Cloudbreak Discovery (LON: CDL) shares are up 10% this morning on the back of their announcement of an oil and gas deal. In itself, the deal is very preliminary – it’s the formation of a joint effort to acquire a petroleum exploration licence in Namibia. This would take substantial time to lead to any actual revenue, given that it really is the attempt to gain the licence to be allowed to go looking.
On the other hand, this is in itself exactly what Cloudbreak itself says is the reason for its existence. To be a “natural resources project generator”. In a sense, this is acting like an investment bank, or a mining house of old, in the natural resources sector. By acting as the spider in the centre of the web that needs to be spun for each and every natural resources project, Cloudbreak can – this is the plan at least – end up with a slice of many such projects as a result of aiding in setting them up, generating them.
Cloudbreak’s only been listed since last summer but we can already spot a certain pattern in the share price movements. As and when deals are announced then, the price rises. When there’s little new information, it seems to slide back. This makes logical sense, of course – a dealmaker is going to be, initially at least, judged on the quantity of deals made. It’s later on that the quality of the deals made will become the determinant. Deals do have to mature before we know how much they’re worth, after all.
This point is shown in the interim results. There are no assets producing income as yet. Clearly, there aren’t, it takes years for mining assets to mature into being cash generative. So, those results give us the raw numbers of what is being spent and so on, but really then go on to tell us about the varied deals that have been done. Which assets, which might then turn out to be cash generative at some point, have been assessed, sweat equities into, and so on.
The basic idea in itself seems fine, as we’ve said. This is indeed how investment and mining houses used to work before financial markets became about trading paper, not doing things. That there might be room to redo this at the bottom, small scale, end of the market could be true.
We’ve also said that we’re a little eyebrow raised at the idea that Cloudbreak Discovery has offered what amounts to a put option to Crescita through the Equity Drawdown Agreement. That Cloudbreak has access to more capital is good, but with a price guarantee, well, that is to raise eyebrows.
From past experience, short as it is as a listed company, we might expect Cloudbreak’s share price to move on those announcements of the deal flow.
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Tim Worstall is a freelance writer specialising in economics and the financial markets.