We are ceasing coverage of Tiger Resources (TGS), due to our view that the risks of operating in the Democratic Republic of Congo (DRC) outweigh the potential returns.
On September 8 we downgraded our recommendation to a "hold". The company had to take on additional debt to acquire the remaining 40% of the Kipoi project. Tiger bought the stake from the Congolese government-backed miner Gecamines.
The deal was approved by the DRC government and announced to the market today. The transaction came about because the Gecamines needed $US160 million for retrenchment payments due to letting go half of its workforce.
The full ownership (excluding 5% which has to be ceded to the Congolese government) lifts the valuation of Tiger as the deal is priced at a sharp discount to the value of Kipoi. But due to the unplanned nature of the transaction, Tiger had to undertake its second equity raising in recent months and take on expensive debt at an 11% interest rate for the first six months. The debt facility can be extended to a year with a monthly extension fee of 0.5%.
The net debt to equity increases to 39% from 22%. On a base case forecast, this level of debt is more than manageable. But it needs to be considered that the company is operating in the Congo where anything and everything could go wrong.
Tiger is one of the lowest cost producers, meaning it can withstand some copper price volatility. Its cost of production of $US4,079 a tonne compares to the current price of US$6,600 a tonne.
For investors who can wear the location risk, the stock is at a discount to valuation, and the increased ownership means it is more likely to be a takeover target.