162 Group (BOD.L/CON.L/PET.L/CLON.L)

Earlier this week I met with the team at 162 Group, one of Ireland’s most entrepreneurial businesses. Led by Dr. John Teeling, it has an impressive track record of building start-up ventures, mainly in natural resources. While these are inherently high-risk plays, recent exits from its portfolio highlights the potential upside when these things work out – since the start of 2010 shareholders have received over $250m in cash and shares from the disposals of Cooley Distillery, Swala Resources, African Diamonds, Pan Andean Resources and Stellar Diamonds. While past performance is of course no guarantee of future returns, I figured that it would be worth running the slide rule over what is left in the 162 portfolio to see what the team is presently developing.

 

There are three strands to the 162 Group today. The Industrial business comprises unlisted businesses in the renewable energy and beverage sectors, along with a minority shareholding in Norish plc. My main focus in this piece is on 162 Group’s Mining and Oil units, where the firm manages four AIM listed companies, namely: Botswana Diamonds, Connemara Mining, Petrel Resources and Clontarf Energy. I profile each of these in turn below.

 

• Botswana Diamonds (Ticker BOD.L, Market Cap £3m). Through this vehicle 162 aims to replicate the success it had with African Diamonds. The firm holds exploration licences in Botswana and Cameroon as well as early-stage diamond licence applications in Zimbabwe. Its main activities are in Botswana, which has been described as the ‘Switzerland of Africa’ due to the stable political backdrop and business-friendly climate. In addition, Botswana is the world’s largest producer of diamonds by value. The firm’s latest presentation gives a good overview of its activities and plans.  While not exactly flush with cash, management’s strong track record in diamonds and industry relationships should prove helpful in agreeing partnerships to exploit any high-potential opportunities the firm manages to identify.
• Connemara Mining (Ticker CON.L, Market Cap £3m). This business holds 34 prospecting licences in Ireland, with a focus on zinc (Ireland produces 25% of Western Europe’s zinc) and gold. Connemara has agreed joint ventures with Teck (the world’s third biggest zinc producer) in respect of 21 of its licences (zinc and lead prospects) and with the privately-owned Hendrick Resources for another 5 (gold prospects). Its sole venture licences are mainly located close to established zinc and lead hotspots (e.g. Lisheen, Galmoy and Silvermines). The partnerships help bring financial muscle and technical expertise to Connemara’s prospects. In its recent results release management said the company “has adequate funds for all proposed expenditure in the next year“.
• Petrel Resources (Ticker PET.L, Market Cap £4m). This oil stock has three strings to its bow – firstly, in Ireland, it has license options for two packages of blocks in the Porcupine Basin, and with interest in offshore Ireland on the rise after recent positive exploration news from the likes of Providence Resources, this could prove to be a very interesting asset. In Ghana it is awaiting ratification (a decision is expected in Q4 of this year) for a high potential spot relatively close to previous Tullow Oil finds. Finally, in Iraq it has some early stage assets. It does trade at a modest discount to its end-2011 net cash, but of course developing its assets will not come cheap.
• Clontarf Energy (Ticker CLON.L, Market Cap £4m). This firm offers a mix of production (stakes in two gas producing fields in Bolivia) and exploration (Peru and Ghana) assets. The Ghanaian interest looks particularly attractive – assuming ratification is received (it is hoped before the end of the year) it will comprise a 60% stake in the field Petrel Resources is similarly awaiting approval to acquire a 30% interest in that is relatively close to Tullow Oil’s finds in that country.

 

Overall, to me the listed companies in the 162 portfolio are all reminiscent of options – the very low market capitalisation relative to the potential upside from a successful commercialisation of their asset bases means that the potential (emphasis) returns are very high. Of course, so are the risks, not least in terms of potential dilutions through farm-outs or placings. So, these are not, for now at least, the type of stocks you’d recommend to widows or orphans. At the same time, for more adventurous investors looking for a high-risk punt, all four of these appear worthy of doing some more work on. It should also be noted that management are significant investors in each of the four listed companies, which points to aligned management and shareholder interests.