real value, page-2

Hi JnrTrader, a worthy attempt to put some numbers up. If I may put an alternate view? I'm not criticising, I have a different take on some of the numbers, that's all.

A few points about how my work differs from yours, and how they are similar:

(1) Converting EBITDA to earnings - I thinks you've assumed a very high D & A, much higher than contemporary companies;

(2) PE ratio of 15 (while entirely possible) is not conservative enough for my liking - I tend to use 10 especially when looking several years ahead;

(3) I find it easier to assume the $1b in capex will be raised by a combination of debt and equity, without going into too much detail. I suspect the ratio will be closer to 50:50. You have used a higher amount of equity raising, resulting in greater dilution (310m shares), whereas I have assumed dilution to 300m shares;

(4) Exchange rate changes don't come into your figures, perhaps a long term exchange rate of $0.85 might be appropriate?

(5) Perhaps to be conservative a long term U price of US$70 per lb, rather than US$80?

So, looking at it very simply, an alternate view of a mature operation is:

All in US$ unless otherwise noted
U price: $70 per pound (long term price)
Production Mlb pa: 15
Sales: $1,050m
Costs @ $25 per pound: $375m
EBITDA: $675m
Tax @ 37.5%: $253m
EBITDA less Tax: $422m (D & A usually quite small for mature operation)
Project valuation @ 10 times profit: $4,219m
Capex costs: $1,000m
EXT valuation: $3,219m
Exchange rate: $0.85 (long term exchange rate)
EXT valuation: A$3,787m
Number of shares: 300m (after dilution from capex raising)
EXT share price: A$12.62

Effect of:

Production increases to 16.5Mlb pa (+10%): +20.4%
U price increase US$5/lb (+7.1%): +14.6%
Opex increase US$5/lb (+20%): -14.6%
Exchange rate increase $0.05 (+5.9%): -5.5%
Capex increase US$100m (+10%): -3.1%

As you can see, the two biggest determination is the annual production, and the long term the U price. This is hardly surprising, as any producer's value is leveraged to the price of the resource, and how much they can produce.

My assumptions of minimal D&A reflects a mature operation, where initial costs have already been written off. Earlier years would have higher write-offs, resulting in higher earnings. Conversely, the first few years would build gradually to full production. So this is a look at a mining company in, say 2017 to 2020. Such a long distance view requires a lower PE, so a multiple of 10 (ie a PE of 10) has been used.

Note that this estimate takes no notice of the size of the resource. The numbers would be the same for a mine with a life of 5 years, and one with a life of 50 years. Clearly, Extract is an unusually large resource, with a very long mine life; such a strategic resource should command a premium which is not reflected in the estimates above.

Also, no premium has been added for the potential for Extract to be taken over.

Overall, Extract is a remarkable company with a long and profitable future. The size and future potential is truly staggering.

From the guidance on the effect of changes, when the DFS comes out I shall be looking closely at the annual production - any increase over 15Mlb pa will have a large effect on EXT's valuation. Conversely, I won't be too worried about increases (if any) in opex or capex, as these have a proportionally smaller effect.