Two undervalued small caps

Tim Boreham

Independent Investment Research

From the fruits of the sea ... to the earth’s mineral riches, here are two stocks that are undervalued. Or at least management thinks they are …


Mareterram Ltd (MTM)

Share price: 27c, Market cap: $32m

At the risk of coming the raw prawn with investors, the WA-based fishing operator presents its own sums as to why the worth of its fishing licences alone justifies its market valuation.

Mareterram holds ten of the 18 perpetual licences to fish at Shark Bay, a World Heritage Area 800km north of Perth, for prawns, scallops and crabs. Each licence is valued on the books at $1.5m each, but in February the public auction of another licence fetched $4.3m and two weeks later another commanded $4.3m.

“We think we are a fair reason for that,” says CEO David Lock. “Corporates are getting involved in prawn fishing and that has created excitement.”

On the raw numbers, the implied valuation uplift boosts Mareterram’s net assets from 17c a share (as of December balance date) to 37c/sh.

Mareterram has a 50-year operating history, but has only been listed since January last year, having raised $18m at 20c a share.

But it’s been an eventful period: in April last year 19.9% shareholder Sea Harvest offered 35c a share in a proportional shareholder and now has a controlling stake of 56%.

South Africa’s biggest fishing company, Sea Harvest supplies all of Mareterram’s hake, the company’s biggest selling line. Sea Harvest is keen to expand out of South Africa, partly because the licences there are not perpetual and partly to reduce its exposure to the country’s currency, the rand.

This year Mareterram won a regulatory free hit by gaining an exemption on a six-month prawn import ban, aimed at curtailing an outbreak of the white spot disease, detected in a Qld prawn farm and then in the wild (in isolated cases).

Unlike anyone else Mareterram is allowed to ship prawns to its certified processing plant in Thailand and then re-import them for local consumption.

In effect, the ban removes 32,000 tonnes of import volume and affects 1500 of local farmed output, leaving a local wild catch of 20,000t.

The ban is subject to a Senate review, reporting in June. “Unless the government lifts the ban – which I would be surprised about – supply will be quite constrained,” Lock says.

Consumers learned all about this over Easter, with prices for the crustaceans soaring.

Mareterram recently struck a deal with Coles to supply 200t of catch. Because no-one else can supply, there was little of the one-sided ‘negotiations’ that defines the supermarket-supplier relationship.

Students of Latin would appreciate that Mareterram means ‘sea’ and ‘land’ , which hints at the company’s acquisition strategy. The company wants to expand into other proteins and this could mean expanding into intensive farming (pigs and chickens) or land-based aquaculture. Whatever the case, management wants something that will double its underlying earnings.

Speaking of the numbers, Mareterram reported December half net profit of $3.4m and ebitda of $4.3m, on sales of $26.6m.

Broker Select Equities forecasts current year earnings of $2.6m, rising to $3.7m in 2017-18.



Share price: 1.4c, Market capitalisation: $17m

Rox chief Ian Mulholland is perplexed why the WA gold and nickel explorer’s market valuation is less than it was last October, just before the company said it would sell its Reward zinc tenement in the NT for $20m cash.

The sale, to JV partner Teck, means Rox now has $15m in the bank, with a further $3.75m to come (albeit in six years).

Since then, the company has also outlined an official nickel resource of 75,000 tonnes at its flagship Fisher East nickel project in the north eastern goldfields region.

“Either the market is not ascribing any value for the cash, or the ground,’’ Mullholland says.

With farm-in partner Doray Minerals funding a separate gold project at Fisher East, Rox is one of those exploration unicorns that don’t need capital. Conversely, it is scouring for a worthy project to buy and could eligible sellers please form an orderly queue.

Mulholland says Rox jettisoned Reward because zinc was not gaining traction with investors. Nickel also isn’t exactly flavour of the month, although at $US7 a pound the stainless steel ingredient recovered from its 2016 nadir of $US4lb.

The price has been affected by Chinese demand for low-grade laterite material, which has subdued demand for the more desirable sulphides. The Indonesian ban on exporting raw –a stance followed by the Philippines – adds another variable.

The sum effect though is that sulphide ore supply is tight, with regional smelters are offering better terms for sulphide content.

In terms of acquisition, Rox is targeting base or precious metals traded on the London Metals Exchange and thus transparent (which precludes a fashionable dalliance into lithium or cobalt).

He would prefer the project to be in Australia, but is amenable to some parts of Europe, which have been underdone on exploration.

In the meantime, Rox should deliver a steady flow of exploration news. An 1800 metre reverse-circulation drilling program at Fisher East is underway, to be followed by a 5-6 week, 3350 metre diamond drilling program (subsidised by the state government’s Exploration Incentive Scheme).

In July, the company should release results of 12,000 metres of aircore drilling at the Fisher East gold prospects.

Under the deal, farm in partner Doray committed to $1m expenditure in the 2016-17 and can spend up to $10m to earn a 75% stake in the project.

Rox believes there is strong potential to increase the 86,000 ounce resource, although it is questionable whether the cash-strapped Doray will pony up any more.

A distracting factor is that Rox is engaged in a legal spat with Marindi Metals, which offered to buy Reward. Marindi was overbid by Teck, which exercised a pre-emptive right Merindi claimed it was not entitled to.

Mediation attempts have been unsuccessful, so it’s pistols at dawn in court room five.

Based on peer comparisons, Rox values the deposit at $23.4m on an enterprise value per tonne comparison.

Analyst Peter Strachan of Strachan Corporate values the stock at 3.8c a share, or $47m.

In harsh reality, Fisher East probably needs a sustained higher nickel price if it is to be developed. But ascribing a valuation of zip to it is a tad stingy.


Disclaimer:  The companies covered in this article are not current clients of Independent Investment Research (IIR).  Under no circumstance there have been any inducements or like made by the company mentioned to either IIR or the Author.  The views here independent and has 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


2 stocks mentioned

Tim Boreham
Tim Boreham
Editor of New Criterion
Independent Investment Research

Many readers will remember Boreham as author of the Criterion column in The Australian newspaper, for well over a decade. He also has more than three decades’ experience of business reporting across three major publications.

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