A small, unknown mining company called Mayfair Mining SA is offering investors a chance to invest via a loan with the promise of a 3% per month return.
That would equate to annualised 36% return - which Mayfair's marketing material claims is "guaranteed". If returns were reinvested then the annual return would be far higher - closer to 50%.
One simply has to question the prudence of a company - obviously in need of capital - offering such a staggering return on a loan from shareholders. It is punitive to cash flows in the extreme... and perhaps an unrealistic return to offer shareholders if operational (remember this is a mining company) schedules are not met.
But let's look at it another way: If Mayfair approached banks for a loan, the company would secure capital at far more "affordable" levels - paying maximum an annual interest rate of 15%.
Why then pitch an offer to the public to raise a mere R20m on far more demanding conditions to the company?
Perhaps there are three reasons:
- Banks - which these days might tend to have some rather tough lending criteria - may not find Mayfair's business model viable enough to advance a large sum of cash;
- Securing funding from public investors is far more convenient for small, unlisted companies - because if the business plan falters the individual investors cannot recall their all or part of their funding (except in the unlikely case of liquidation).
- The policy of a 3% monthly return is not written in stone. And what recourse will shareholders have if Mayfair decides it would be better to retain capital for a mooted acquisition rather than continue to the generous monthly payouts?
Dangerous market fallacies
Mayfair Mining SA is not the first company to offer such attractive monthly returns, and my colleague Vic De Klerk has also written on this topic in the recent past.
Unfortunately for Mayfair its pitch to public investors falls in the wake of the Wealth 4 U Mining & Exploration debacle.
Much like Mayfair, W4U also promised generous monthly dividends to its shareholders. The dividend policy, though, did not last long - and effectively discontinued when W4U claimed capital needed to be retained in order to seek an offshore listing.
However, it has become blatantly apparent that W4U simply did not have the capital or cash flow to pay dividends when its marine diamond production (which in itself was none too convincing) contract with Alexkor floundered.
There are two reasons why I - at this point - would not invest in Mayfair.
The first is that marketing material issued by Mayfair is pure hype, and bases its investment premise on some dangerous market fallacies.
An advertisement in last weekend's press claimed Mayfair was an "international mining company" offering a "fantastic and winning investment opportunity".
Other marketing guff claimed the board of directors will only allow a specific number of investors to "get on board this unique opportunity, so it is important to act quickly in this regard."
And, of course, there's the usual the intention to list on various offshore bourses and the JSE "as soon as operational profits meet the said requirements of the exchange".
The real clincher
Then comes the real clincher in terms of determining Mayfair's corporate class: "The Private Investor will enter into an agreement with Mayfair Mining SA (Pty) Ltd. for a period of 12 months. The Investor will determine his own investment amount. It is important to point out the obvious - that the bigger the investment, the bigger the return!"
Two things stand out for me - the suggestion that investors need to rush into this venture and that a big investment means a big return.
Two things I can tell you for free: NEVER rush into an investment (especially a small, unlisted company), and you DO NOT increase your chances of a big return by investing large sums of capital into such ventures.
The other issue that worries me, is that there is a paucity of financial information available for Mayfair - which certainly belies the company's self-proclaimed status as an "international mining company".
Mayfair Mining SA's website does not have a link to any recent annual report or audited financial statements. My requests for such documentation want unheeded when I was referred to the "business plan" (which certainly does not contain enough vital data on which to base an investment decision).
The lengthy business plan does have an attachment that shows financial results for the 2005 financial year, which are so scant in terms of assets, cash flow and profit that its inclusion can only be to verify that a company called Mayfair actually does exist.
Without up-to-date financial statements - or a prospectus detailing the last few years of operational activity and other key corporate issues - no investor should contemplate making an investment in Mayfair.