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Pan Asia Metals Limited (ASX: PAM) - Tungsten and Lithium Projects located in Thailand - By-products including, sulphate of potash (“SoP”), a high quality Potassium Fertiliser

CRITICAL METALS IN A LOW COST JURISDICTION Pan Asia Metals (“Pan Asia” or “the Company”) is a recent listing on the ASX, with a focus on developing “critical” metals projects in the emerging economic powerhouse of SE Asia. The overall strategy is to concentrate on those commodities and jurisdictions that provide the opportunity for low cost operations with the potential to value add, and thus maximise returns. As such, SE Asia, a low operating cost region with strong economic growth when compared to other jurisdictions has been targeted. The initial projects include tungsten and lithium properties located in the Southeast Asian Tin- Tungsten Belt in Thailand, the 21st largest economy globally. Both commodities are considered “critical” in terms of supply and economic importance by the USA and European Union, and also present the opportunity to undertake downstream processing should economically viable deposits be found. This strategy is also in concert with Thailand’s “Thailand 4.0” development strategy, which is looking towards high return, value add industry. The 100% owned Khao Soon Tungsten Project saw significant high grade production until ~1980, and work to date by Pan Asia has highlighted the potential to define high grade mineralisation - this work has already resulted in an Exploration Target of 15 to 29 Mt @ 0.2% to 0.4% WO3 for 30 to 116 kt contained WO3 being defined. Drilling by the Company has returned up to 51.2 m @ 0.50% WO3 from surface, including 12.8 m @ 1.07% WO3 from 14.8 m. Lithium projects include Reung Kiet and Bang Now, which host lepidolite-bearing pegmatites that have seen historical tin production. Although currently global hard rock lithium production is from spodumene pegmatites, development studies and pilot scale test work by various companies have demonstrated the potential of lepidolite to be a cost effective source of downstream lithium products when the value of by-products is included. Such by-products may include, amongst others, sulphate of potash (“SoP”), a high quality potassium fertiliser, that should see a growing market with increased intensity of agricultural production in the region. The Company has an active work programme, largely comprised of drilling (which has commenced at Khao Soon), going forward, and thus we would expect to see steady news flow over coming months. There are no COVID-19 impediments to exploration activities in Thailand, with the country having one of the lowest infection rates globally. KEY POINTS Quality projects: Pan Asia has a portfolio of largely brownfields tungsten and lithium projects in an under-explored but globally significant mineralised province with the quality being affirmed by results of work to date. Khao Soon historically was a very high grade producer. In demand metals: Demand for both lithium and tungsten is forecast to grow over coming years - lithium largely due to growth in electric vehicles, and tungsten due to overall economic growth as we come out of the COVID-19 pandemic and governments printing money to drive growth. Also, production of downstream products (and in the case of tungsten, upstream production) is largely controlled by China, with end users looking for diversity in supply. Attractive jurisdiction for investment: Recent government initiatives have enhanced Thailand as an investment destination, with these aimed at attracting foreign investment, developing infrastructure, high tech and value add industries and modernising the agricultural industry. The country has also updated the Mining Law, with Pan Asia being one of the first companies to be granted tenements under the new law. Infrastructure rich: The projects are in a region well endowed with infrastructure, including transport and utilities. Experienced and committed personnel: Company personnel have extensive experience in the junior resources space (including in SE Asia), In addition directors directly and indirectly hold ~56% of the shares in Pan Asia, a key strength that aligns the interests of company personnel with that of the other shareholders. Leveraged to exploration success: With an enterprise value (“EV”) of ~A$16 million, Pan Asia is well leveraged to exploration success.

