A Reservoir of Value?

09/02/2014 8:00 am EST


Adrian Day

Chairman and CEO, Adrian Day Asset Management

Significant news has come from one of our best-performing stocks—a miner which has announced a plan to drill some of its 100%-owned land near to its exciting copper discovery with joint-venture partner Freeport at Timok in Serbia, says Adrian Day, editor of The Global Analyst.

Reservoir Minerals (RMC) has been busy with preliminary exploration work in recent months. Despite the attractive location (on trend with the historic and prolific Bor mine), this ground has never been drilled.

The geology and structural setting appears similar and—given the thin cover rocks—drilling will not be as lengthy or expensive as at the joint-venture discovery location.

Reservoir, with a strong balance sheet (over C$40 million in cash), has budgeted an initial $5 million towards this program, money it can well afford.

This could be a game changer for Reservoir in more than one way. Success, of course, would inherently increase the value of the company significantly, and given the tremendous success of multi-year drilling at Timok, success here would likely be extrapolated.

Given the ground is owned 100% by Reservoir, not only would the value boost be all the greater, but it would put the company in the driver’s seat in the entire regional play.

Indications of a possible other discovery would attract interest from other major companies which could bring in a second major and potential eventual acquirer or provoke Freeport to step up to the plate.

Part of the reason that Reservoir decided to move ahead on exploring its 100% owned ground was the suspension of drilling by Freeport amidst protracted discussions on finalizing an operational joint-venture agreement.

Reservoir has bolstered its negotiating position by successfully raising money and bringing in strong shareholders, including a Chinese smelter (who would be looking for offtake) and a BlackRock investment fund.

Other key investors including a Chinese investment fund (with 10%, and wanting more) and JP Morgan (with almost 5%), as well as two other 5% holders, Sprott, Inc., and our asset management company (on behalf of clients).

With one-third of the shares in strong hands, this ensures the company won’t be bought cheaply. Again, success on the new drilling may prompt Freeport to move quicker, at least to finalize its agreement and resume drilling.

We can expect initial drill results from the new drilling as early as late September, and then over the remainder of the year. We would also expect a finalized agreement with Freeport and resumed drilling over the same timeframe.

We are holding Reservoir for the end game. The stock has seen a steady decline (on lack of new Freeport drilling) from exaggerated moves over $7 earlier in the year. Now, with the stock appearing to form a base around $6 and with the new drilling, we would buy again.

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