the farm-in fallacy, page-2

77,

I have a different view.

Current MC and the cost to develop are not the starting point. You should start with the agreed present value of the tenement.

Let's say for argument sake the farm-in relates only to PEL16, and only to csm.

Let's say the agreed present value is $400 million, but the cost to develop is a further $500 million.

If MEL farmed-out 70% ownership, it would receive $280 million, possibly over time on a milestone basis.

It would have ample funds to meet its minority share of the further development capital ($150 million).

If your question is, why would a third party not instead just buy MEL 100% in a takeover, try these reasons:

1. MEL is not for sale for its current MC, or even a 40% VWAP (see PES).

2. A third party may quite like to operate subtley through the current MEL entity and management team.

3. Such third party may get a further "pick-up" through an existing stake in MEL.

4. Milestone payments effectively de-risk the acquisition for the third party, compared to a full take-over.


Favre