@tr1ptych Your points may sound well conceived but fail to hold up to scrutiny.
I'll start with your last point about stage 2 funding.
Stage 2 fundingStage 2 has been structured to be fully debt funded. KMS will have sufficient equity in it for the funders to extend a loan for the full amount of stage 2 capex.
Even in the scenario it needed to be partly equity funded by SFX and YS, this is inconsequential to a valuation. This is because any debt amount will be repaid out of future earnings, and if the debt is smaller because the JV partners were required to put in part equity, then the additional future earnings that would have been used to pay off the larger debt will be redirected to the JV partners as increased dividends once the smaller debt is paid off.
This in effect means 6 of one half a dozen of the other as to how its funded.
As far as looking at what TB is worth on paper at this point in time (stage 1 or stage 1&2), all those costs, associated debt and negative cashflows have been worked into the NPV calculations. So the NPV's I keep referring is the best guess of the project's present days worth including the funding of stage 2.
Maintenance Capex and Free CashfowsAnother of your points is that future maintenance and maintenance capex needs to be considered to determine free cashflow (as opposed to just initial capex). These additional amounts are all built into the DCF model that produces the KMS NPV, EBITDA and other financial metrics. The company produces a maintenance schedule and capex upgrade forecasts, so these costs are factored into the NPV and EBITDA and therefore free cashflow to SFX.
DCF ModelYou also argue that one should have their own model because the NPV could be old and outdated. I would completely agree if this was the case, but it's not. In effect having one's own model is the same as understanding the existing model and adjusting it for any variables which are no longer valid due to changes. I do understand the model and have assessed it for currency.
The NPV model which I'm relying on was updated in October 2022 at FID (a year ago). We know the assumptions, and they are still all current and relevant. If anything the model underestimates NPV and cashflows because of:
i) the reduced time value of a year between 2022 and 2023
ii) an additional quarter of production (Q4 2022 vs Q1 2023)
iii) more favourable foreign exchange rates than forecast for early years production
iv) conservative long term foreign exchange rates
v) lower actual capex cost than forecast ($311mil vs $336mil)
vi) $60mil remaining in the cost over run and working capital facility.
vii) Operating costs were over estimated in the FID DCF on two fronts
a) assumed high mining costs to cover for induration
b) a general 10% inflation factor applied to Oct 2022 cost forecasts.
for these reasons the opex costs are still current.
Also note that the DCF model is a post tax model as opposed to many company's models which are pre tax models (eg Strandline).
So, as far as I'm concerned, the NPV is a current, conservative and well understood number to work off.
Free cashflow vs EBITDAThe post you replied to was referring to free cashflow (ie, $120mil pa from KMS to SFX - that is free cashflow into SFX of $120mil pa for 30+ years), however you seem intent on conflating this for EBITDA, probably because I mentioned it was a derivative of SFX's share of LOM EBITDA.
I mentioned this to help give an idea of the enormity of what SFX owns, ie large free cashflows over 30+ years
So to be clear, as presented by the company, SFX under the current mine plane is due $120mil pa from KMS (post debt repayment). This is an average over the life of the mine.
Let's get onto your point about depreciation and amortisation being expensed. Yes it's expensed, but the more significant point you seem to be overlooking is that depreciation is not a cash cost, in other words it doesn't reduce free cashflow. Depreciation is the depreciating value of the capex which was injected upfront, the depreciation value becomes a tax expense but it isn't a negative cashflow. Hence it doesn't reduce free cash flow, which is what your argument is incorrectly asserting.
My back of the envelope calculations of SFX's 50% portion of interest amount to approx $60mil for stage 1 and 2 (combined). So when looking at SFX's 50% share of $4.4bil LOM earnings, $60mil is immaterial and can be ignored.
As for the Tax component, even though the company hasn't specified this to be the case, I've taken the conservative view that the $120mil pa (from KMS to SFX) is cash and cash equivalents (ie cash + franking credits).
Therefore the tax expense has already been factored into the sum I quoted of $120mil pa going to SFX from KMS (as per SFX presentations). Hence I say, in this case, EBITDA is the same as free cash flow.
eg KMS EBITDA is $120mil, KMS NPAT is $100mil (adjusted for depreciation), tax on NPAT is $30mil, therefore distribution to SFX from KMS is $90mil cash + $30mil franking credits ($120mil cash and cash equivalents)
The only time that EBITDA is not free cash flow (including franking credits) is in the years when debt is being paid down. Having said this, remember that debt repayment is a reduction of a liability and therefore EV increases commensurately as debt is paid down, so debt repayment has the same asset effect as free cashflow to SFX. That's why I say it doesn't much matter what the free cash flows are used for as long as it is not being used for costs.
If we are looking at NPV then let's remember that it's a post tax DCF so the NPV number ($900mil in 2024) is post tax.
Fairy Land Share Price ValuationsLastly, you imply that my view of share price value is unrealistic and couldn't possibly play out in reality because my cost of capital assumptions are unrealistic and my risk discounting is not appropriate, both of which lead to higher than reasonable share price valuation forecasts - easy to say, but how true is it?
Well, this is where we can leave the conceptual realm and just look to the markets for proof. STA when it was trading prior to the commissioning problems emerging is a perfect proxy. For many months in 2022 (March - November), even as early as March when the plant was less than 75% complete, the stock traded between 40c and 55c.
This was a high daily volume traded stock, owned and traded by the institutions you referenced as being price setters. And what's more they even raised $50mil at $0.43 which is translates to a pre-raise market cap of $480mil.
$480mil (topping off at a market cap of $690mil) for a company with a primary project with a pre tax npv of $705mil using 0.70US/AUD, project still 6 months away from production, plant incomplete, and a technically inferior deposit (low grade). Nonetheless for the purpose of this point let's say the two projects (100% Coburn and 50% of TB, NPV8 $800mil post tax, 0.75 US/AUD) are comparable.
Well there you have it, the market was happy to value STA shares as well as put in $50mil at a market cap of $480mil (topping out at $690mil) when the plant wasn't even built, and you say that my SFX $1.20 price forecast ($480mil market cap, with first shipment just weeks away) deserves to be in fairy land??
I don't hope to convince you that I'm right, happy for us to have different opinions. What I did want to do is to back my opinion up with my explanations save that someone reading was unsure which way to fall.
(20min delay)