Wednesday, 10 April 2013

Why the price movement up to 10th April 2013?

This is from someone that I invest with and whom understands litigation stocks very well. Not legally qualified in International Arbitration but an excellent investor. Information about Indonesia I have supply. As a reminder, this is not an invite to buy, sell or make financial decisions on information in this blog. It's merely my view point...sad that caveats have to be applied to common-sense but required for ones own protection.

It's quite hard valuing 'litigation or Indonesian stocks'; you could pick a point on the CHL chart below and argue any valuation in the past 3 years. Just look at BUMI Plc. What exactly was their boardroom level investigation into 'cash issues' really about? Was it a motivation to assert blame for the dire performance of the company?? Or is Indonesia so corrupt even the majors find it hard to do business there even with 'an alleged' good Indonesia Partner?


So from the price movement, people (whether Institutional or Private Investors) believe CHL has a value above the previous 2 years and is identical to what happened to Oxus Plc (LSE: OXS) *(whom we also have significant exposure from 0.7p). Volume is well up, so perhaps people are understanding these stocks more. With Rurelec in the news, as well as Oxus there's likely to be a knock on across similar types of companies. 

My view point in valuation is; can the company show they had a 'legal right to own the asset.' Contrary to the crap you read around Bulletin Boards, which are predominantly by Trollers or over-exposed idiots, it's very simple. Did the company clearly show they had a legal right to own, development and eventually operate the asset(s)? Remembering, that in most foreign countries it's a Commercially Operation Service agreement or similar. Whereby the asset or right to mine is retained by the Government and not the company. The company (CHL) merely apply to 'prove up the asset' (Exploration License or similar), then if feasible, apply for a Mining License (Operation or Service License). You'll note Churchill were exploring and not mining nor logging (as one court Judge would have you believe). 

It's my view, Indonesia know they have done wrong and should have protected the rights of Churchill Mining and related associates/parties. The Government has knowingly tried to sweep it under the carpet, with a final attempt at 'gagging' Churchill to stop informing 'others.' The reason being the Government of Indonesia knew full well what damage they have done to their mining business; with projects stalled, postponed or abandoned together. Australia Companies are reminded regularly to 'be aware of the risks.' Similar in essence to the UK and US contingent. Now why would you want 'Churchill Gagged'; they don't want people knowing what the Indonesian Government have done? Surely not...

So to put it simply (I am simple); Churchill Mining have lost their licenses despite there being clear cut evidence to show they were entitled and legally the rightful owners (albeit not 100% share). Churchill attempted to protect their 'rights to these mining licenses in an Indonesian Court to licenses with clear cut evidence but failed even on appeal.' The Government has allowed this to happen and not protected the Investment of a Foreign Company's Rights to do business (Key component of a BIT Claim). Now to add insult to injury, the Government of Indonesia have allowed the licenses to be "given" back to the Nusantra Group. This is despite there being clear evidence Nusantra relinquished their right to the licenses previously...does it sound 'fishy' to you?

Strange isn't it that once Churchill Mining had found a 'vast' resource of Coal, that Nusantra Group (and/or Subsidiary) suddenly 'starts protesting' that it was theirs all along. They couldn't even evidence that they were appropriately proving up a resource, had any intention of mining nor had legal right to the licenses. By the actions of a few Indonesian's, Churchill had their licenses 'stolen' from under their feet and now they've been re-awarded to an Indonesian's Ex-Politician's Company, whom strangely is married to a daughter of a previous president? So for me the proof is already there, albeit it's assumed...I am sure CHL can show they had legal right to the licenses and as such the Government should not have awarded to any other company, but protected in their legal right to do business.

Valuation is a tricky one, as I do not see $2B being paid but would be happier with say $300-500 million (£200-£330 million $1.5 to £1 rate). The risk is 'if' Churchill can't show they had a legal right to the licenses etc...which I the legal Due Diligence at the very start of the case would have established; as this is a primary part of a claim. So in assuming that 'legal are well-qualified and good advice has been received' then going to International Arbitration is the only way of asserting their legal rights for Churchill.

There are rumours that Indonesia want to settle, figures hear are around $300 million but more than likely it's the exposure in the papers whetting the appetite of international arb risk takers. I envisage another spike upon Rurelec's (LSE: RUR) settlement for the Nationalisation of the Combined Cycle Power Station in Bolivia (a much simpler case that CHL's as the asset was developed, producing and more importantly, the company was called back in after the Bolivian's blew it up (not quite but damaged it). Likewise, Oxus isn't far off a ruling either!

I won’t be discussing the "what if the Government doesn't pay the awarded compensation" as the damage to the Country would be more significantly damaging than the 'act of re-appropriation / re-allocation of Churchill's Licenses.' The same with Rurelec and Oxus...likewise it’s clear what the downside risk is…my view is £6-9M Market Cap as a shell company with tax benefits.

Currently valued today at £40M (Mkt Cap) or 32 pence a share...the longer time buyers should be 3-4 fold in profit with cream off the table after the last spike!

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