Zeehan’s there are out there for RAB and indeed how many that may never make the grade and get to AIM.


Investor's Champion is a registered trade mark of Investors Champion Ltd.  Investor’s Champion Limited is a company registered in England and Wales under number 03577867 whose registered office is at Langwood House, 63-81 High Street, Rickmansworth, Herts WD3 1EQ. Investor’s Champion Ltd is associated with Fundamental Asset Limited who is authorised and regulated by the Financial Services Authority.