a share buy back, page-2

The motive behind most companies is to do things that benefit shareholders. Usually this means increasing the price of a share.

The price of a share is primarily linked to the value behind the share. There are two main ways of measuring value : book value and intrinsic value.

Book value is based on the value of total assets less the value of total liabilities - it attempts to measure the net assets a company has built up until the present time.

Intrinsic value is a measure of value based on the future earnings a company and is expected to generate for its investors - it attempts to measure the total net assets a company is expected to build in the future. It is considered the true value of the company from an investment standpoint and is calculated by taking the present value of the earnings (attributable to investors) that a company is expected to generate in the future, along with the future sale value of the company.

Mr Market also adds an emotional component into the stock price. In the short term this can make a difference but in the long term the price should equate to the value. It is often said that in the short term the market is a voting machine but in the long term it is a weighing machine.

In terms of a share buyback, shares are purchased by the company management because the company beleives the share price is below value and that Mr Market has under valued the shares.

The effect of a share buy back is to reduce the number of shares on the market and thereby reduce the supply of shares to the market. The reduced number of shres means that earnings per share increases as earnings are constant. The Market capitalisation of the company does not reduce as the shares purchased by the company hold value. All the company is doing is swapping cash for shares in the same way that you or I do not loose money when we purchase shares. The 1 Billion of value is transfered from the cash asset part of the balance sheet to the share asset part of the balance sheet.

A share buy back does not prevent the company from performing another purchase as the company can use shares instead of cash to buy.

The limited supply of shares means that there are less shares for the same amount of people to hold. This drives the the share price up from demand and supply in economics.

Additionally once Mr Market sees the share price rising the shareprice gains a momentum and Mr Market jumps on board as everyone else is jumping onboard driving the price higher.

We are currently in a Bear Market. A Bear Market usually means that Mr Market sits on the sidelines and sells irrationally. If OZ Minerals is the only share increasing while all other shares decrease then OZ Minerals may be seen as a safe haven to the bear market driving the share price to $8.

This is a successful strategy that most successful companies do. RIO tinto, BHP and so forth. I recommend this strategy as conservative, safe and smart.

The real question is are OZ Minerals Managers conservitive, safe and smart?

Ryan