  • 11 Nov 20
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Pengana Private Equity Trust - Secondary Offer Review (ASX code: PE1)

SECONDARY OFFER OVERVIEW On 23 October 2019, Pengana Capital Group Limited (ASX: PCG) announced its intention to offer additional units in the Pengana Private Equity Trust (ASX: PE1) in the first quarter 2020 period (‘Secondary Offer’). The rationale of the Secondary Offer was to satisfy strong latent and realised secondary demand as well as improve the degree of secondary market liquidity in the Trust. The Secondary Offer comprises an offer of up to 345.4m units at a subscription price equal to $1.37 (representing the NAV per unit of the Trust as at 31 January 2020 less a special distribution of $0.0125 per unit). The Secondary Offer comprises three components based on a waterfall structure: 1) the 2:1 entitlement offer; 2) the shortfall offer; and, 3) the discretionary offer. Under the entitlement offer, each existing investor as at the entitlement record date of 20 February 2020 (“existing unitholders”) can subscribe for up to 2 new units for every 1 unit held. The shortfall offer will include any new units not applied for under the entitlement offer and is open to existing unitholders who have subscribed for their full 2:1 entitlement. The discretionary offer is open to existing unitholders and new investors, the latter at the discretion of the Responsible Entity. Any new units that are not applied for under the shortfall offer, plus 16.8m units under the Trust’s 15% placement capacity (of which ~10% is being used for the discretionary offer with the remaining ~5% reserved for the future issue of the loyalty units) will form part of the discretionary offer. All existing unitholders, irrespective of whether participate in the 2:1 offer or not, will also receive loyalty units in PE1 issued at the subscription price and which will be fully paid for by PCG. The amount issued to each existing unitholder will be based on 1) the units held and retained for four months (expected to be 23 July 2020 and 2) a “loyalty percentage”, which will be equal to 1% per $100 million raised under the offer. For example, if $100 million is raised under the offer, then the loyalty percentage will be 1%. If $250 million is raised under the offer, then the loyalty percentage will be 2.5%, etc. The variable percentage does not necessarily mean existing unitholders are better off the higher the raise amount, all things being equal. Rather it is designed to at least partly offset the increasing cash dilution impact the higher the secondary offer raise amount. SECONDARY OFFER CONCLUSION The issue with any follow on capital raises in private investment markets is the risk of cash dilution for existing unitholders. That is, it takes time to fully invest the new capital raised, with the prolongation of this deployment timeline diluting the prior expected returns profile. PCG have been steadfast in saying that it would only consider a secondary raise if it was not detrimental to existing unitholders in addition to not providing a substandard returns outcome to new investors (i.e. both should be on roughly the same footing in terms of longer term expected returns). PCG have achieved this outcome for existing unitholders through a unique structuring innovation in the Australian listed managed investments sector. Namely, loyalty units are issued to all existing unitholders irrespective of whether they participate in the 2:1 offer or not. This is in contrast to the recent Magellan and VGI Partners loyalty unit offers, which required existing investors to participate in the respective offers. IIR has in the past expressed reservations about this latter structure, with the risk that it creates an incentive to participate in a raise based on considerations that are not entirely directly related to the relevant investment vehicle. Hypothetically, if this sort of structure is determined to partly create an incentive exogenous to the investment merits of the vehicle in question, IIR suspects ASIC would ultimately review the appropriateness of the structure. Reassuringly, the Responsible Entity and Investment Investment Manager has undertaken extensive modelling on the basis of a maximum 2:1 raise to determine over a nine year forecast period whether the additional capital raising will prejudice existing and new investors via its impact on both the deployment of capital and investment returns when compared to the Investment Investment Manager’s initial IPO expectations. This analysis reveals that both existing and new investors are better offer under the 2:1. Existing investors, irrespective of whether they participate in the 2:1 or not, are better off on account of the faster than initially expected deployment of capital, the additional value of the loyalty units as well as the better than modelled short duration credit returns. Expected annualised returns for new investors are effectively comparable to existing IPO investors, as new investors are benefitting from a Day 1 portfolio that is already partially deployed into private equity. In our view, the structuring of the loyalty units tied with the modelling initiative and output lead us to believe that the secondary raise could not be better structured.

