Ann: Dividend/Distribution - GRR, page-236

Interesting comments from the company in response to Rocket 973.

However, all directors should allocate capital in the best interests of the company and by implication the shareholders.

With Grange having current cash on hand around $500m and a market cap of around $700m, a share buyback would be a much better investment by the company than either the underground at S R or the proposed new mine in W A. While I would be in favour of both provided they stack up economically, there is no reason debt could not be used if they are so compelling, if it was required.

Looking at the current share buybacks by CBA and WOW and recent ones by RIO and BHP the logical way to go about the share buyback would be a tender process to current shareholders. This would result in Grange buying back it’s own shares at a 14% discount to the market which would make the economics of the buyback even better. I think a company can buyback either 10% or 15% of it’s shares on issue before having an EGM. Not sure on this so someone may clarify.

For the sake of using numbers to make the case I would foresee a capital return of say 10 cents a share and the balance of the buyback as a fully franked dividend.

The franking credits are of no value to the company but of great value to most shareholders. From the point of view of the company it is buying it’s currently undervalued shares at a further 14% discount. Given there will be less shares on issue the share value of Grange should increase.

The only problem I can foresee is that the Shagang equity interest would increase if it did not tender a number of their shares. However, there is no reason why they could not tender the exact number of shares to maintain their current equity position or sell into the market the number of shares to maintain their current holding. Presumably it can also use the franking credits though not sure on that.

The point is, in my view, this is the most compelling use of Grange’s capital and should be prioritised by the directors, before other capital initiatives. In any event, given the relatively small amount of capital required for the share buyback, relative to their current cash on hand, it should not compromise other capital plans. If the company decided to buy back say 10% of it’s capital it would be buying back 115.73m shares. At the current price of around 61 cents, less the 14% discount, that would equal 52.46/share or $60.71m. Chickenfeed in the scheme of things.

Would be grateful for any comments on flaws in the logic or possible improvements in the proposal, prior to sending the suggestion to all directors.