Canadian-based rare earths company Stans Energy (HRE:CA) (HREEF) is not your typical resource development company. Admittedly, the company has spent the better part of the past five years dealing with some major issues, much of which was outside of management's control. Now, however, the company could be sitting on a $118 million windfall that could serve as a major inflection point for Stans Energy if the company is successful in its collection efforts.
In 2009, Stans Energy acquired the Kutessay II rare earth mine in the Kyrgyz Republic right as the rare earth market was about to experience a parabolic jump in prices. Then according to Stans Energy, the government of Kyrgyzstan took expropriatory actions in the company's interests in the country. It should also be noted that the Kyrgyz government seems to have exhibited a noticeable pattern of threatening a number of foreign companies with nationalization as well.
After taking the Kyrgyz government to arbitration, Stans Energy was awarded $118 million. Now, the major catalyst is the company's pursuit of its award. Considering that Stans Energy currently trades at a fraction of the stated award amount based on its current valuation, the company could be in line for a major windfall if it is successful in its efforts. This poses a very intriguing name to follow as the investment community gradually catches on to this compelling story.
Equities.com had the opportunity to speak with David Vinokurov, Vice President of Corporate Development for Stans Energy, to learn more about the current situation and how the company is positioning itself to collect what has been legally awarded to it.
EQ: David just to start off can you provide us a brief overview of Stans Energy.
Vinokurov: Stans Energy was originally founded as a resource exploration company for rare earth and specialty metal products in the former Soviet Union. We acquired the past-producing rare earth mine Kutessay II in Kyrgyzstan, which is in the former Soviet Republic located between Kazakhstan and China on the map. We started working on developing new technologies to process and separate rare earth into individual rare earth oxides with the assistance of the Russian technical institutes that originally helped to put it into production.
Kutessay II was a unique property in that it was the only hard rock, heavy rare earth deposit that was ever put into production outside of China so we were very excited to begin development on the mining site. We were in talks with all the major end-user groups to set up offtakes from the mining site.
In parallel to the rise and subsequent reverse in prices of rare earths, there was a corresponding rise in our market capitalization. Our market cap at one point reached north of $400 million. It was at this point that elements within and associated with the Kyrgyz government started to present us with legal challenges, which eventually led to them expropriating the mine from us.
In October 2013, we took the Kyrgyz government to an international arbitration tribunal, the Moscow Chamber of Commerce and Industry. On June 30, 2014, the Moscow Chamber of Commerce and Industry awarded us $118 million. What Stans Energy is now doing is looking to seize that $118 million here in Ontario because the Kyrgyz government owns assets here in Ontario, and those assets are 33% of Centerra Gold (CG:CA) . We have arrested 47 million of their 77 million shares that they own and our award recognition process will begin at the end of June.
EQ: Considering where your market cap currently is that is a considerable windfall for the company if you're successful in your pursuit.
Vinokurov: Yes. Basically, we just recently completed a $600,000 financing, so our shares outstanding at that point will be roughly about 170 million shares outstanding on a fully diluted basis. If we're able to collect on a $118 million award, which is in US dollars after you do the exchange rate plus interests and so forth, we're looking at the company potentially coming into about a $150 million (CAD). Our market cap today is about $11 million.
If and when we're successful in collecting, I think that the stock should reflect our asset base more closely and hopefully take our stock price up higher somewhere hopefully in the neighborhood of the amount awarded.
EQ: It's difficult to predict exactly when this will all play out, but what kind of time horizon are you potentially looking at here for this to be resolved?
Vinokurov: Our final arguments in the actual seizure of the $118 million worth of Centerra Gold shares should be submitted by June 29. Typically, the Ontario Court of Justice issues a judgment anywhere from three to six months after that date. So theoretically, by the fall of 2015 we could have a positive judgment for them to recognize our award. Beyond that, that award is subject to appeal, which could take another 12 months.
It takes about six months to get an actual appeal hearing and closer to six months to actually get the judgment from the appeals court. We're realistically looking at having this result in the next 18 to 24 months. The Kyrgyz government can appeal this to the Supreme Court of Canada but there is a small chance of that happening. The Supreme Court of Canada only considers a small number of cases and not necessarily commercial cases of this nature.
