The decision by Egypt-based gold producer Centamin (CEY) to increase its stake in small cap explorer Nyota Minerals (NYO:AIM) may come as a surprise, given the negative market reaction to the junior's progress in Ethiopia.
Nyota has spent the past two years in freefall with the shares falling from a peak of 29.5p (Jan '11) to a mere 2.3p. Yet today's announcement of new stake-building by Centamin could provide a stark reminder to the market that Nyota could still be an interesting proposition.
The shares jumped 4.6% to 2.3p on news of a £4 million placing, whereby Centamin was among the major participants. Centamin has increased its holding from 13.6% to 19.9%, subject to a shareholder vote.
The placing at 2p was done at a 9% discount to last night's closing price. To see a rising price today suggests that there is renewed interest in the stock, not simply because it has a few more quid with which to continue exploration work. Alas, some investors took the rare price strength as an excuse to reduce their holdings and the share price, at the time of writing, is now flat at 2.2p.
The presence of a mid or large cap on a junior's shareholder register will always provide excitement to the market. It suggests that the larger business has put its foot in the door and has the optionality to make a takeover offer, or at least have a say if a third party decides to do the same.
Centamin has been building up a stake in Nyota as part of efforts to diversify beyond Egypt. It has already bought Ethiopia-based explorer Sheba. Both investments are part of a strategy to explore the Arabian-Nubian Shield, a mineralised belt that stretches across Egypt, Ethiopia, Eritrea, Sudan and Saudi Arabia. Centamin says the geology in parts of the Shield is similar to its own Sukari gold deposit, so it wants to apply its experience and find similar-looking deposits.
This map shows Centamin's four exploration licences inherited from the Sheba acquisition and the proximity of Nyota's Tulu Kapi project to Addis Ababa, the capital of Ethiopia.
Tulu Kapi has a 986,000 ounce gold reserve, the amount of material deemed economic to mine. The market didn't like the initial economic study on the project and hasn't been over-excited by the latest feasibility work, published in December 2012. Nyota is guilty of dressing up the economics by using a lower discount rate and higher gold price than most analysts would use in their models on companies.
The small cap last month flagged funding problems, which explains today's share placing. To Nyota's credit, it has published a series of excellent quality drill results, which could explain why Centamin is still in the game. The good results are coming from the 'Feeder Zone' which could help to improve Tulu Kapi's attraction.
House broker Ocean Equities said in December that the 'abundant adjacent and satellite mineralisation' around the mine area, including the Feeder Zone, is likely to either bolster the head grade of the ore feed during the initial operating phase of the mine and/or add 'significantly' to the mine life of the operation.
Centamin's interest in Nyota is almost certainly focused on the bigger picture of its land holding, not Tulu Kapi in its present form.
Nyota's share price weakness is a great opportunity for Centamin to increase its position at a low cost. Indeed, a £1.6 million investment in today's placing for a further 6.3% of the company could turn out, in hindsight, to be a bargain if Nyota has further exploration success. If there isn't any good news, then Centamin will probably view its investment as a punt on a prospective region that simply didn't come up trumps. It has bucket loads of cash and can afford to take such a gamble.