MUI Properties Bhd is hoping to strike gold Down Under with its 40% investment in Nex Metals Explorations Ltd, a gold exploration company listed on the Australian Securities Exchange.
The developer’s executive chairman and CEO, Andrew Khoo Boo Yeow, attributes the idea to his father, Tan Sri Khoo Kay Peng, who is the founder of Malayan United Industries Bhd (MUI Group).
Andrew took over the reins of MUI Group from his father last year.
Back in 2011, the property development arm of MUI Group, under the watch of Khoo Senior, granted Nex Metals a loan in the form of a secured convertible note amounting to A$1.5 million (RM4.28 million) with interest payable at 10% per annum, to kick off its first gold exploration venture.
The rationale behind issuing a secured convertible note and not an actual loan was to give MUI Properties the option to convert the note into shares when the time was right. It was also less risky than acquiring a stake in Nex Metals at the time as gold prices were volatile.
“We have been receiving interest payments over the last eight years and have decided now that we want a more vested interest in Nex Metals. So, we are converting the note into 40% equity interest in the company,” Andrew tells The Edge in an interview.
He says it is an opportune time to take up an associate stake in Nex Metals because the price of gold has been rising steadily in the past 12 months.
As at last Tuesday, spot gold prices had appreciated 20% year to date to US$1,477 per ounce, sparked by recession fears and monetary policy easing by central banks around the globe. Some quarters have forecast that the precious metal will hit US$1,500 per ounce next year.
“Gold is, of course, a hedge against economic uncertainties. That was another reason why we felt the time was right to go into gold exploration now. I also felt we should start looking at Australia again in terms of the retail sector, hotels, maybe some property, and now gold, as it is a country I am quite positive about,” says Andrew, who is an Australian national.
However, he is cognisant of the gold mining situation in the country. “No doubt there is gold; this whole region is rich in gold. The issue is finding sufficient gold that can be commercially mined.”
Perth-based Nex Metals’ gold exploration projects include the Yundamindera and Kookynie mining leases that cover a total area of 6,746ha in the northeastern goldfields of Western Australia. The company is led by its managing director, Kenneth M Allen, who has been involved in the industry for more than 20 years.
In May this year, Nex Metals entered into a farm-in agreement with Metalicity Ltd, another ASX-listed mineral exploration company, to undertake exploratory drilling at nine separate gold mining sites in the Kookynie area.
“Basically, the agreement is for Metalicity to invest A$5 million over five years in exploring gold in this area, which is under the tenement rights (control) of Nex Metals. Metalicity obviously saw potential in the area and has pumped in its funds. It is not cheap to explore gold; you need to invest in the equipment to drill the holes and so forth,” Andrew explains.
“The results were positive for the nine drill holes [where it was confirmed that gold mineralisation existed] and on Nov 27, Metalicity announced that it would proceed with another 10 drill holes. This is the second phase of the drilling [that started] on Dec 2.”
Nex Metals was in the red in its last financial year ended June 30, 2019. It posted a net loss of A$2.22 million while its net liabilities amounted to A$4.32 million.
It is worth noting that MUI Properties is the only profitable company in the diversified MUI Group, which has interests in retail, hotels and food manufacturing. It reported a net profit of RM17.09 million in FY2019.
To Andrew, MUI Properties’ investment in Nex Metals will not necessarily dent its profitability. “From an accounting standpoint, the recoverability of the loan given to Nex Metals was in question. To be prudent, we decided to fully impair the loan, although we had already received 60% of the total interest payments. So when the conversion [into equity interest] happens in January next year, there will be a reversal on the loan impairment. That is an immediate positive for MUI Properties.
“Secondly, if things go well with Nex Metals, if we do find gold there and we start to commercially mine it, it will immediately be a positive contribution to MUI Properties. In the worst-case scenario, where the gold venture does not succeed, we would need to impair the investment again. The way I see it, there is more of an upside risk than a downside risk.
“From the perspective of MUI Properties, there will only be a cash outlay from us if we find gold and decide to commence mining operations, at which point we need to invest in equipment to start the extraction.”
Andrew is tight-lipped on the volume of gold that can be mined from the area but reiterates that MUI had done its due diligence on Nex Metals.
“It is not a fly-by-night company. It is not like we picked some random company on the ASX and decided to invest in it. We have had a working relationship with Nex Metals and its managing director Kenneth in the past eight years. So there is that level of trust.
“We have viewed the previous two JORC [standard] reports on Nex Metals that show there is a viable gold investment there. We are going into this with our eyes wide open. If we strike gold, we will benefit and if we don’t, we are prepared for the downside,” he says.
For clarity, the JORC Code is the Australasian code for reporting of exploration results, mineral resources and ore reserves.
As MUI Properties will be able to exert significant influence on Nex Metals via its 40% associate stake, it will be represented on the latter’s board.
“Of course, we will be monitoring this as part of our investments, and until we find gold, which could be anywhere between the next 90 days and the next five years. It will be a non-core business for us.”
At present, the main contributor to MUI Properties’ revenue is its 1,990-acre flagship Bandar Springhill township located along the Seremban-Port Dickson highway.
Even so, the developer’s share price has been on a downward trend in the last four years since it peaked at 47 sen in January 2015. The stock closed at 17.5 sen last Wednesday, giving the company a market capitalisation of RM129.7 million.
Whether gold can take over as the money spinner for MUI Properties and its holding company MUI Group in the next five years remains to be seen. If the developer as much as ekes out a profit from its gold exploration venture, that will certainly boost its share price and shareholder confidence.