New Portfolio Idea — MON-V
Junior miner offering an asymmetric bet on its ongoing arbitration
In this post, I am excited to share a new portfolio idea, Montero Mining and Exploration (MON-V). I came across the idea in this VIC pitch published in February. I believe MON presents an asymmetric investment opportunity centered on company’s arbitration claim against Tanzania. Recent developments in two very similar precedent litigations suggests a high likelihood of a favorable legal outcome, with the likely award/settlement significantly above the current market cap. Nonetheless, given the low trading liquidity and the ‘binary bet’ nature of the investment, I’d note that MON should be sized accordingly, i.e., as a small position.
Without further ado, let’s dig in.
Montero Mining and Exploration (MON-V)
Elevator pitch: Junior miner offering an attractive bet on its ongoing arbitration.
Current price: C$0.30
Target price: C$0.70+
Montero Mining and Exploration is a C$14m market cap Canadian junior miner that owns a C$90m arbitration claim against Tanzania for expropriating its mining license of the Wigu Hill rare earth element project.
For some background, Montero commenced exploration activities in the Wigu Hill project in 2008, investing over $17m in mine exploration and development over the following years. In 2015, MON was awarded a retention license by the Tanzanian government. However, several years later, the government of Tanzania abruptly amended the legislation, canceling previously issued retention licenses, with MON’s license revoked in 2019. After failed attempts to negotiate with Tanzania, MON filed a request for ICSID (part of the World Bank group) arbitration in 2021. You can find more background information on the litigation here. The ICSID hearing is currently scheduled for November 25-29, with the arbitration agency’s decision expected to be announced several months after that.
At the current share price levels, MON is trading at a wide 84% discount to the claim value. Now, you might be thinking that a junior miner with an arbitration against a developing country should rightfully trade at a wide discount to the claim, given 1) uncertainty of the litigation outcome and 2) potential recoverability issues, among other concerns.
However, what makes the MON investment setup attractive is the recent developments in a couple of precedent litigations involving other publicly-listed junior miners, Indiana Resources (IDA-AX) and Winshear Gold (WINS-V). These companies have recently reached settlements in their arbitrations against Tanzania for expropriating their mining licenses. The settlements were at 83% and 32% of the award/claim value, respectively, significantly above the 16% where MON is currently trading. The key point here is that the three litigations are nearly identical from a legal perspective. Besides the fact that all three arbitrations have revolved around mining license expropriation in Tanzania, they have all been pursued through the same legal mechanism (ICSID arbitration) in the same location (Washington, DC). On top of that, all three companies have employed the same legal team.
Below is a brief summary of the key developments in the two precedent arbitrations.
Indiana Resources: IDA initially filed a claim of US$95m. The ICSID hearing was held in Feb’23. Subsequently, in Jul’23, the court granted the company 120% of the requested damages, or US$114m. In response, Tanzania appealed, requesting an annulment of the award. The request was subsequently struck down by the tribunal earlier this year. Then, late last month, IDA announced a settlement with Tanzania, with the government agreeing to pay US$90m, or 83% of the award amount. The settlement amount is payable in three tranches: $35m upfront, $25m by Oct’24, and $30m by Mar’25. Funding and legal costs stood at 26% of the settlement amount.
Winshear Gold: WINS filed a claim for C$130m. Similarly to IDA, the ICSID hearing was held in Feb’23. In Sep’23, before a court decision, the company announced a settlement for a gross amount of US$30m, or 32% of the claim value, payable upfront. Funding and legal costs accounted for 38% of the settlement amount. While WINS’s settlement as a proportion of the claim value was substantially lower than that of IDA, this might be explained by the push for an early settlement from WINS’s largest equity holder, another junior miner, Palamina, to satisfy its near-term liquidity needs for exploration activity funding.
Considering the two precedents, a similar arbitration outcome, i.e., a settlement, is likely for MON. So, what could be the potential upside in this scenario? Let’s assume a settlement at the midpoint of the two precedent cases, a 43% discount to the claim value, with legal fees at 32% of the settlement amount (vs. 38% and 26% for WINS and IDA, respectively). In this scenario, pre-tax proceeds to MON would stand at C$0.72/share, or 100%+ above the current stock price levels. Even a settlement in line with WINS, i.e., at 32% of the claim value (with funding and legal costs at 38% of the settlement value), would imply pre-tax proceeds of C$0.37/share. Other potential scenarios are illustrated in the table below. The point I’m trying to get across is that one must use very punitive/conservative assumptions to arrive at pre-tax proceeds below MON’s current market cap.
Given the timelines observed in the IDA and WINS cases, I’d expect the tribunal’s decision in early 2025, with a potential settlement shortly after that. However, considering the WINS arbitration precedent, there is also a chance that both sides might come to an agreement before the tribunal’s ruling.
As for recoverability, I think the significant upfront payments already made by the government of Tanzania in peer litigations suggests that this is unlikely to be an issue. It is worth noting that late last year Tanzania secured a large $1.1bn funding from the World Bank. Given that ICSID belongs to the World Bank group, any potential non-compliance with award or settlement payment terms would risk the country’s funding getting revoked.
So, that is the gist of the investment thesis. Given the developments in the two precedent cases, I believe that MON currently presents an attractive, asymmetric litigation investment opportunity.
It's worth pointing out what I consider one of the key risks: capital allocation in the event of a favorable litigation or settlement outcome. This risk might explain why MON is trading at a significant discount to the claim value compared to peer settlements. Unlike MON, both peers have already paid or stated intentions to initiate capital returns. Shortly after reaching a settlement with Tanzania, WINS announced a large dividend of C$0.75/share, compared to share price of C$0.84 shortly before the dividend payment (both adjusted for the stock split). Meanwhile, IDA has stated that it intends to initiate two distributions to equity holders, with the amount expected to be confirmed after the second settlement installment is received in Oct’24. The silence on MON management’s part is somewhat understandable, given that the company has yet to be granted an award or reach a settlement. However, in a recent investor presentation, MON’s management hinted at “creating shareholder value by exploration.”
Nonetheless, what provides some confidence on this front is the involvement of activist investor Jeremy Raper. Jeremy has participated in several private placements (Jan’24 and Aug’24) and currently likely holds a c. 10% stake. Given Jeremy’s track record of micro-cap activism (e.g., at Far Limited), his presence seems to significantly lower the risk of management wasting cash on value-destructive exploration activities.
this company had no revenue?