Post-Settlement Update on MON

Latest thoughts on MON following the recent settlement with Tanzania.

Montero Mining and Exploration (MON-V) — initial post here

Today, I am sharing a quick update on Montero Mining and Exploration (MON-V) after the company announced a settlement with Tanzania a couple of days ago. I would regard the settlement outcome as neutral or slightly positive. I plan to reassess the situation after management provides more details on the anticipated net cash proceeds and capital allocation. Until then, I continue to believe the risk/reward remains attractive.

Before diving into the update, here's a quick recap of the investment thesis for those not familiar with the idea. Montero is a C$18m market-cap Canadian junior miner that has held a C$90m arbitration claim against Tanzania for expropriating its mining license in 2018. The investment thesis has been based on favorable outcomes in two similar arbitrations involving other junior miners: IDA-AX and WINS-V. These peers settled at 17% and 68% discounts to the award/claim values, respectively, compared to the 80%+ discount to the claim value at which MON has been trading. Given that the three litigations were nearly identical from a legal perspective, a similar arbitration outcome—a settlement—has seemed likely for MON.

The long-awaited settlement was announced a couple of days ago, shortly before the arbitration hearing scheduled for late November. The settlement came in at C$38m, payable by Tanzania in three installments. The first payment of US$12m has already been received, while payments of US$8m and US$7m are scheduled "on or before" January 31 and February 28, respectively.

I would regard the settlement outcome as broadly in line with my expectations or slightly positive. While the settlement comes at a substantial 61% discount to the original claim value (i.e., much closer to the WINS settlement discount than that of IDA), it represents only a 12% discount to my estimated "realistic" claim value. As for the payment terms, they are more favorable than I expected, with payments scheduled to be received in just over three months. I would note that peer IDA’s installments were spread over a slightly longer timeframe (August 2024, October 2024, and March 2025).

With the settlement in the books, the attractiveness of the investment setup now boils down to two key questions:

• What portion of the settlement proceeds will be retained by Montero and available for distribution to equity holders?

• Will Montero’s management distribute most all of the available net cash to equity holders?

Let’s start with the first question. MON’s management has not specified what portion of the settlement proceeds will go toward litigation funding and other expenses. The press release highlights that the first and second payments will be split between Montero and the litigation partner, while also mentioning that the second payment might be used to cover Montero’s "needs and legal expenses." I would highlight that the order in which the parties (Montero and the litigation funding partner) were mentioned is switched between the first and second payments. While I’m not sure what to make of this, it seems reasonable to conclude that a sizable portion of the first two payments might go to the litigation funder. As for the third payment, it will be entirely retained by Montero.

So, how much could Montero potentially pay out to equity holders after all of the expenses? Well, here’s my attempt to estimate the company’s net cash available for shareholder distributions:

• C$38m in settlement proceeds.

• Less US$14m in litigation funding and legal expenses. This assumes litigation funding and legal fees at 38% of the settlement amount, in line with the WINS case (compared to 26% for IDA). While MON has not provided details of the litigation funding agreement, company’s management has stated that the litigation funding deal is “substantially similar” to that of WINS.

• Plus US$1m in cash from the exercise of 4m stock options granted in September, at an exercise price of $0.33.

• Less US$3m in estimated administrative expenses. Montero has indicated that it “will retain funds to cover legal, taxation, and administrative expenses, including potential costs for arbitral proceedings or enforcement actions if the second or third installments are delayed or unpaid.” I would note that legal expenses are already included within the $14m above, while taxes are likely to be minimal given Montero’s significant sunk costs in the project (C$15m). So, the $3m for administrative expenses seems to be a reasonable, if not conservative, estimate.

• Less US$2m in cash retained for any further expenses, including potential employee severance payments and company wind-down costs. I would highlight that MON’s proxy states that, in the case of termination, the CEO would receive two years of annual fees equivalent to $240k. This, coupled with the fact that the company has minimal balance sheet liabilities, suggests that my estimate is reasonable.

With these assumptions, I arrive at C$20m in net cash available for potential shareholder distributions, compared to MON’s current market cap of C$18m. I must note that this is not a precise estimate, and given MON’s small size, any deviations could have a material impact on the potential net cash available for distributions. Nonetheless, I think this exercise directionally shows that the margin of safety at the current stock price levels is sufficient.

The next logical question is how much of the potential net cash will be distributed to equity holders? While in the press release management highlighted that it intends to return capital to equity holders, no specific details have been provided. Considering that MON’s management has previously hinted at “creating shareholder value by exploration,” there is some risk that a sizable portion of the proceeds might be allocated toward exploration and/or acquisitions. However, given no indication of such plans in the most recent press release, coupled with the presence of activist investor Jeremy Raper (who anchored the recent private placement), I would expect management to return most or all of the available cash to equity holders. Considering the quick payment timeline, I would expect the distribution to be completed within Q1 2025.

So, these are my quick thoughts on MON. I believe the setup remains interesting. MON equity holders are likely to receive all of their capital back shortly, potentially by the end of Q1 2025, with the possibility of distributions exceeding the current share price. While the upside in the base case scenario is not large (13%), I think that, considering the short timeline until potential capital returns and the sufficient margin of safety, it is worth holding on to the shares to see how things unfold.

I will be waiting for further details from management on the potential net cash proceeds and further capital allocation. For now, I continue to like the setup and have thus maintained my position.