EQ: You mentioned earlier that Stans Energy's stock price currently does not reflect the award amount. Is that primarily because the investment community is not aware of this story. From your perspective why do you think that is?
Vinokurov: Number one, there is the 18- to 24-month legal battle ahead of us. I think it's important for us to demonstrate to the market that our war chest is full so that we can see this matter through to the end. That being said, we are currently working on securing long-term financing that will satisfy our legal expenses and overhead throughout this process. I think we are 30 to 60 days away from finalizing the terms of that agreement.
Once we can demonstrate to the market that we actually can see this through to the end, and that some of the challenges that the Kyrgyz government is bringing in other jurisdictions really have no effect on what's going on here in Ontario, that will eliminate a lot of the uncertainty that has to do with the story right now.
If we can demonstrate that we're fully funded and that the secondary challenges that the Kyrgyz government has really aren't amounting to much, it will give the investment community more certainty in our outcome and that will attract more people to the stock.
EQ: Obviously this is an amazing story for anybody who is coming across this right now. Where can they go to learn more about the current proceedings and basically just to stay up to date? Is the company releasing news on regular basis?
Vinokurov: Absolutely. As I said, there's ongoing news with respect to ongoing court dates that we publish our website at www.StansEnergy.com. Furthermore, we have all the translated court rulings that have been in our favor available in our website. Of course, I'm always available for any phone calls. It is a complicated story, so I'm always available to speak with our shareholders at any time they have an inquiry.
EQ: Near term, this is a significant catalyst for Stans Energy. Is this the primary focus for the company?
Vinokurov: Our primary objective in the short term is to close the financing negotiations that we have in order to secure the long-term legal case in the company. That being said, we still continue to develop and work on new initiatives in the former Soviet Union—in Russia, specifically—and that allows us to capitalize on all of the brain trust that we have here at the company.
I mentioned earlier that we're working with the institutes that put our rare earth mine into production. We work with VNIIHT, one of the leading institute of chemical technology in the world and a division of ROSATOM. It handles all the rare earth needs for the Russian state and the only country with more rare earth than Russia is China. There's a huge opportunity for the company to continue developing technology for the capitalization of rare earth technologies in Russia and for the world.
Furthermore, we're working on due diligence right now on a very unique property, it's a speculative property within the Russian Federation that has some nanotechnological capabilities for downstream applications, which could potentially revolutionize the global industrial coatings industry. So while we focus on the immediate pressing concerns with regards to the lawsuits, we still continue to do our technical due diligence on a very exciting project. Ultimately, investors are more focused in the short term on the outcome of the lawsuit because that could potentially represent a significant windfall for the company.
Our plan is, and management has dictated this in the past in press releases, our intention is once we're successfully able to collect on that award amount, our intention is to distribute the majority of those proceeds back to shareholders. We may keep a small percentage of that award in the treasury so that we can continue to deploy those funds on those new projects we're working on to develop, but at the end of the day the goal is to compensate our shareholders who, unfortunately, have had to endure this wild ride that we've been on legally for the last three years.
EQ: That's very interesting. As we know, this is a very capital intensive industry, but to take that award and reward your shareholders is a very admirable thing that the company has decided to do.
Vinokurov: We would have represented the second largest foreign investor in Kyrgyzstan. At one point we had over a 120 people working at the mine site and at the processing facility, which we also purchased and refurbished in Kyrgyzstan. We have fantastic relationships with the local community but unfortunately due to some unscrupulous actors within the country, they've caused damage to the company. We had to lay people off. Our stock price has suffered. But at the end of the day, our responsibility is to our shareholders and if we're able to succeed in securing that monetary award, the only logical thing to do is to reimburse the shareholders for the time and suffering that they've gone through as we all have.
EQ: As you said, Stans Energy's most immediate concern is resolving the current lawsuit and collecting on the award. Going beyond that, what are some industry drivers in your space that will help to propel the company's long-term growth?
Vinokurov: With respect to our market, rare earth technology continues to develop, green energy applications continue to spread across the world, and we feel that rare earths are going to be a large part of the critical metal requirements for the global economy for many years to come. So we feel that there is a healthy outlook for rare earths regardless.
We feel that we have strong technical expertise on our team here at Stans Energy to help us secure the properties that will satisfy those demands moving forward.
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