  • 19 Feb 20
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Jindalee Resources Limited (ASX: JRL)

Full Research Report can be accessed on www.independentresearch.com.au Jindalee has a A$11m market capitalisation, with a portfolio of properties in the lithium, nickel and gold commodity space. The 100% owned McDermitt Project in the USA has been receiving the most attention, and in 18 months from acquisition as a greenfield exploration site, has reported a maiden resource of 1.55Mt Lithium Carbonate Equivalent, with an exploration target that remains larger. Comparable ASX listed companies are trading at market capitalizations of A$30M to A$300M. These companies generally have completed scoping/PFS/DFS studies that provide the market with specifics on project scope. if Jindalee can provide this level of information to the market, we would expect the share price to be re-rated. KEY POINTS Jindalee is a geology driven project generator – The management has a track record of acquiring projects early and cheaply, adding significant value during the early lower cost phase of project generation, and partnering when assets entered more capital intensive development phases. The company has been listed since 2002 and still has only 38.5M shares on issue. McDermitt is one of a new class of lithium deposit – Current global lithium supply comes from hard rock spodumene producers, typically in Australia, or brine based producers in Chile and Argentina. McDermitt is a dried out lake deposit at surface, basically an open pit clay mine, with the potential to have cash operating costs close to the bottom end of the brine producer cost curve, while also having half the time to ramp up to full capacity of brine projects. Being a new class of supply is a source of risk at present, translating to a higher discount at present, but the discount is likely to wind back if similar projects are successfully developed. Share price drivers – We expect the McDermitt project to deliver news flow relating to additional drilling, and particularly additional metallurgical test work, which we expect will form the basis of a scoping study, or possibly a PFS and Reserve announcement. The PFS/Reserve would be the major share price driver, but we would expect interim announcements along the way to create a positive share price trend. Lithium price oversold – From our assessment of the cost curve, and more importantly by the actions of some existing producers who are winding back production, it is clear that the current lithium price will rebound, although that will probably have to wait for US/China trade wars, Corona virus impacts, and the effects of the Chinese subsidy changes to ease. Australian gold and nickel exploration – The newly applied for North Gruyere tenement is certainly a focus, and if Jindalee is allowed to drill in the Dorothy Hills shear zone along strike from the 6Moz Gruyere operation, we would expect that to spark some market interest. VALUATION As an exploration story, we find it difficult to place a specific value on the company’s assets. Any valuation is contingent on the outcome of value adding activity. From a review of comparable ASX listed lithium project developers, the median market capitalization per tonne of lithium carbonate equivalent resource is around A$80/t LCE, and if Jindalee can convert all its current 1.6 Mt LCE resource into a competitive project, with similar capex and opex metrics to comparable companies, then it should trade at over A$3/sh. The risk is that in the process of building an economic project, the resource typically shrinks, hence the market’s caution. The nickel and gold exploration ground in WA provides diversification and additional upside. Please note any comments on valuation are conditional on the occurrence of events that have yet to happen. All the assets of this company are either at the exploration stage, or very early in the project definition stage.

  • 19 Feb 20
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The New Criterion: Weekly Small Cap Stock News Australia

