SFG Getting Ready For LiftOff

SFG Getting Ready For LiftOff
I have previously posted my view that as Project Sea Dragon (PSD) key steps are ticked off during 2016 SFG share price should move up to multiples of what it currently is. I continue to hold that view.
But in the light of how the share price has moved in the past month my view with regard to its share trading performance is worth revisiting at this time, even as the general market continues to wobble from issue to issue.
I’m the first to admit that I got the timing wrong when I posted just prior to Christmas that there was still time to slowly accumulate shares in the range of 5.5 – 6.5 cents. That prediction wasn’t helped when the Chairman announced soon after that he had added a few million more shares, by way of on-market purchase, to his private holdings (over 45% of total shares on issue). Clearly that came out of the blue, but that in itself confirmed that market sensitive news was still some time off and that the PSD must be still on track and SFG being undervalued by someone involved at the coalface.
Since then we have observed another bump up in share price, touching 10.0 cents briefly before settling around 8 cents currently. That ‘bump’ may be related to the Chairmans purchases plus the news article that Usual Suspect graciously alerted us all to on HC.
There are plenty of technical analysts acutely aware that SFG has gone through a few “bumps” upwards in share price over the past year, previously the most recent of which was in July 2015. And at that time it very quickly settled back to 7 cents before copping some further significant selling that dropped its share price with it briefly touching 5.4 cents. Based on that last share price movement most chartists appear to presume that SFG will once again head towards 7 cents, and that appeared to be in process even as late as earlier this week.
But it is noteworthy that in fact the current circumstances for SFG are vastly different to those back in July 2015. Just after the share price moved up briefly to 10.5 cents in July there was a Trading Halt, followed by the announcement of a placement at 7.0 cents to Sophisticated Investors plus an Entitlement Issue to shareholders at 6.5 cents, to raise a total of $16.0 million. Clearly that capital raising put pressure on the share price, thus its move down from the “heady heights” at that time back to 7.0 cents quick smart, and below, was to be expected. Especially as soon after that raising occurred the overall markets (globally) were put under pressure by the combined effects of looming US rate increase speculation, Greek debt issues and growing concerns around China and Shanghai share trading.
This time is different for SFG. And whilst global markets continue to wobble from issue to issue as we have observed this week, the real concerns previously of the first US rate increase timing and Greek debt crisis are behind us, at least for a reasonable time to come.
Firstly we know that the SFG capital raise that occurred back in July 2015 ensures no further capital raising until the first stage development of PSD, and we also know that there are a number of initiatives due in coming months regarding the Bankable Feasibility Study (BFS) for PSD. We also know that SFG has got its AGM in just under 3 weeks’ time.
The time to the next important announcement for the BFS surely must be approaching, and I’m of the view that the first key announcement about PSD will signal to the entire market increasing probability that PSD will happen.
After dropping momentarily to 7.6 cents earlier this week, but ending that session above 8 cents, I have become increasingly confident that we may not see the share price retreat to 7 cents again! Thus I’m of the view that accumulation of shares in SFG is probably unlikely at anything like 7 cents, and there may be a limited time frame now to build a position before things start to happen with PSD announcements.
In preparation for the future funding of Stage 1 of PSD its highly likely that SFG management will be planning to increase the awareness of the status of the company and the project to a far wider audience in coming months, especially to potential international investors. That in itself must encourage an increasing level of SFG awareness to a far broader audience within the Australian market as well. Whilst it will still not be on the radar of many Australian investment houses until it is in production and builds sufficiently to be included within the ASX200 index, there will be an increasing level of buying by smaller boutique investment houses that are not so bound by such rules of investment IMO.
mce-anchor Since a lot of current shareholders have been buying to hold for the outcome of PSD I’m of the view that SFG share price will finally break through and clear the 10.0 cents barrier, and once this has been achieved the share price will likely test prices not seen since its heady days when involved with its former carbon business at the height of its glory.
How high the SFG share price can go this time however, with first go ahead of Stage 1, is anybody’s guess, but clearly it depends very much on how Stage 1 is funded, and whether SFG retains a significant equity in PSD, and the extent to which debt funding can be achieved (increasing debt achieved = increasing return on funds employed).
Arguably SFG should be able to retain a substantial equity, probably 100%, for Stage 1 along with operatorship for PSD due to the high input costs it has borne to complete the Pre Feasibility Study, plus costs to date on the BFS and additional outstanding expenses with the BFS, plus its other Intellectual Property re CSIRO and James Cook Uni studies that it has pursued. And the extent of its involvement with all stakeholders certainly is not easily transferrable to a large third party fundor, particularly any funding party that is not an Australian entity.
The bigger picture:
IF we were to presume that SFG can retain a high proportion of PSD equity through to the development of Stage 1, and BFS confirms at least the Pre Feasibility Study financial outcomes, then its market cap in the run up to the development could arguably increase to more than A$200 - 300 million.
This is prior to any further announcements regarding the entire development of the full blown 100,000+ tonnes annual production (currently expected to result in around $1.5 billion revenue). Then a market cap, far in excess of A$300 million, is more than likely for SFG.
My views on market cap (and possible PE ratios) considers the numbers achieved for milk producers A2M and BAL which are considerably higher than what I have assumed for SFG!