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I tipped East West Resources (LSE:EWR) – the stock formerly known as Ambrian when it was a gold investment company called Golden Prospect at 5.25p back in October 2001. The shares peaked at c60p as the company became an investment bank. Today the stock is back at 11.375p. I was a total git for not bailing out much higher. A total bloody git. There has been the odd dividend along the way but I make no excuses. As things stand, today this one should be sold for a gain of 116% ( dividends would add another 40% or more) but this is still a piss poor result given what might have been. I am so cross. Here is why the shares should be sold even though the June 30th NAV was 17.8p per share.
Former CEO Tom Gaffney tried to build an integrated investment bank. Costs went through the roof and in the overserviced AIM market that could only mean that operations were unviable. Most have now been sold. The company is now left with just one activity, its metals and biofuels trading business.
The problem is that it is loss making and requires stacks of capital to operate it and much though East West wishes to sell it there seems to be no buyers at all. Hence the H1 loss was £1.26 million (or 1.32p per share). How much of that 17.8p June 30th 17.8p of NAV is free unencumbered cash? Er, the interim results statement of 28th September makes that clear and explains where the cash has all gone:
“The Group’s cash resources, net of amounts due to clients totalled £6.91 million at 30 June 2012 compared with £15.38 million at 31 December 2011. The principal reason for the reduction was the use of cash within the metals and biofuel divisions for margin and working capital requirements.”
So that is c6.8p per share net cash. Given the fact that East West is clearly operating at a loss expect that number to fall on a month on month basis. My guess is that by now it is already down to 6p per share. The real worry is that the Metals and biofuels business can only operate using large lines of bank credit. If the cash continues to fall, at some point the banks might start to get nervous.
If East West could sell all its operating businesses tomorrow for £1 it would be a decent cash shell and might (given its cash pile) merit a modest premium to net cash – say a share price of 8-9p. But, if it cannot offload them, the cash will continue to dwindle and its value (even if it does offload its operating businesses) will also fall.
I bitterly regret not banking mega gains on this one at the point that Golden Prospect as it once was first encountered Tom Gaffney. My error. I apologise. But having discussed this matter with a couple of people with a good knowledge of the business, I am afraid to say that this share is a clear sell.