The New Criterion: stocks that tap the disaster zeitgeist With the stock market off to a galloping start in 2020 – at least before the coranavirus sniffles set in -- most investors would have been content with a passive market exposure to the usual blue chips. As is the norm, the speculative end of the market moves to its own rhythms and influences. In this vein, here are three ‘special situation’ stocks that plug into the topical anxieties of natural disasters, the coronavirus threat and the security of domestic gas supply. Biotron (BIT) 9c Shares in the antiviral play Biotron, which rose tenfold in value in 2018 after unexpectedly efficacious HIV trial results with its drug candidate BIT 225 The share rally subsequently fizzled, but on January 22 the stock spiked from 6c to 8.4c as the coronavirus outbreak intensified. It’s been trending up ever since. Queried by the ASX, the company merely noted that two directors had been recent keen buyers and referenced patent applications and upcoming medical conferences. While there was no specific mention of the ‘c’ word, punters have latched on to Biotron’s clinical program for ‘pan respiratory’ viruses including coronaviruses. In June 2019 a Biotron prezzo mentioned “corona” as part of an early-stage screening program – and it wasn’t referring to a 1970s Toyota. Named after its crown-like shape, the common coronavirus is responsible for past pestilences including Severe Acute Respiratory Syndrome (SARS) and Middle Eastern Respiratory Syndrome (MERS). Biotron CEO Michelle Miller says while the company’s work on pan respiratory viruses continues, there’s not much to add at this stage. “We have some good advanced compounds we can progress towards a treatment,” she says. “They might not work on this current virus but if it hangs around … we would like to be in a position to have something ready to go.” She says while a vaccine can be developed reasonably quickly, a drug cannot: “even if we have a compound which is absolutely fabulous we would have years of lead time before anything gets to market.” By that time, the virus will have taken on another malevolent form. Meanwhile, the US-listed Novovax says it is cloning the coronavirus to develop a vaccine, in the same way it developed one for MERS in 2013. Johns Lyng Group (JLG) $2.47 How lucky is a builder specialising in insurance disaster repairs at a time of devastating bushfires, floods and hail storms? Amid the misery, Johns Lyng has upgraded its full year profit expectations to ebitda of $32 million, 11 per cent higher than previous guidance. Revenue is forecast to be $420m, 5 per cent higher. On February 25 the company will also report first half underlying earnings (ebitda) of $18m, up 75 per cent on the previous corresponding period. Revenue is forecast to be $234m, 53 per cent higher. The upgrade doesn’t relate to the current summer of pain, but to earlier disasters such as Cyclone Debbie and the Townsville floods of early 2018. CEO Scott Didier reports a “significant flow” of new job registrations, so expect the 2020-21 year to be buoyant as well. The company is engaged directly by the insurers, who are seeking to reduce the number of providers on their builder panels. As the only national provider, Johns Lyng is likely to consolidate its presence. Johns Lyng has operated since 1953, with Melbourne entrepreneur Didier buying the business in 2003. The helicopter flying Carlton Football Club fanatic fostered an eclectic array of side businesses including golf tournament software, a wine company and the (lucrative) domestic Nike franchise. But by the time of the October 2017 listing Johns Lyng had returned to its more staid foundations. Struck at a $1 a share, Johns Lyng’s $220m valuation at the time of listing looked toppish. Now worth $557m, the company trades on a current-year earnings multiple of more than 30 times. CCZ Equities pencils in 2021-22 revenue of $544m and $46m of ebitda, a beefy 43 per cent increment on the company’s current-year guidance. Sensibly, the broker notes that disaster-related job flows are hard to predict. Leigh Creek Energy (LCK) 13c Speaking of special situations … Claimed to own Australia’s biggest uncontracted gas reserves, the Adelaide-based coal gasification pioneer has ambitious plans to enter the fertiliser sector. We take it that Leigh Creek has filed a formal offer for Incitec Pivot’s fertiliser business, IPF, which accounts for 60 per cent of the local market for the soil nutrient. UBS has been gauging buyer interest on behalf of Incitec Pivot, which last year announced a “strategic review” of the underperforming IPF. While this does not necessarily mean an outright sale, Incitec Pivot wants to focus on its better performing explosives business based on the acquired Dyno Nobel. IPF is speculated to be worth anywhere between $300 million and $1.5 billion, with the most likely price in the mid range of $500-700m. Making fertiliser requires not just phosphate, but a lot of gas. With a gas reserve of 1153 petajoules at its eponymous site in outback South Australia, Leigh Creek looks to be well positioned to supply IPF’s two eastern seaboard manufacturing operations. Leigh Creek’s master plan also entails adding value to the gas by building an in situ plant at Leigh Creek to produce urea, widely used in fertilisers as a source of nitrogen. Costed at $3.2bn, the plant would produce the material at a rock bottom $US100 a tonne. With annual capacity of 975,000 tonnes, IPF’s Phosphate Hill facility near Mt Isa in northern Queensland turns mined phosphate rock into ammonium phosphate. IPF’s Gibson Island, in Brisbane, is the biggest supplier of anhydrous ammonia, another fertiliser material. Phosphate Hill’s current gas contract has eight years to run. Gibson Island gas is supplied by the APLNG joint venture but subsidised by the Queensland government up until 2023. A few things have to go right for the $70m market cap Leigh Creek to realise its dream of becoming the new force in fertiliser. Firstly, the energy project is still subject to a final investment decision (FID), having operated as a pilot project for six months early last year. The company estimates it needs $60m of funding over two years just to get to FID stage. Secondly, it needs a deep pocketed cornerstone investor to stump up the billions of dollars needed for the energy project and urea plant. Leigh Creek is 24 per cent owned by China New Energy and the parties are in initial negotiations to form a joint venture. These chats, however, have been delayed by the coronavirus threat. Of course, Incitec Pivot needs to accept Leigh Creek’s offer. In December Incitec Pivot chief Jeanne Johns reported “plenty of interest” in the asset, but said it was too early to tell who was serious. The company is not in a hurry, citing an end of year (September) deadline to wrap it all up. IPF recorded an underlying (ebitda) loss of $80m in the year to September 2019, the result of decade-low prices, flood-related outages and drought related slump in demand. But in the previous two years the division chalked up earnings of more than $100m and presumably that’s a more normal performance. Finally, coal gasification remains on the nose with investors because of the earlier mishaps in Queensland exemplified by Peter Bond’s hero-to-zero Linc Energy. A year ago Leigh Creek shares spurted from sub 10c to beyond 40c, but a more sceptical investor mindset now prevails. Leigh Creek argues its project bears no resemblance to these past failures. Otherwise, Leigh Creek CEO Phil Staveley is staying mum: “We naturally look at all options in the fertiliser space,” he says. Tim Boreham edits The New Criterion tim@independentresearch.com.au Disclaimer: Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.

