Ann: 2015 Annual Financial Statements, page-75

Nikec - I am not too sure where you are getting your numbers...

The forecast cash operating costs post debottlenecking to 32.5 ktpa are US$1.27 per pound (which will be the C1 cost). The difference between the revenue and the C1 will give you a rough site based EBITDA. So using your numbers, with a copper price of $2.30 per pound, then the site EBITDA will be US$73.6m or A$98.2m. Admin and exploration was approx US$10m last year and with headcount reductions, lower legal charges (no re-fi this year) and lower exploration costs - this could fall to US$7m this year. So forecast company EBITDA of US$67m.

Depreciation and amortisation was US$17.9m last year. So EBIT should be approx US$49m.

Worth noting that the cash operating costs is a site based cost, so excludes the interest payments and corporate overheads. And it probably doesn't include sustaining capex (they weren't explicit). Sustaining capex was $0.09 per pound last year and royalties were $0.10 per pound - so the AISC (site based) should be US$1.46 (if they stay the same, and grid draw is at forecast levels).

At these AISC levels, Kipoi will easily be a second quartile global copper producer. Many investors (and companies - OZL and SFR for instance) like to focus on C1 costs but it really is meaningless when you want to understand cash flow. OZL and SFR have very large sustaining capital requirements that means their AISC's are significantly above C1 costs.

Interest payments will come down significantly this year - and this will be one of the major cost savings yoy. Finance charges were US$23m last year and this should fall to approx US$14m this year. Take the US$14m from the US$49m of forecast EBIT and PBT should be US$35m (A$47m).

The company has US$66m of tax losses, so the tax payable on profits should be minimal (though maybe they get hit by small charges by the DRC). Therefore, NPAT should be approx US$35m or A$47m in 2017 (assuming production forecasts, cost forecasts, grid draw forecasts and copper at US$2.30 per pound - a lot of assumptions in there). There are 1,795 million shares - so at these profit levels the forecast PE (2017) of 2.2x.

Every 10c per pound on copper adds approx US$7m in cash flow that should (due to the tax losses - until they are used up) drop to the bottom line. So at US$2.50 copper, the NPAT should be approx US$49m and at $3.00 copper it should reach approx US$84m or $A112m (a forecast 2017 PE of 0.9x).

Interestingly, if copper averages $3.00 per pound, then the site based EBITDA in 2017 should be US$123m (or A$164m). Take away US$23m for admin, interest, exploration, sustaining capex and royalties - and the company should generate free cash flow of US$100m (using a very conservative 4x cash flow valuation, the company should be worth approx US$400m or A$533m). Net debt is currently approx US$130m, so the company would be debt free in less than 1.5 years if this scenario plays out.

What do they do then? Either double the plant capacity again to 65ktpa, which could be funded through mostly cashflow and a small amount of debt, or just pay out FCF in dividends. Lets assume they start paying tax at this point, and assume a conservative payout ratio of 70% - then the dividend could be 6c a share (in 2018).

I understand that there a lot of assumptions in the above, and the outcome could be very different. I think the important point is this - the downside for the company at the current copper price is minimal, yet the leverage on the upside is incredible.

TGS have re-set the balance sheet, there is good term on the debt and a very manageable re-payment schedule. The plant is operating well and the company continues to reduce the cost base. The expansion project is low risk, low cost and will lift production to 32.5 ktpa in 2017 (conservatively).

If copper improves to $3.00 per pound, then the company could be in a position to pay a dividend of 6c a share by 2018 - if you are a long term investor, then the risk to reward ratio is currently compelling.