Shares of Churchill Mining (LSE: CHL) have jumped by as much as a third today on news that the company may be close to reaching a settlement with the Indonesian government over the disputed ownership of a 350 sq km mine site in East Kutai.
Churchill says the resource is worth around $1.5bn. The company has spent more than $10m on its legal bid against the Indonesian government, claiming that it had been unfairly stripped of its licences and accused of fraud.
Legal issues
Churchill spent $67m on exploration and feasibility studies for its East Kutai Coal Project, but during 2010 the project’s four development licences were cancelled.
The Indonesian government revoked the licences claiming that Churchill, along with its development partner, had forged documents and undertaken exploration activities without a licence.
And since 2012, Churchill has been tied up in an international arbitration battle regarding this dispute.
As Churchill claims that the East Kutai mine is worth around $1.5bn, this dispute is certainly worth the money. According to the available figures, East Kutai is one of the world’s largest coal prospects.
It is estimated that East Kutai contains 2.73bn tonnes of coal reserves — around 50% of Indonesia’s estimated coal reserves and enough to meets the country’s energy demands for seven years.
Relations improving
Over the past week, there have been signs that Churchill is moving closer towards a settlement with the Indonesian government.
Indeed, last week the government retracted its allegations of fraud against the company and reports suggest that an “open channel” of talks has commenced between the two parties.
Previously, it was expected that a settlement wouldn’t come before the end of 2016 but now, one source has suggested that a settlement is just around the corner.
Premature gains
Churchill’s shares have gained around 200% year to date off the back of these rumours.
By Churchill’s estimate, the value of the East Kutai is around $1.5bn. So, if the company does come to a settlement with the Indonesian government, the miner could be set for a big payoff. City analysts estimate that the payoff could be in the region of $1.3bn.
Binary bet
With a possible settlement payout of $1.3bn just around the corner, Churchill is a binary bet.
If the company reaches a settlement with the Indonesian government, it’s set to receive a cash lump sum, which, if City estimates are to be believed, could total around $9.70 per share. Or, in sterling terms, approximately 670p per share — 1,333% above present levels.
However, if Churchill fails to reach an agreement, the company could be left high and dry. The company’s cash balance has dwindled over the past four years to only £3m, down from £22m four years ago as the drawn out legal battle has sapped resources.
High risk, high reward
All in all, Churchill is a high-risk/high-reward play.
Even after recent gains, if the company reaches a settlement with the Indonesian government, Churchill’s shares could rocket higher. Although if Churchill fails to negotiate a deal, there’s a chance the company could go out of business.