Over the weekend a friend commented that I must be very happy with SFX's rise in share price from 46c to 60c, a 30% rise, and that if he was in my position he would be taking profits.
I replied that if I had sufficient liquidity I would be buying more and not selling!! Regardless of a 30% rise in the share price, at 60c the SP attributed valuation is trailing the
2023/24 NPV (Stage 1 only) cashflows from KMS to SFXof $550mil by a factor of more than half.
What this means is that even if the SP were $1.20+ at this current stage it could be easily supported by almost all valuation metrics and still would have a risk discount factor built in. What's more important is that in general, similar sort of stocks on the ASX in situations such as this routinely trade with an equivalent SP that would equate to well over $1.20 in SFX.
I feel that at the moment the SFX market is subject to the 'boiling frog syndrome' where investors, as a result of the share price being capped in a range of 45 - 52c for most of the development period, have assumed this is normal, that this MUST represent fair value (risk adjusted of course) because that's where the share price is trading.
Well to be frank, I find it amazing that there were 200,000 shares just sitting on the offer at 60c for most of Friday and no sophisticated investors snapping them up. It really is baffling, this really does appear to be the same value proposition as a sports punter receiving odds from a bookie of 3 to 1 for the world champion soccer team to win against the lowest ranked team in the competition (now they are not usual odds, you'd have to ask why). You place a bet for $1000 for the favourite to win and you get $3000 for the win. What I'm saying is the odds at 60c given the risk reward ratio are very much on the side of those buying. I'm not just making outlandish claims here, I'll back them up in a following post , however in short - it's hard to contemplate a scenario from here with any significant chance of eventuating where the theoretical value is less than $0.60, and conversely, if things go just to plan we see a theoretical value for stage 1 only and a risk adjusted value for stage 2 of over $1.50. Importantly though, things aren't just going to plan, they are exceeding projections on several fronts (I'll explain more on this in a folllow up post).
Looking a cashflow projections and NPV's when production is still conceptual as in the case of exploration companies is one thing, and it makes sense that the market capitalisation will vary significantly from the forecast, however when a company is in production then looking at forecast cashflows becomes an entirely different valuation metric.
The company is now producing Heavy Mineral Concentrate (HMC). That's right, the mine is producing HMC, we saw the initial stockpile in pictures during the October 31 presentation and that stockpile is growing by the day.
Why is this important? because it demonstrates that KMS is now in production and all but the penultimate stage of production is working.
The final phase of production, which as of 31 October had not yet been activated is the Concentrate Upgrade Plant. This final phase may well have been activated since then and if not, will be imminently. After that its simply a process of trucking to Port and then loading on the ships.
The Concentrate Upgrade Plant is where the concentrate is separated into the main sub component concentrates - Magnetic (Ilmenite), Non magnetic (zircon), and para magnetic (mix of zircon, Tio2 and rare minerals such as monazite and others).
The chance of the concentrate upgrade plant having significant issues is unlikely as it's a traditional magnetic separation process which is relatively simple. It will take time for the operators to optimise throughput versus recovery, however this is a process which is factored into the ramp up schedule. The fact that this process is not instantaneous shouldn't by virtue of timing lag effect forecast cashflows.
In a following post I'd like to go through why using the 23/24 NPV of cashflow from KMS to SFX is an excellent metric that demonstrates (without confounding factors) what a reasonable market price should be if SFX were trading in perfect market conditions (which as I've explained previously, I don't believe it is).
The follow-up post will also summarise the presentation of October 31st to highlight why the NPV of cashflows can be relied upon and where in fact we can expect to see the previously forecast NPV figure increase.
The large divergence between SP and the theoretical value (where no significant explanatory factors seem to exist) makes SFX an stand-out target for either an industry player such as Iluka or Base, or for an investment group looking to acquire long term earnings for a fraction of their current value. This is one of the main reasons I'd like to bring as much attention to this topic as possible.
(20min delay)