  • 11 Feb 20
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Moelis Australia Private Credit Fund

The Moelis Australia Private Credit Fund (“the Fund”) is a newly established fund that provides investors exposure to the Australian private debt market. The Fund was established by Moelis Australia Asset Management Limited (the Trustee) which, in turn, appointed Moelis Australia Funds Management Pty Ltd (the Manager) as investment manager. The Fund will endeavour to create a diversified portfolio of secured loans to mid-market corporates and small and medium enterprises (SMEs). All loans will be secured by first lien senior secured collateral, which ranks ahead of any other type of debt in the capital structure in terms of priority of payment and security on assets and cash flows. The Manager will not engage in any subordinated loans. Private credit investments will include a mixture of senior, stretch senior (unitranche) and secured loans, to operating businesses with stable recurring cash flows and/or strong asset backing. This reflects a strategic emphasis on lower credit risk, rather than stretching for yield, and in turn reflects a consistent approach by Moelis Australia of focusing on preserving investor capital. The Manager has a very proactive approach to structuring and managing its credits. It facilitates this by being either the sole-lender or, in the case of syndicated corporate loans, being the lead or co-lead lender. This provides for greater transparency and deal control, with the potential to structure more favourable pricing, collateral, covenants, and other credit terms, in addition to greater control / influence in the event of a default and potential recovery / workout situation. The Fund is targeting a quarterly distribution equivalent to 5% p.a. and total returns equal to 8-10% p.a. net of fees. INVESTOR SUITABILITY The Fund is designed to deliver stable returns with exposure diversified across credit market segments, borrowers, industries and origination channels and lower risk of capital loss created by the defensive nature of senior secured credit investments. Returns are expected to be in the form of income and capital, with a risk of capital downside should the Manager recoup less than the principal outstanding on a defaulted loan. IIR would deem the investment strategy to be at the lower end of the risk spectrum of private debt based on the first lien security, prudent underwriting, a very proactive approach to portfolio monitoring, which includes the investment team’s significant experience in resolving deteriorating credits in addition to the investment team’s prior track record. Private Debt offers several advantages over the traded sub-investment grade markets of high yield bonds and bank loans (public debt). Private debt lenders receive more detailed due diligence information, senior investments benefit from security over assets, there is a lower degree of interest rate sensitivity as private debt investments are more often floating rate notes, and there is lower marked to market volatility. Further, private debt investors benefit from stronger covenants and better information / monitoring rights. For these reasons, IIR views private debt strategies such as pursued by the Fund as a sensible allocation within a larger holding of debt related investments. RECOMMENDATION IIR ascribes a “Recommended Plus” rating to the Moelis Australia Private Credit Fund. The investment strategy is managed by an experienced team with an established history in the corporate and SME lending segments. While the Fund is newly formed, IIR has a high degree of conviction in the Manager’s ability to achieve the stated total returns objective over the foreseeable future given the strength of the investment process and broader resources at Moelis Australia. Private debt has, to date, presented an attractive income opportunity, partly through a persistent illiquidity and complexity premium, attractive arrangement fees and a considerable market opportunity given the withdrawal of traditional bank lending in the SME and mid-market corporate lending segments. Given the first lien senior secured nature of the direct loans the Fund will engage in, IIR considers the targeted total return premium to that generally derived in the more established North American and European private debt markets, let alone to that of the liquid / bank loans market, as attractive to very attractive on a risk-adjusted basis.

