knees-up!, page-35

chimera asks: "do you believe, given the placement implied cost of equity that 8% is the right number here?"

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The discount rate in an NPV should represent the opportunity cost of capital to investors in RNI … not necessarily the cost of capital to the firm itself. We, as investors, are calculating the present value of the future stream of all expenditures, and future net revenues. Given that the riskless rate is about 3%, then using a figure of 8% (as assumed) provides a healthy margin for a risk premium.

Of all the things one could worry about, I think you are quite mistaken to worry about the discount rate, because whether it should be 7% or 8% or 9% or 10% etc is frankly mostly irrelevant to this project. This is because:

a) the Feasibility Study (FS) assumes a very conservative initial mine life (the PayDirt conference presentation refers to 8 years; the FS seems to refer to just 5 years which is even more conservative than I thought) - either way, we are only discounting over a very short time frame, and the discount rate is not going to be the key variable here at all. You are barking up the wrong tree worrying about the discount rate.

b) rather, the key determinants will be the price of gold (in AUD), and the size of the actual resource.

RNI estimates they have some 2million ounces of gold, but they have conducted the feasibility study based on recovering roughly 500,000 ounces … and even then, ... it comes out as an expected net profit, after paying back all loans, all mining costs, all expenditures etc … net $100million in today’s money. That’s not marginal — that’s a massive multiple of the company’s current market cap. It is incredibly conservative, and still provides a 3 times multiple.

Then, we have the next 1.5million ounces of gold to play with … and potential longer mine life … all not factored in .. and that’s just the gold. Then the copper bunnies can add copper on top (or underneath, as the case may be) ;)