This article first appeared in The Edge Malaysia Weekly, on December 7 - 13, 2015.

BORNEO Aqua Harvest Bhd’s share price has jumped 39% since it announced to Bursa Malaysia in late October its proposal to acquire Wullersdorf Resources Sdn Bhd to venture into mining gold, copper and silver.

The share price rally boosted the loss-making fish farmer’s market capitalisation to more than RM500 million. Based on last Friday’s closing of RM1.21, the stock is trading at 216 times its trailing 12-month earnings. Although the company has yet to strike gold, its share price seems to have already factored in that possibility.

Last month, Borneo Aqua entered into a conditional share sale agreement (SSA) to take over a company called Wullersdorf Resources for RM131 million. Southern Gold Sdn Bhd, which is majority-owned by Borneo Aqua’s largest shareholder and CEO Datuk Lo Fui Ming, has obtained a prospecting licence from the Sabah Land and Survey Department to mine for minerals in a 20,000ha tract in Bukit Mantri, Tawau.

The proposed acquisition is a related-party transaction (RPT) as Lo also holds a 70% majority stake in Wullersdorf Resources, while two other individuals Mohd Amir Masry and Dr Tan Su Haw hold 25% and 5% respectively. Lo holds an 11.87% stake in Borneo Aqua.

The purchase consideration will be satisfied via the issuance of 104.5 million shares and 34.84 million irredeemable convertible preference shares at 94 sen per share.

Southern Gold has also been granted a mining lease of 35 years on 1,000ha in the same area. Wullersdorf Resources is leasing a 317.7ha portion of the main leased land in Bukit Mantri for 33 years at an annual rent of RM60,000.

With the asset injection by the controlling shareholder, Borneo Aqua will stand a chance to strike gold and change its fortunes.

Borneo Aqua’s (fundamental: 1.30; valuation: 0) current core business is aquaculture in Sabah. It exports its red snapper and grouper to Northeast Asia.

In the financial year ended March 31, 2015 (FY2015), its net loss nearly halved to RM2.34 million from RM4.28 million in FY2014. In the six-month period ended Sept 30, 2015, it returned to the black with a small net profit of RM988,000.

Mining, to some extent, is a high-risk venture because there is no guarantee of production despite expensive, detailed research.

Take the example of Peninsular Gold Ltd. The Malaysia-based gold miner, which is listed on the London Stock Exchange’s Alternative Investment Market, ran into financial difficulties late last year.

Trading of the company’s securities was suspended last December after its operations in Raub, Pahang, was halted by the authorities owing to environmental concerns. It was required to change its tailings storage facilities.

Owing to the suspension, Peninsular Gold made a pre-tax loss of £7.1 million last year as revenue declined to £204,573 from £8.7 million previously.

Now cash-strapped, the company is said to be looking to secure additional funding before the resumption of operations.

It is not known if it has resumed operations as targeted in July. The company maintains that it has always complied with environmental regulations at its mine in Raub.

To be fair, Peninsular Gold could just be one of the unlucky miners that fail to strike gold. There is no shortage of examples of successful mining companies, including Australia-based Rio Tinto group, BHP Billiton and Glencore.

In the announcement to Bursa, Borneo Aqua said the prospective area has 4.6 tonnes of indicated gold reserves and 1.9 tonnes of inferred gold reserves. The area also contains 14 tonnes of indicated silver reserves and 6.5 tonnes of inferred silver reserves.

“Borneo Aqua may outsource part of Wullersdorf Resources’ mining operations to external contractors to reduce the initial capital and operational cost outlay,” the company said in the announcement.

According to Borneo Aqua, the initial capital expenditure and operating expenses for the first two years is estimated at RM30 million. The group intends to fund the financial commitment through a combination of internally generated funds, bank borrowings and shareholders’ advances.

Its balance sheet as at Sept 30 shows that it has cash of RM3.2 million, long-term borrowings of RM2 million and short-term borrowings of RM10.9 million.

Mining venture aside, Borneo Aqua’s shares are valued at over 200 times earnings.

In comparison, Singapore-listed Pacific Andes Resources Ltd is trading at only 1.4 times its historical earnings while New York-listed, China-based Sino Agro Food Inc is trading at 1.89 times historical earnings.

Pacific Andes made a net profit of RM397.4 million last year while Sino Agro earned RM301.4 million. It is not known why the market values Borneo Aqua at such high multiples.

Nevertheless, the group has some institutional funds as substantial shareholders. Lembaga Tabung Haji is the second largest shareholder with a 9.17% stake, followed by BNP Paribas Wealth Management with 4.4%. The pilgrim fund has been a substantial shareholder since 2009.

Borneo Aqua has an integrated cage-farming project in Sandakan that was recognised as an Entry Point Project by the Performance Management and Delivery Unit (Pemandu) in May 2012. However, the project stalled after the incursion of extremists from Southern Philippines last year.

Borneo Aqua was supposed to invest RM98.5 million in the project by 2020 through its subsidiary, Plentiful Harvest Sdn Bhd. The fish farm targeted to produce 800 tonnes of high-quality hybrid grouper annually for local consumption and export to Hong Kong and China.

According to Pemandu’s Agriculture National Key Economic Area director Dr Fadhlullah Suhaimi Malek, the incursion has indirectly eroded confidence and stalled the project for more than a year. Construction was at only 45%.

“We have had to do a problem-solving intervention and a project review. Upon finalisation of the review, we will be able to ascertain if any reimbursed disbursements have been made thus far, and if so, the company is contractually obligated to return the funds upon the termination of the project,” says Fadhlullah.

Its aquaculture business is starting to turn a profit. However, the management does not seem to have faith in the fish farming business. Otherwise, it would not be jumping on the gold mining bandwagon.