Greencastle Resources: attractive net-net and nanocap
Greencastle Resources Ltd (filings, ticker VGN on the venture exchange in Canada) more or less acts as a closed-end fund and co-finances exploration projects in Canada, mainly gold exploration projects but also oil projects. It acquires stakes in other companies such as junior miners through complex transactions exchanging mining rights for shares and/or royalty rights.
In particular it owns a stake in listed Gold Lake Exploration (ticker GLM on the Canadian Securities Exchange). It is possible it will acquire a stake in private Atikokan Resources as well.
Furthermore it owns about 5 million CAD worth of shares in Deveron Corp (ticker FARM in Vancouver, Canada). At 0.47 CAD per share Deveron is a loss making, cash flow negative growth stock with a high P/B. The company provides high-tech data acquisition and analysis solutions for North American farmers. I consider it a growth stock. Currently the company owns 10.371 million shares in Deveron. I think Deveron used to be a gold exploration subsidiary (“Deveron Resources”) that was IPO-ed (as a carve out) and then went on with other business. See also this news article from 2012 and Deveron’s filings since the IPO in 2012 as Deveron Resources, in particular the IPO prospectus.
I have not found any dividends. An investigation of the cash flow statements shows the company spent small but still substantial amounts on buybacks during the last 8 financial years.
However I also found the company did a small private placement in January 2021. In this non-brokered deal the company issued units of one share and a warrant for 0.10 CAD with gross proceeds of 100k CAD. The exercise price is 0.15 CAD and the warrants expire on 21 January 2024. In addition the company issued 200k shares in the first quarter of 2021. These shares resulted from an option agreement related to one of the company’s projects. Red flag: I could not find a reason for this deal. I am not sure this equity raise was really necessary although the proceeds might have been used for buying the Mayflower Property and Seagrave Property.
There are 1.00 million warrants at 0.15 CAD expiring on 21 January 2024 and 38.76 million shares outstanding. Moreover, there are 3.50 million options at 0.10 CAD expiring on 10 January 2023 and 4.00 million options at 0.10 CAD expiring on 25 August 2026. I think these options have been granted to new directors and to the CEO but I could not find all details back in the documents later. See also page 17 of the management discussion of 2021. Combined option and warrant overhang is substantial, maybe worth 10% of the market cap.
Substantial shareholder: CEO and director Anthony Roodenburg owns 14.27%.
Searches on the company name or the name of the CEO and keyword “fraud” did not reveal any relevant information. I do not think related party transactions are reasons for concern but I find the option grants very generous.
The balance sheet is strong with hardly any leverage or non-current assets. Almost all current assets are listed securities, in particular shares of Deveron Corp. But there is not so much cash and cash flow from operations was negative in 2021. Because of the low cash balance the auditor issued a going concern warning. I think this is overdone.
Valuation
According to the balance sheet (31 March 2022) net current assets are 9.89 million CAD. However after the balance sheet date the share price of Deveron Corp decreased. As a result I estimate net current assets at only 8.9 million CAD at 3 June 2022. At 0.0952 CAD per share the market cap is 3.69 million CAD. Adding another 10% for the options and warrants I arrive at a market cap of 4.06 million CAD. So, NCAV/Market cap = 1.9. I think this is very cheap.
Conclusion
Well-managed net-net and nanocap that is completely off the radar. I think this stock gives cheap exposure to the gold price and to certain technological developments in agriculture. It is also cheap based on NCAV/Market cap. I do not like the high volatility of the stock price.
It is possible Atikokan Resources exercises their option. In that case the company gets 10 million shares and 10 million warrants in Atikokan Resources. I guess nobody knows how much these shares and warrants would be worth. I have not found a balance sheet item for this implicit option.
Disclosure: long Greencastle Resources