Heritage - a great trading stock

Tuesday 30th April 2002

Heritage Mining, one of the few mineral exploration companies listed on the New Zealand stock exchange, has been in the news recently. It's one of the dual- listed companies that could be squeezed out of the Australian market by the recently announced change in the ASX listing rules.

The directors have announced plans for an innovative two for three rights issue of up to 49.3 million warrants. These warrants are cleverly priced, with one cent payable on application, another cent for each of the next two years and a further 7 cents within 5 years. Upon payment of all instalments (a total of 10 cents) the warrants will convert to fully paid ordinary shares.

Assuming that the company succeeds in having the issue underwritten this capital raising is quite smart. It's not at all onerous for existing shareholders (for example a holder of 100,000 shares with an existing market value of $3,300 will need to find only $667) and the warrants should attract investors for two reasons.

The first is the low entry price (only one cent) and the second the historical volatility of the Heritage ordinary shares. Even with the head shares trading at 3-4 cents after the issue, the warrants will almost certainly trade at a premium over cost, despite there being another 9 cents due to convert them into ordinary shares.

If history is a guide, Heritage shares won't sit around present levels for very long. I've followed the stock closely for several years and have seen investors take advantage of the volatility the stock exhibits. For example, it would have been possible to build up a substantial holding at around 7-8 cents during 1999 and quit it at prices well above 20 cents a year later when Heritage directors announced that the company was going to participate in the dot-com boom. As Heritage was in 1999 one of the cheapest listings on the market it would not have been rocket science to assume that something of this sort would happen.

Since then the share price has trended steadily down and at one stage last year reached a low of 2.8 cents, somewhat in contradiction of the reality of the company's improved circumstances. But even while trending down the price has spiked every 12 months or so creating trading opportunities for the fleet footed.

The proposed warrant issue is good news for Heritage as it guarantees a capital inflow of close to $500,000 a year for the next three years. This should be more than enough to cover corporate overheads and to advance the company's various mineral exploration projects.

Heritage's projects include three gold prospects near Waihi, of which one (at Waihi North) has geological structures that the company describes as "reminiscent of those at the Martha and the nearby Favona discovery". The Martha mine is presently the largest and richest gold mine in New Zealand and the recent Favona discovery is believed to contain significant quantities of high-grade ore.

The company also continues to pursue an $8 million claim against the Crown in relation to expenditure incurred in Coromandel on projects that were "sterilised" by an amendment to the Crown Minerals Act.

In Australia Heritage has a 33% interest in the Thakaringa cobalt project.

Other investments include substantial shareholdings in Cadmus Technology and E-cademy Holdings, both floated off by Heritage during the dotcom era. Heritage shareholders did well out of these issues - they got Cadmus and E-cademy shares for free while Heritage earned handsome fees managing the floats.

So is Heritage a good deal at the moment? Yes. At 3.3 cents the company is valued at $2.4 million. This matches only its existing cash reserves ($276,000) and the current market value of its holdings in Cadmus and E-cademy ($2 million).

The market doesn't seem to be placing any value on the Waihi gold prospects, the claim against the Crown, or the Australian cobalt project. If one valued the gold prospects at (say) half their book value, the claim against the Crown at (say) nil, and the cobalt project at cost then the book value of the shares is 8.3 cents. There is clearly a lot more value if any of the existing projects take off. Conversely, the new warrants about to be issued could dilute these values. However, these will only be converted to ordinary shares if the Heritage share price is over 10 cents.

But I wouldn't rush out and buy the shares right now - with the proposed warrant issue there should be some selling pressure. This may also come from Australian based shareholders if the ASX listing is lost despite the present endeavours of the Heritage directors. And if you do invest be patient - with this company nothing happens for months then suddenly the shares move up 50%. With those sorts of returns one can afford to wait.

Disclosure: no shares held

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