This article discusses an anomoly a listed in the US stock exchange. Arabian American Development has multiple value unlocking triggers ahead and these triggers can take the stock price to much higher levels than the current stock price of $10.34 and a market capitalization of $250 million.
About The Company
Arabian American Development's principal business is the manufacturing of various specialty petrochemical products. The company owns South Hampton Resources that operates a specialty petrochemical facility near Silsbee, Texas. To support the petrochemical operation, the company owns 82 storage tanks with total capacity of 233,000 barrels, and 127 acres of land at the plant site, 59 acres of which are developed. Further, the company also owns a truck and railroad loading terminal on approximately 56 acres of which 13 acres are developed.
Arabian American Development also owns a 35% stake in Al Masane Al Kobra Mining Company. AMAK is a Saudi Arabian closed joint stock mining company, which is in commercial production of copper and zinc concentrate. As of April 2014, the mine had 8,267,000 tons of proven reserves with a reserve life of 11.5 years.
Arabian American Development has US mineral resources through the ownership of 55% interest in Pioche Ely Valley Mines, Inc. (PEVM). The Nevada mining corporation does not conduct any substantial business activity currently, but owns undeveloped properties in the United States. PEVM's properties include 48 patented and 5 unpatented claims totalling approximately 1,500 acres.
Valuing The Mining Asset
Just to give a perspective on the undervaluation, I would like to value the company’s 35% stake in Al Masane Al Kobra Mining Company. Valuing the asset is also important as I believe that an IPO for the mining entity will result in meaningful value unlocking for Arabian American Development. Before discussing the valuation, the chart below gives a snapshot on the rich mining asset.
To put things into perspective, according to Arabian American Development, the mining entity would need an IPO two years after attaining profitability. According to the company’s presentation dated April 2014, the mining entity has been in operation and in profitability since the fourth quarter of 2012. This implies that Arabian American Development is targeting an IPO by the fourth quarter of 2014.
Therefore, investors can expect the end of 2014 or the beginning of 2015 to be significant in terms of stock upside as the value unlocking of the mining asset takes place.
In order to arrive at an estimated valuation of the asset, a past transaction on the company’s shares might give a rough estimate. In January 2013, new shares of the mining company were issued to Arabian American Development Company at $8 per share.
Considering the current total outstanding share of the mining company at 55 million, the value of the entity works out to $440 million. However, this valuation is as of January 2013. With mining activities continuing and the mine being profitable, it might be safe to assume that the asset value has increased marginally to $500 million as of May 2014.
A 35.25% stake in the mining company for Arabian American Development Company would therefore be roughly valued at $175 million.
This gives an idea on the level of undervaluation as one mining asset is roughly 70% of the company’s current market capitalization. Assuming that there is an IPO for the mining asset by the end of 2014, the stock will witness significant rally.
More Value Unlocking Opportunities Present
According to the company website –
ARSD also owns approximately 55% of the capital stock of a Nevada mining company, Pioche-Ely Valley Mines, Inc ("Pioche"). Pioche owns a 300-ton a day mill which is not currently operable. It also owns 48 patented and 5 unpatented claims totalling approximately 1,500 acres located in the Pioche Mining District, Lincoln County, Nevada. A significant expenditure would be required in order to put the mill into continuous operation if commercial mining is to be conducted on the property. ARSD believes that the real estate value of Pioche is greater than the metal value.
What I want to point out here is the fact that Arabian American Development Company also has other value unlocking assets in its kitty. As mentioned by the company, the asset has significant real estate value and a 1,500 acre plot is of considerable importance for a $250 million market capitalization company.
For the same reason, I believe that Arabian American Development Company is a dark horse with two significant value unlocking opportunities under its belt.
Conclusion
Over the last one year, Arabian American Development Company has gradually trended higher by 25%. I believe that the upside potential is still significant and the mining asset IPO by the end of 2014 can trigger another upside momentum in the stock.
Further, a 55% stake in the Nevada Mining company can be a potential real estate revenue generator for the company. I do believe that the proceeds from the sale of the land of stake sale in the mining business can help strengthen the company’s petrochemical business and its presence. For now, investors can benefit from the rich asset value unlocking.
