Personal Sale: Not so much “Mongolian”

by Travis Johnson, Stock Gumshoe | March 27, 2013 2:21 pm

A while back I invested in Blue Wolf Mongolia (MNGL), which is a blank check company — they were set up to collect capital and invest it in an operating business or use it to take over another company.

The idea was that the business would be in Mongolia, and presumably connected to natural resources projects there (since that’s the bulk of the Mongolian economy), but they weren’t technically prohibited from investing in another country or another sector. Which is probably good, since the uncertainty level regarding Mongolia and their treatment of foreign investment is fairly high right now. We can argue about whether or not this is likely to go beyond political posturing, and about whether Mongolian investments up to and including Turquoise Hill/Oyu Tolgoi will end up being profitable … but it’s clear that global investors are very worried about the government seizing assets or “renegotiating” deals.

So it’s no great surprise that Blue Wolf ended up arranging a deal in a completely separate geography — they want to merge with the Chilean mineral salt explorer Li3 Holdings, effectively using Blue Wolf’s capital to explore, permit, and develop Li3’s potential properties in the high Chilean desert.

The goal is to build another lithium producer in those salt brine flats, where Rockwood Holdings (ROC) and SQM (SQM) are the dominant producers, though it’s early days in terms of permitting and everything else they would need to do to get to that point, so the capital infusion would obviously be a big help. They do have a big partner already in Posco, and they have made progress, but they’re still a very young company and are valued at less than $20 million right now. Given the merger plan, that LIEG shareholders will get one share of MNGL (which will then rename itself Li3 and change it’s listing to LIEG) for every 250 shares they now hold, the combined company would probably trade at pretty close to the cash value on the books. There’s even a bit more uncertainty than that, though, since the deal can’t close before the predetermined April deadline, so shareholders need to approve a delay and the deal, and opt not to cash out their MNGL shares.

I haven’t researched this enough to make a determination as to whether or not I like the prospects for Li3 specifically, but I am not particularly interested in investing in an exploration stage lithium company right now — so I’m going to cash out my shares. Blue Wolf is doing a buyback, as required by the blank check agreement, so it’s possible to tender the shares back to the company at about the IPO price — but given the hassle of dealing with my broker on that, and the larger fee they would charge for manually processing it, I’m just selling my shares on the open market. The price is nearly identical to the buyback price, so I feel fine about how this worked out — the point of investing in a blank check is that you get almost all of your money back if you don’t like the investment they choose, and you get the potential for much better returns if they can make a good private market deal that wouldn’t otherwise have been available to you, so I’ve been patient because of that downside protection … and I can’t complain too much about the fact that I’m pretty much just breaking even after 20 months. Turned out, not investing in Mongolia but keeping that possibility open was a better idea than investing in a Mongolian project like Mongolia Growth Group (YAK on the Canadian Venture exchange) or Turquoise Hill (TRQ) — if I were to commit to turning this cash back into a Mongolian investment I’d look at Mongolia Growth Group, but as I noted back in January[1] I continue to think that stock is a bit expensive and may well become cheap at some point if sentiment swings a bit.

But as of now, no Mongolian exposure for your friendly neighborhood Gumshoe.

  1. as I noted back in January:

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