Cloudbreak Discovery (LON: CFL) shares are up 6% in London this morning as the company reveals another deal in the Namibian oil space. This, plus the earlier one announced a few days back, gives a good idea of how Cloudbreak intends to work over time.
The basic idea at Cloudbreak Discovery is to work as a “natural resources project generator”. We can think of this as being like a small investment bank – of the old style – or even a mining house. A mining house being the old name for what was, effectively, an investment bank specialising in the natural resources industry.
The background is that the sector as a whole is hugely fragmented. There are projects and would be projects all over the place. To get one up and running requires the partial employment of many different talents. Plus, at certain points, small amounts of cash to get to the next stage. Having someone at the centre of a network which can provide the varied services, plus perhaps the cash, can reduce the costs of each specific project. And of course, some of those savings can be earned by the centre of the network – a share in each of the projects organised. While that’s not quite how Cloudbreak puts it that is a useful pencil sketch of what they’re doing.
The implication of this is that Cloudbreak shares will be valued by the deal stream. Which is rather different from the way junior miners themselves are normally valued which is by the deal itself. With any specific natural resource project, we want to know exactly the details of that project. Is there gold there? How much? At what price to get out? But with a project generator, we want to see the stream of projects. Having a slice of each project is good, but we want to see the number of pies a slice is had of increasing over time.
There are two Namibian projects. Two different oil exploration licences. In each one, there are a number of parties, Cloudbreak’s position is to be adding the little dollop ($120k in one, $70k in the other) of cash that enables the licence to be acquired. The funding seems to be coming from the equity deal with Crescita, something we’ve expressed a little concern about at Cloudbreak before.
It’s possible to have two different views about this. One is, great, the deal pipeline is clearly continuing, Cloudbreak shares are worth more – as above, it’s the deal flow that matters to a deal maker. It’s also possible to think that oil, while it’s a natural resource, is rather different from the mining we might have thought Cloudbreak Discovery was going to concentrate upon. The oil industry isn’t quite as short of wildcatters as the minerals business, for example. Trading positions need to be on the balance of those beliefs.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage . 68 % of retail investor accounts lose money when trading CFDs with this provider . You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money .
Tim Worstall is a freelance writer specialising in economics and the financial markets.