Investors woke up to some cracking news from Pathfinder Minerals today which provided an update on its Bilateral Investment Treaty Claim, along with an option agreement for the sale of IM Minerals. All of this could see Pathfinder temptingly ending up as a cash shell and a big beneficiary to any pay out from legal proceedings.

We learnt today that Pathfinder has entered into an option agreement with Acumen Advisory Group LLC (AAG), an asset recovery specialist incorporated in Delaware, USA, which has a track record of international claim enforcement.

Pathfinder has granted AAG an exclusive option to acquire IM Minerals Limited (IMM), a wholly owned subsidiary of Pathfinder, and the rights to bring a claim against the Government of Mozambique (the claim) under the Mozambique-United Kingdom Bilateral Investment Treaty (2004, for the expropriation of Mining Concession 4623C.

This exclusive option is granted to AAG is for a period of three months to 27th December 2022 (unless extended), which should allow enough time for AAG to complete due diligence and the Acquisition Agreement document to acquire IMM and the rights to the claim.

For Pathfinder to enter into Acquisition Agreement three matters would need to be in place. Firstly, a payment of £2 million in cash from AAG for the acquisition of 100% of IMM on signature of the Acquisition Agreement. Secondly, a binding commitment by AAG to commence legal proceedings against the Government of Mozambique in respect of the claim within three months of completion of the Acquisition Agreement, with AAG confirming that it has secured at least US$15 million and will use its best endeavours to pursue the claim to a satisfactory conclusion within five years.

The third and last condition involves the all-important divvying up of the spoils, with a contingent payment by AAG to Pathfinder of the higher of either US$24 million or 20% of net recoveries from any award or settlement of the claim.

CEO Peter Taylor added that “This transaction, if completed, will ensure that the full force of a timely and well-funded Claim is brought against the Government of Mozambique and that Pathfinder could participate very considerably in any financial upside which has been independently evaluated to be worth in a range of US$110 million to US$1.5 billion.

A great deal of work has gone into preparing to bring a Claim and this now paves the way for AAG to apply its financial firepower to launch it and see it through to conclusion. The biggest hurdle has never been the strength of the Claim – which is assessed by Counsel to be in Pathfinder’s favour – but having the funding to bring it. A successful transaction with AAG would remove that hurdle.

In the meantime, the £2 million proceeds from the disposal of IMM, if completed, would enable Pathfinder to pursue from a robust financial position other opportunities for value creation within the minerals sector, a number of which are under review.”

Reassuringly, this morning’s announcement also contained a comment from the Chairman of AAG, James R Stothard, who said that, “I am proud to announce our Option Agreement with Pathfinder to acquire 100 percent of the share capital of IMM in order to vigorously pursue the Claim against the Government of Mozambique. AAG has a proven track record of international claim enforcement. Working with our international legal team at DLA Piper, which also has considerable experience in these types of disputes, we are confident of a successful outcome which will benefit Pathfinder and its shareholders.”

Here we should point out that DLA Piper is the numero uno in terms of litigation in Africa. Any government looking at DLA Piper across the table in a meeting would think “I didn’t need that”. Meanwhile, AAG offers intelligence and asset recovery. Although for good reason there is little published information about AAG, they seem to be involved in successfully unwinding toxic debt situations such as defaults on sovereign loans and are very active in West Africa and Nigeria. It is really good news that Pathfinder is bringing in AAG as they are clearly experts in this field.

The saga here concerns the heavy mineral sands mining concession in Mozambique which has been going on for ages. It involves concession 4623C which was taken from the company by sleight of hand more than ten years ago. It looks to us as if Pathfinder has pretty much got all its ducks in a row concerning referring its case to the International Centre for Settlement of Investment Disputes (ICSID) under the Mozambique – United Kingdom Bilateral Investment Treaty (2004) for facilitating the expropriation of the mining licence.

Legal opinion in December 2020, gave Pathfinder a 55-60% chance of establishing liability on the part of the Government of Mozambique in a claim under this treaty – about as high a chance of success as it comes in the legal arena. The briefing pack included detailed valuation mechanisms determined by Versant Partners LLC which assessed a range of successful scenarios with valuation ranging from a minimum of US$110 million for an ex-ante damages award through to US$1,500 million for an ex-post damages award.

Pathfinder is confident in its position, but as in all these situations there are no guarantees that this, or any, amount will be recovered, should the company refer the matter to the ICSID. But hey, the wheels seem to be in motion for a lawsuit where the ultimate top prize could be US$1.5 billion, and where the company could end up getting a 20% share. To save your calculator that’s approaching 50p a share at current FX rates. Do we believe this will be paid out? Unlikely but we do believe that the pressure to settle has now gone up several notches

With the matters concerning the HMS licence now looking to be neatly parcelled up and dealt with by consummate experts (and no longer a drain on the PFP’s meagre cash resources) the company will be free to plot a decent course for its future. This a big deal and so entering into the Acquisition Agreement will require shareholder approval, resulting in Pathfinder being classified as an AIM Rule 15 cash shell.

The company has already established a battery metals and graphite subsidiary as well as mentioning the countries and commodities that they are interested in pursuing – so we have a glimpse into the likely focus of future interest. Apart from that, as an AIM cash shell Pathfinder would be much sought after by businesses seeking a listing as the company has none of the legacy issues like most shells seems to have.

All this could open up the opportunity of injecting into Pathfinder a really exciting business or asset which can be developed while waiting for the big potential pay day. The company is currently capped around the £4 million mark and so £2 million would represent a big cash injection that could really open the doors to all sorts of tempting opportunities.

We suspect that this news will now have both TZM (the current licence holders) and the Government of Mozambique sit up and realise that after over 10 long years that a settlement does now need to come to a head. Matters are only going to intensify for them. The “elephant in the room” however is the disconnect between the market cap of Pathfinder and the claim value. Even based on the minimum recovery of @ £23m (at current FX rates) ref the agreement with Acumen ( if exercised) and which is over 4p a share, the current price is but a fraction of this figure let alone hitting the big payout for a realistic value for the licences… If we were in TZM’s shoes the best way out of this is to, irony of ironies, attempt to buy Pathfinder Minerals. Either way, at a closing price of 0.7p and market cap just under £4m the skew, we believe, is categorically to the upside with downside to upside estimate of 1:19, ie back to 0.5p in the event of no exercise and upside to 4.5p in the event of exercise & settlement – 0.2p v 3.8p in our estimation.

RISK WARNING & DISCLAIMER

Pathfinder is a research client of Align Research. Align Research Investments own shares in Pathfinder and and cannot be seen to be impartial in relation to the share price outcome. Full details of our Company & Personal Account Dealing Policy can be found on our website http://www.alignresearch.co.uk/legal/ 

This is a marketing communication and cannot be considered independent research. Nothing in this report should be construed as advice, an offer, or the solicitation of an offer to buy or sell securities by us. As we have no knowledge of your individual situation and circumstances the investment(s) covered may not be suitable for you. You should not make any investment decision without consulting a fully qualified financial advisor.

Your capital is at risk by investing in securities and the income from them may fluctuate. Past performance is not necessarily a guide to future performance and forecasts are not a reliable indicator of future results. The marketability of some of the companies we cover is limited and you may have difficulty buying or selling in volume. Additionally, given the smaller capitalisation bias of our coverage, the companies we cover should be considered as high risk. You should also assume, given that the majority of Align’s fees are received in stock, that for general corporate cash management purposes including taxation that divestments of investments held will take place as and when, in Align’s sole discretion, it is deemed appropriate.

This financial promotion has been approved by Align Research Limited

• Pathfinder Minerals