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03/02/20

11:55

Post #: 42713831
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Originally posted by pe981: ↑

Ok, so final proposal has been released with virtually no changes (which effect minority holders)
FMS have previously rolled out the basis of this proposal and have had considerable feedback not the least at information sessions so the lack of changes is dissappointing & concerning (and surprising).
The IER provides us with little comfort and I believe FMS need to go back to Grant Samuel for further information. (Thanks also to Killa68 and Scarpa for their early comment in the Draft IER thread - it sometimes takes a few reads to get to specific issues)
I have today sent the following email to FMS focusing mainly on a couple of issues in the IER. I have also contacted Grant Samuel for a contact point however I expect they will not be interested in engaging with anyone other than the contracting entity.
I decided to copy my email here in the interests of public record and perhaps may prompt other specific queries / views forwarded to FMS.
I think it important to keep all correspondence to specific analysis of the various aspects of the proposal:

Dear Messrs McAdam, Warburton, Gurrey and Mrs Edwardes,

I refer to the recently released Notice of EGM and final details of proposed BBIG / FMS transaction. It is disappointing that the proposal differs little from the original deal previously rolled out including at information sessions. I know you have had considerable feedback on the deal, in particular in regard to the lack of value minority holders can expect compared to the upside potential for our majority owner and associates!
It is also disappointing the lack of modeling provided which was promised and anticipated.
I will not reiterate all the concerns in regard to the deal, however, I think it is important to raise a couple of issues in the IER which appear deficient or incorrect and do not allow minority holders sufficient information to assess the proposal.

Firstly –
The basis and methodology for finding that the deal is “Fair”
The report defines“Fair” based on the value of the consideration paid by BBIG for the Call Option must be equal to or greater than the value of the BBIG Call Option.
It is noted that the previous consideration of $10m pa to be paid was considered “Not Fair” presumably due to its discounted present value being below $40m. The increase to $15m pa enabled the value attributed to the consideration to be increased to $50 - $52m which is within the range of $40m to $80m and deal deemed “Fair” in the IER.
The value of $50 - $52m is based on a consideration paid of $60m (4 payments of $15m) and is noted as BBIGs “contractual obligation”.
However, unless there are other conditions to the payments which we have not seen there is no “Contractual obligation” on BBIG to pay $60m!
The Contractual obligation is to pay $15m pa with FID to be declared within 4 years.
In other words if FID is declared before end 1^st year the contractual obligation is $15m, 2^nd year it is $30m and 3^rd year it is $45m. There is no minimum total amount agreed that has been published.
The issue of the cost of a BFS has been a concern for minority holders for some time and despite the issue being raised before we have never had any supporting evidence or confirmation of the amount estimated.
I could not find any comment in the IER in regard to the veracity of the estimated BFS cost and It appears the estimate provided by Flinders has now been accepted as “Fact” and stated as a “contractual obligation”! This does not appear (to me) to fit in with an independent assessment in regard to testing information provided and calls into question the calculation for consideration paid.
(Note – I am not making any claims in regard to the correctness or otherwise of the estimate)
I understand that reports such as this, use information supplied by the contracting Company however it seems incongruous that an estimate can be extrapolated and stated as a “Contractual Obligation”
It is also a conundrum that the fair value estimate is based purely on the consideration paid by BBIG for the Call Option (second issue). Obviously minority holders value expectations will hinge on the actual infrastructure deal. I do however understand it is difficult to value the “Control” afforded to BBIG by acquiring the Call Option in the event this deal is passed!
In regard to the BFS, I also believe that while the proposal requires that BBIG provide funding, the BFS should be contracted, monitored and released by FMS so transparency in process is ensured and funds spent solely relate to PIOP can be confirmed.

Secondly –
I note that there is no modeling in regard to the 2 options which would need to be considered at FID which is the whole crux of future value for minority holders.
There is comment in regard to circumstances where one option might be preferable to the other, such as low or high Iron Ore price however there is little comment on the methodology and comparativeness of setting a royalty at 2.5%.
It is well stated in the IER that once deal is approved BBIG are the only ones who have an option in regard to proceeding and once FID is declared FMS either has to :-
- Rely on the vagaries of financial performance of an unlisted (and BBIG/Equity funder majority controlled) Company (Mineco) which will also have a high debt load (as noted in the IER based on the expectations of FMS) Or
- Relinquish 40% ownership for a 2.5% Royalty!
It would seem logical that there would be considerably more discussion around these 2 options and while it may be difficult to quantify the 40% earning capacity of a developed PIOP I believe there should be more discussion into quantifying and comparing a 2.5% royalty to establish the fairness of that part of the proposal.

I believe these issues need to be referred to Grant Samuel for further investigation and response provided to minority holders to enable further assessment of the proposal.
If I have misunderstood or misinterpreted any aspects of the report I welcome any clarification you can provide.

Expand

Great work pe981. Some further comments on the unacceptability of the FMS proposal below.

1 - Shareholders have repeatedly called for a substantial upfront payment to cover cost to FID and a substantial dividend to all shareholders. Despite claims that FMS has listened to shareholders this demand has not been met and not even commented on.

2 - The 2.5% royalty option is way too low and completely unacceptable. The IER gives no comparisons or industry norms for royalty payments. Compare this to the Canadian IO deal mentioned in HC posts recently (LIF). 2.5% just doesn’t pass the pub test, does it? I would expect a royalty option to be in the order of 8-10%.

3 - The proposal provides no modelling and projections. What exactly does this deal mean for shareholders apart from “maybe” going to production? It seems like a more “trust us” document. I don’t!

4 - The deal is unnecessary complex and difficult to understand yet if accepted gives control of our major asset to BBI.

5 - The document does not provide a value for our IO with a pathway to market.

6 - The risk outlined are far too great for the pittance of a reward muted.

7 - The IE takes estimates as provided as factual without testing those estimates.

8 - No minimum spend of $60m for BFS. No verification of the BFS spend required. How does that stack up with other companies BFS cost? Realistic?

9 - How does this deal compared to other industry JV’s? The proposal does not address this.

10 - The document makes no reference to the likely estimated returns to BBI or FMS. What will we make and what will they make assuming an average IO price of say US$55, US$65, US$75/t and exchange rate of 70c?

The overall deal is unnecessarily complex, gives the option of control to BBI and falls well short on reward for FMS shareholders IMO. The proposed deal is extremely disappointing IMO and I will be voting against it.

Please check my comments above as I do make errors. Comments and corrections are welcome.

FMS Price at posting: 5.5¢ Sentiment: Hold Disclosure: Held
37 Upvote

21 Great analysis

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