Cloudbreal Discovery (LON: CDL) shares are up 8% this morning on the announcement of the Foggy Mountain Project. This is a potential gold, silver, and copper project in British Columbia in an area where several similar projects have been successful over the decades.
The project itself looks entirely fine for what it is, a very early stage prospect for those metals. The work to be done is that very first step of mapping out the mineralisation and then drilling to confirm them – this is a long, long, way away from producing anything if indeed there’s anything there to produce. But then someone does have to do this very first stage and while there’re significant risks this is also where the potential rewards are high. Proving that there is something there worth mining will lead to a very substantial revaluation of the project.
Cloudbreak touts itself as a “natural resources project generator,” and this is a natural resources project that has been generated. The base claim of the company is, as with the earlier Namibian oil projects, being justified. As we’ve pointed out, if your business is generating projects then the valuation is going to depend upon the stream of projects generated. As Cloudbreak is generating such a stream then that bolsters that valuation.
It’s possible though, as the strategy unfolds, to have certain bearish thoughts. We’ve muttered some things about Cloudbreak’s Crescita option for example. Having access to capital is necessary, and so that it is available is a good thing. Yet there’s a put option implicit there, and that could – could – lead to dilution issues.
The other thing is that OK, yes, we agree that the market here is terribly fragmented, that there’s a value in there being a central network which reduces the costs of any one project. That reduction in costs of organising the project leading to a slice being held by that network – that’s really Cloudbreak’s business model. Akin to the old style of investment bank, or even a mining house.
It’s also possible to think that the projects generated might benefit from some strategic vision. Say, an analysis of what the market actually desires, then building projects that meet those needs. Rather than, perhaps, simply picking up likely looking projects that are already extant. That is, purely as a surmise, that at least some of the value of such a project generator is in actually constructing projects to meet market needs, rather than taking part without that strategic planning.
If that is the way we think then Cloudbreak’s activities don’t seem to be showing much evidence of that. Oil in Namibia, then a few weeks later gold in BC. Yes, interesting speculations – both are, given the stage of exploration both are at – but there’s not any great evidence of a specific value add by Cloudbreak Discovery and that strategic process.
It’s possible, therefore, to end up with an either way view on Cloudbreak. If it is to be a collection of near unrelated natural resource projects, then it becomes simply that, a fund of projects. Which likely has a lower valuation than a series of projects linked by an overall strategic vision. Trading positions will depend upon which view is taken no doubt.
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Tim Worstall is a freelance writer specialising in economics and the financial markets.