numbers questions from a newbie

G’day all.
New to this one, with thanks to my good mate Gottsy for bringing it to my attention. I’ve been in my bear cave for a while now (comfortably retired on my share investing profits), but with interest rates falling, I’ve decided to commit a small percentage of my portfolio to shares. I’m currently almost 100% cash, (with a few CWNHA & CBAPC & now some PLV).

I’m a long term investor (part of a group), that looks to find undervalued companies & PLV seems to qualify on my first pass look.
Early days for me, so just a small holding so far. I’ll continue my research & DD. If it continues to prove up, then I add more as I go. If I find issues that I can’t reconcile, I’ll bail & move on to the next one.
As Gottsy can confirm, we’ve had a quite a few outstanding rides over the years (BMS, OXR, AOE etc). A few bad ones of course, but fortunately the good ones far outweighed the losses, to the point where I was able to retire early at 56 (2005). I think we had 6 or 7 10+ baggers, including one 20+ & one 40+ bagger. I think those days are gone for now, so my sights are set a little lower, with 2-3 baggers that have potential to 5+ what I am now looking for. My early look indicates PLV has that potential. Plenty of risk factors, of course. But the risk/reward ratio looks good for me.

One part of my process is a rigorous “devil’s advocate”, where we ask every hard & dirty question we can come up with. We then try & answer all possible negatives. The outcome of that process determines if we hold, sell or buy more.
I don’t do this on the public boards; too many of the faithful can’t cope & take it as an attack on their beloved stock. There’s a group of us that correspond & we tend to do it privately. I may ask one or two of the questions on public boards if we are struggling with any particular issue. But prefer not to for the obvious reason.

So, on to PLV.
Apologies if this has been asked & answered before, but has anyone run the numbers? I read back 100 posts or so & couldn’t see anything on this.
From what I have seen in the last 20 announcements & various reports, PLV sold 50% Cockatoo island for a $20m prepayment for the environmental bonds. Is this $20m a prepayment against future shipments? It seems to me to be that; just need confirmation.
I can also see they have the 1mT off take with a US$12.7m (A$12.2m) prepayment against future shipments for acquisition costs & working capital.
Those costs look like $525,000 cash, $1.29m over next 12 months ($1.50/t x 860,000t shipped Dec. ’12 to Nov. ’13); not sure of legals/advisors etc – maybe $2m? Let’s say $4m all up, leaving $8.2m working capital.

“Target” FOB operating costs $51 (VERY important to watch when they advise what this actually is)
10.5% (royalty + WEG marketing fee) & PLV receive a $5/t Management fee. 50/50 JV.
Depends on selling price. I assume they are receiving spot or close to it? Not sure if there’s anything in the offtake on price? Spot around 4120, so I’ll use that for this exercise.

Using their stated expected shipping tonnages – 43,000t/m Dec. To Mar (4 months). Then 86,000t next 9 months will see 860,000t shipped first 12 months. Assuming all the above are right, including the vital real FOB cost, PLV 50% share of the cash profit will be around $20m over first 12 months.
We don’t know the details of the prepayment schedule, but I assume they simply don’t receive any more cash until the prepayments have been repaid in tons shipped. So, further assuming that $20m is also prepayment against shipments, they will ship until around March 2014 to pay off all that $32.7m in prepayments (I’m assuming the 1.5% acquisition royalty continues).
Now I’m only using the above costs & stated admin going forward of $1.5m/Q. I do like their reasonable admin costs at this stage in their development. It’s one of the first things I look at (Director’s fees/consulting); any that are too high, I just walk away.
There are probably other cash costs, but I can’t see them & we won’t know until we see the half yearly, unless someone has some ideas on them?
I’ll need to understand all costs, including, development, exploration, D&A etc (now in production), before trying to do a guesstimate on their full P&L for next year or two. Then a further guesstimation on what might be possible in the out years. Although we’ll need to try & figure out when Irvine might come into production for that. Someone here suggested 2015 or 2016. That means for the foreseeable future, we will only have our 50% of Cockatoo driving the value of PLV.
I note the comment in one of their 29 Nov. preso:

No sign of any projected start up time from the company.

What I’m driving at, is the question of funding ongoing development, exploration, $15m seawall & any other capex requirements for Cockatoo & potentially Irvine. It depends if their funding partner has allowed them a more generous time to pay back the prepayments or not. If not, then there’s a fair bit of capital required. So debt, equity, another prepayment against Irvine, or a combination. With that seawall construction planned to start Q1, they must have the funding sorted, or will soon do so. Let’s hope it can be done from cashflow &/or a bit of debt.

Biggest query for me & one that can’t & won’t be answered for a while is the underground prospect. Unusual, but not unheard of with Iron ore. However, going underground brings on a whole new raft of issues. UG has killed off many good projects in the past & will remain a ? until they actually do it & succeed. Suggesting a tried & tested procedure like block & pillar sounds fine, but it will all come down to execution & solving the many problems that will be thrown at them as they go. But that’s one of the reasons why the market cap is where it is & not way higher.

The obvious main risk (apart from UG), is the state of the world & subsequent IO prices. As I said up front, I’m a bear & have been all cash for a few years. I believe the crash we have to have is somewhere ahead of us. I’m HOPING the world muddles through, but I just don’t see how printing money/creating more debt to solve a debt problem can ever end in anything but tears. So my investment in PLV will be small to start & never grow too big that any major loss can hurt me. When I retired on my profits in 2005, I made a simple rule for myself:
If any investment loss after going bad either by itself or a major market collapse, would change to quality of wine I drink, then I will not make that investment.

Overall, I like this company & I like what I see in the way management have handled the minefield of moving from explorer to producer. Management are the #1 factor for me in assessing any company. I’ve made most money from companies with outstanding management & lost money where management turned out not to be up to the task. I also watch management carefully as we go, as management can change (as we saw with the disastrous results at OXR). Success can sometimes go to their heads & they then make bad decisions (as OXR board did).

So, I have bought a small lot so far & will continue my DD (hopefully with some help from those here). I’ll add to my holdings as my confidence in the medium/longer term prospects grows.

My sentiment is a hold for now, until I have completed my DD, when I hope it will change to a LT buy.

Good luck to all.

as usual;
CAVEAT EMPTOR - risk in all Investments.
Everyone should make their own investment decisions & not base them on what they might read on an Internet chat site, or receive from me (who is just an enthusiastic amateur).
Remember, this information is probably worth what you paid for it.

Cheers.

Ned, off for morning coffee on a beautiful Melbourne day.