I've spent some time looking into Strike Resources Limited (SRK) after seeing that they were a major holding of Orion Equities Limited (OEQ) which is trading at about 1/3rd of book.
At face value Strike (SRK SRK.ax) is a resource company selling for 2/3 of cash of hand. They have an iron ore tenement that may have been worth as much as 400M to them at the peak along with a coal mine that will nearly pay for itself in one year of cash flow. This is what attracted me. On the downside here is some history of the founders:
- Farooq Khan and Victor Ho are both executive directors of Strike. They founded a company called FAST SCOUT LIMITED which started trading in March 2000. They almost immediately announced that they were going to attempt to list on the NASDAQ in the US. They had no product or revenue. In their first year they were involved in court case. By 2003 their principal business was Employee Internet Management and management of share investments. They lost 11M in 2002 and 1.7M in 2003.
- By 2004 their principal activity was Virtual Web internet filtering, the pursuit of other internet technologies and the management of investments. They lost another 1.6M. They also became involved in yet more litigation this time with Rivkin Financial Services Limited. Fast Scout were accused of insider trading though the judge found no merit in the case.
- In 2005 they announced a proposed change in business activity to the resource sector. They lost a further $1.7M in 2005 and changed their name to Strike Resources as well as raising new capital.
- By 2006 they were a resource company with Iron Ore, Uranium, Gold and Copper exploration opportunities. They lost $2.2M.
- In 2007 they IPO’d their uranium portfolio as Alara Uranium Ltd (which is now trading at 3c). They made 2.3M in profit including the IPO profit from the Alara IPO. Aside from that non-recurring item they lost 4.4M. They removed uranium from their business description.
- Farooq Khan and Victor Ho took $2.4M in compensation, including equity compensation, in FY 07, remember this is against a loss from continuing operations of $4.4M. Directors in total took $6.2M including equity compensation.
- OEQ - Orion Equities Limited also has Farooq Khan and Victor Ho as directors along with Yaqoob Khan who was originaly a director of Fast Scout. OEQ owns a substantial numer of SRK shares. OEQ sold the Berau Coal Project to SRK in exchange for shares in SRK and options. This allowed OEQ to show a $17.5M gain albeit non-cash. Farooq owns 50% of OEQ though Victor Ho owns none. At face value, selling the coal assets to SRK is a transfer of wealth from SRK shareholders to OEQ which is 50% owned by Farooq. It's worth asking yourself why OEQ sold Berau Coal when it did.
Strike is now locked in litigation in Peru and criminal charges have been discussed. Of course SRK's management insists that the claims are without merit. Peru is a good location for mining. The independent Fraser Institure has published an index of locales. Peru scores about 55 along with New South Wales and Victoria! Their Iron Ore tenement may really be a valuable asset
As for their coal mine; Indonesia scores a 15 out of 100 as a mining jurisdiction and is 7th from the bottom of the list. Another mining company executive is quoted as saying “Indonesia: No security of tenure, transparency, etc. Shame, as it is technically one of the best countries in the world to explore.”.
It is critical to understand that $40M USD of capital expenditure or $57M AUD would leave $16M AUD if they don’t spend another cent on any other corporate activity. That expenditure will be in one of the worst mining jurisdictions in the world
. That is assuming that the capital expenditure is really only $57M AUD. If it goes over by 25% then SRK is out of cash.
To value Strike you have to look at their cash and what it’s going to be used for. If the Indonesian mine goes ahead next year then there will be little to no cash left in the bank. So it isn’t reasonable to value SRK based on today’s cash when they have already planed to spend it.
All in all the origins of this company are very shaky. They’ve never really made money and the founders look like professional promoters switching from hot sector to hot sector while spending time every few years in court. Their new directional shift to Indonesia probably continues their money losing tradition and in 2 years time they’ll be explaining how the mine isn’t producing anywhere near forecast due to political issues. They’ll also have used up the cash they need for their one great iron ore asset in a secure jurisdiction. Finally they are paying themselves substantial amounts of shareholder money (cash and equity) while continuing to lose money.
I’m tempted buy at 38c but I have to pass.