Hi, guys --

(Trying to resubmit this -- VIC Contact yanked the original because it looked too ugly.)

(All numbers in South African Rand, unless I forget; current $ exchange ratio is 7.42.)

I made certain the last time I wrote this up to point out how speculative the stock is: "This isn't a value investment, or any other kind of "investment", for that matter -- it's just sheer raw gambling." It's still speculative, but getting less so. I think it's likely to deliver 40%-80% returns over a short time frame.

Briefly, R&E is a South African holding company that was looted in a spectactular fashion by Brett Kebble. Fortunately, a good chunk of the assets wound up in JCI, a sister company, and seem to be recoverable. Management today released figures suggesting a post-recovery NAV ranging from R29 to R33, and I think they're low-balling.

For more background on R&E, I _strongly_ recommend reading,

http://www.valueinvestorsclub.com/value2/Members/view-thread.asp?id=2263&more=dtrue

, which I've been told is entertaining. Go ahead, I'll wait.

Back? OK, here's the table of contents:

1: NAV and the Merger

2: Will the Merger Go Through?

3: NAV and Aflease

4: Recap

5: Resources

1: NAV and the Merger

JCI owes R&E at _least_ R1.1B -- that's what the forensic auditors pinned on them. R&E have made claims for R5B, or more than twice JCI's NAV. The boards of R&E and JCI (who are essentially the same people) have proposed resolving the whole mess by merging R&E and JCI, with R&E to own 71% to 81% of the combined company. NewCo would then quite likely be taken over in a share swap by Aflease Gold. Estimated NAV's of JCI and R&E look like this, in R1MM:

Combined NAV is R2.94B. At 71%, using 72MM shares, R&E's NAV is R29/share; at 81%, we get R33. We'll footnote the NAV estimates in a bit.

The rationale for the merger was laid out by the mediators: "To ameliorate the difficulties in making an accurate assessment of the net asset value, it is recommended that an overall settlement be pursued on the basis of a merger between the companies. On a merged entity basis, at least any under/over estimation of the asset values will be captured within the shareholders' shareholding in the combined entity." Assuming NewCo isn't taken over by Aflease, it will be relisted on the JSE, and perhaps also on NASDAQ. Since NewCo really has no reason to exist, I'd then anticipate an orderly liquidation.

2: Will The Merger Happen?

Management has been on the road rounding up support; I think it unlikely that they would come public with this unless they were pretty sure it was going to go through. But here are the issues.

A merger would require High Court approval and a 75% affirmative vote from both companies. The key players are:

- Investec, SA investment bank, which effectively -- hmm, let me be careful here -- which some say effectively controls both companies.

- Alan Gray, SA investment manager, which directs 25% of the shareholding in R&E and JCI.

- Montague Koppel, shadowy London financier, who owns 20% of JCI and has filed suit against Investec challenging the legitimacy of the R400MM "profit share".

- Quinton George of Trinity Asset Management, who owns 15% of R&E and has also challenged the "profit share".

- Aflease Gold, headed by Neal Froneman, which owns 12% of R&E and has an agreement with Trinity to swap Aflease shares for Trinity's R&E stake once the disputes have been resolved.

The sticky points are (A) The Investec profit share and (B) The exact ratio.

(A) The Investec profit share is _extremely_ questionable. Briefly, as a last ditch maneuver to raise funds, Kebble placed all of JCI's assets in an SPV, gave Investec 30% of the upside, and allowed Investec to appoint the boards of JCI and R&E. The deal was supposed to be ratified by JCI shareholders, but that never happened. In addition, it's been pointed out the that fee is unconscionable, because Investec was never at any risk, and were in fact feathering their own nest by shoring up the Western Areas hedge book, which they profited from/were on the hook for. Given that JCI was probably insolvent at the time, R&E shareholders might want to challenge the transaction as a fraudulent conveyance.

I'm sure when they put this together, the Investec guys were saying, "Woo-hoo! Yippie-ay-yay! We get to save the hedge book, make money, _and_ put the boots to Kebble! What a day!" Which is probably still what's going to happen, but meanwhile it's a big PR problem for Investec because it just stinks and puts them in a very unflattering light.

I don't see the profit share as a deal breaker because Investec might be willing to compromise, and absent a settlement, the benefits to R&E and JCI of challenging it are unclear, because it's unclear who would wind up with the money.

(B) The Exact Ratio

The range of ratios presented come from NAV estimates for R&E and JCI, and the mediator's position that JCI coughing up R1.2B to R1.5B "appears [...] to us to be a realistic starting point."

George, the most vocal advocate for R&E shareholders, has indicated that the upper end of the range is acceptable to him. Koppel has said that he'd rather be a large shareholder in JCI than a smaller one in a merged entity, but wouldn't object to a merger if it led to the company being taken over. Alan Gray will vote for any settlement. Froneman doesn't care much about the exact terms, since he's planning on buying the whole thing anyway.

Anyone involved in this thing is either a crook, vulture, speculator or sucker. People (especially the suckers) will scream and bitch, but it's in everyone's interest to split the difference and move on.

Finally, if the deal falls apart, there's speculative upside for R&E, because they've got as good a claim on JCI's assets and the Investec profit share as anyone else.

3: NAV and Aflease

Froneman has said that he'll make a bid for the combined company. What might he pay? Well, depends on what it's worth, so it's time to go through NAV again.

The biggest chunk is GFI stock, which I've shown at market. I'm not a gold expert, but I suspect that the company is undervalued because they've recently issued a lot of shares to take over the South Deep mine and clear out the Western Areas hedge book.

JCI's R284 from Jaganda is under dispute. JCI says it's R478, Jaganda say R89, R284 is the mid-point, so there's an R200MM swing either way.

The prospecting rights are likely worth more: this is a "conservative valuation", and doesn't include "indirect stakes in the prospecting rights contiguous to the South Deep gold mine", which are currently being bid upon.

There's still billions of rands floating around, maybe some of them will come back some day.

It looks to me like NAV is pretty solid. It's presented as guide to calculating merger ratios, not as an attempt to puff the stocks. And it doesn't include a huge intangible asset:

Knowing where the bodies are buried.

The scale of Kebble's misdeeds is enormous. It's like combining Enron and Watergate into a single, all-encompassing scandal. There were a lot of people involved in this. The PV of filing a $1MM suit against some corrupt government official when you know only get $200k if you win is, I don't know, $100k. But what's _not_ filing that $1MM suit worth? If you want to do business in South Africa, as Froneman does, the answer is, as the advertising campaign says, "Priceless". It's like being Haliburton in Iraq.

I don't think Froneman's offer will be at a significant discount to NAV.

4: Recap

I think RANGY shareholders realize R30 or more sometime over the next few months. Obviously this is not garuanteed, the investment may not be suitable for all accounts, etc. If the time frame stretches out, it's not necessarily a bad thing, because I think RANGY shareholders are getting at least mildly screwed over in the current settlement framework.

5: Resources

I was going to include tons of links, but instead will just direct you to the R&E home page.

http://www.randgold.co.za/

Of particular interest are:

Mediator's statement.

http://www.randgold.co.za/investor_centre/announcements/company_news/news_280207.asp

Merger Suggestion

http://www.randgold.co.za/investor_centre/announcements/company_news/15032007_announcement.pdf

Yours,
Bowd