Hi all, forgive the intrusion but this situation is so interesting. Yet I have seen it play out time after time over the decades.
A lot of smaller investors assume that the "in situ" (in ground - un-mined) valuation based on spot price somehow represents the value of a company. That is patently wrong on every level of mining, but if you don't believe me calculate the in-ground value of BHP's Resources. The share price never represents that calculation; not even close. This misunderstanding costs a lot of investors dearly and it is hard to watch. I analyze markets and mining companies for a living, and make my income from investing and trading mainly.
The independent valuation report on DVP is clearly an academic exercise, based on no specific DVP business acumen IMO. That is; the quality of management and the team is not included in the (under)valuation. The reasons I claim this are outlined in detail by Bill in his recent DVP presentation. The market price for DVP is proof of conceptat nearly double the valuation. So the big money is valuing that "not fair" assumption at a near 100% adjustment; and it is still rising. See the Woodlawn update today with (obviously) more Resource and $$$ upside in a couple of months.
Bill has also hinted that they will have more cash flow in the near term as a deal (maybe two) is / are done in the mining services division. ESS holders should study the DVP mining services division; it is a fantastic model that can de-risk your investment and protect your money too if you take the deal. No. 1 rule in investing is; "don't lose money".
Did the valuer understand the structure of DVP? Was he just covering his ass with a low valuation so he could not be accused of overvaluation? If so he overdid it IMO (and the market agrees so perhaps you should also consider that as at minimum a possibility?). I remember (off the top of my head) they applied a 23% discount - on top of the measurable discounting on everything else DVP has to offer. There are a lot of reasons that only some companies grow substantially but it comes down to management + commercial deposits. Is the addition of superior business acumen "unfair" to ESS holders?
Issues / considerations faced by ESS holders:
1. We all know what financing / development risk does to a share price; hint, that is extremely negative for an extended period, but it mainly applies to single mine companies. DYOR on those risks as they are substantial. DVP has cash flow and diversity so this does not apply to anywhere near the same degree.
2. ESS was about to face massive dilution only to go down a route that could have led to failure (a high strip ratio = a bad plan in a rising energy environment). Yet, you were not wrong in being interested in ESS as they have a deposit and the longer term outlook for SC6 spodumene is good, so in the right hands it can be a highly profitable project.
3. The spodumene SC6 price has now declined by 63% since the TLEA/ESS 50c per share deal was announced. ESS peers have plunged painfully for shareholders as that happened. They have also declined by 45% since the DVP / ESS transaction was announced.
4. At current ratios DVP is still offeringover 51.5c per share. That is a big win already so I am sure most of the larger holders will overwhelmingly agree to this scheme and be very grateful for the opportunity to make a profit and participate in a lower risk future with DVP.
5. Which company has the ability and scale to bring this to commercialization? This is the expert valuers reason for "reasonable" I believe; but it comes down to time horizon for individual investors to reach their target share price. Do you really want the pain of a probably significant decline in the ESS share price through the funding and development phase? Will you ever see a profit if left to a small company to develop this?
My hope in sharing this is for ESS holders to look at this differently. Do you want a higher probability to make money (bird in the hand) and move to other opportunities (there are plenty)?
My suggestion is to take a fresh look at this if you have been confused by "potential" over an uncertain future and incorrect valuation models. It is not easy to bring a mine into production and you have been handed a lifeline in this deal IMO.
GLTAH CW Disclosure; I hold DVP so I have my money where my mouth is.
ESS Price at posting:
49.0¢ Sentiment: None Disclosure: Not Held