  • 11 Feb 20
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Moelis Australia Secured Loan Series - Class A and Class B

Overview The Moelis Australia Secured Loan Series (“the Fund”) was established in April 2018 and provides investors with a diversified exposure to a portfolio of commercial loans secured by a first lien mortgage on Australian real property. As an open-ended vehicle, the Manager has the ability to accept additional applications, with the current application process a continuation of the general bi-monthly capital raises. The Fund was established by Moelis Australia Asset Management Limited (the Trustee) which, in turn, appointed Moelis Australia Funds Management Pty Ltd (the Manager) as investment manager. In response to changing market conditions and Moelis’ intention to remain ahead of market developments and provide attractive risk-adjusted returns to investors, the existing Fund was restructured to a two class basis - Class A and Class B effective December 2019. The distinction between the two is the maximum LVR, specifically 60% vs 75%, and the target LVR of 55% and 70%, respectively. We also note maximum loan tenor has been extended from 12 months to 24 months. Consistent with the different risk profiles, the Manager is targeting a distribution yield of 6.0% p.a. net of fees for Class A and 10.0% p.a. net of fees for Class B. IIR stresses that all loans will be first mortgage and subject to exactly the same due diligence processes which have held the Secured Loan Series in good stead to date. This restriction to first mortgage loans is a critical point, as the difference between first and second mortgages is very considerable. Under a first mortgage, at all times, the Manager retains control of the loan and is aware, through monitoring and either direct or indirect contract with the borrower, the status of the loan. This level of control, information flow, and ability to act can be considerably greater than that of a second mortgage. Class B unitholders represent the first loss component on any co-invested loans in which a default and forced sale recoups less than the principal amount. IIR stresses that the property market would have to experience unprecedented declines in value for such a situation to arise on any given loan. Unitholders with an existing investment in the Fund were invited to nominate their preferences as to allocation of their investment between the Classes. INVESTOR SUITABILITY Existing and new investors have the choice, based on their preferred risk-return profile, of choosing the lower risk-return option of Class A, the higher risk-return option of Class B, or a mix of both in their desired proportion to generate a melded risk-return profile. In IIR’s view, we agree with the Manager that this is a superior structure to simply increasing the risk parameters of the existing Fund, as the former has the benefit of choice for investor based on their investment preference. From a risk spectrum, we view the Class A units as being at the very lower end of the spectrum, especially as Class B units represents the first loss component and in the event of a default and where the Manager takes control of the property and proceeds to seek to recover the outstanding principal (and any interest payments) through enforcement, the Class A component of the loan must be fully repaid before Class B unitholders begin to receive repayment proceeds. For Class A, IIR views the 50% - 60% LVR as a particularly prudential level, and even more so given the short duration of the loans. IIR deems Class B units to be at the mid-level of the risk spectrum, with the risk elevated by the first loss aspect. RECOMMENDATION IIR ascribes a “Recommended Plus” rating to the Moelis Australia Secured Loan Series. The investment strategy is managed by an experienced team and an investment manager with an established history in the property sector. The Manager has delivered on its performance objective on the Fund and existing comparable investment strategies to date, which has enabled the Fund to continue meeting its performance objectives. While there is a material difference in the risk profile of Class A versus Class B, in IIR’s view we believe Class B unitholders are being attractively rewarded with a target return of 10% p.a. For Class A, the 55% target LVR is extremely conservative, and even more so for any given loan in which Class B is co-invested.

  • 11 Feb 20
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