If we continue along the above lines (in terms of possible...

If we continue along the above lines (in terms of possible scenarios), we can perform a valuation for each by thinking about the current shares as purely having option value (ie, the option to participate fully, proportionately, in future capital raisings).

So if we assume that the possibility of the whole enterprise being canned (no wharf approval is given, anywhere) is too pessimistic, then we can ignore the value of KPT based on its current balance sheet (ie, liquidation value). That is, we can treat the current equity capital as having zero value, beyond the option value.

If we base our valuation on a 10% required return, then we can say that the value of participating in future capital raising will be approximately equal to (aggregate value of all current equity):

V = 0.7 x EBIT/10% - C = 7 x EBIT - C

Where C is the total capital to be raised (equity + debt).

This equation is the value at the time of participating in the capital raising (aggregate value to all current shareholders), and assuming that earnings commence about 1 year later (which seems approximately right, as long as wharf approval doesn't drag on for too long after the NF acquisition is completed, I think...).

The equation ignores any benefit from front loading future sales. But on the other hand, and perhaps more significantly, it also assumes the magnitude of earnings will continue indefinitely (beyond just 10 years), which may perhaps be optimistic (those that understand the opportunity better may want to correct me here).



Scenario 1 - Timing continues without a hitch (to current plan)

Under this scenario, the CR raising occurs within a matter of a few months (well within 6 months), and revenues commence in a little over a year. As such, we can use the value equation as stated.

Current shareholders have the opportunity to contribute a total of $37m of fresh equity capital (ie, a total of $87m of capital to be raised) at incremental rates of return (debt adjusted) in the range 16% to 24% (0.7xEBIT/[$37m+$50]), depending on the actual magnitude of EBIT (assuming it is somewhere between $20m and $30m).

So the value equation states that the option value to participate in the CR is somewhere in the range: $53m to $123m. Or, on a per share basis (there are currently 2.4m shares on issue), the value is somewhere in the range: $22 per share to $51 per share (if we desire a 10% rate of return).


Scenario 2 - Smith Bay wharf comes with delays & cost overuns

Under this scenario, the CR raising occurs in about 8 months, and revenues commence in about 19 months.

Current shareholders now have the opportunity to contribute a total of $53m of fresh equity capital (ie, a total of $103m of capital to be raised) at incremental rates of return (debt adjusted) in the range 14% to 20% (0.7xEBIT/[$53m+$50]), once again depending on the actual magnitude of EBIT.

This time we should possibly account for the time value of the earnings, to acknowledge the facts that there will be no receipts for another 19 months (and again assuming that the CR occurs about 12 months in advance of this). So we should multiply the value equation by 0.95 (1/[1.1]^[7/12]), based on our continuing assumption about a 10% desired return.

So this time the option value to participate in the CR is somewhere in the range: $35m to $102m. Or, on a per share basis the value is somewhere in the range: $15 per share to $42 per share (if we desire a 10% rate of return).


Scenario 3 - Smith Bay is knocked back & a wharf is constructed at an alernate site

Under this scenario, the CR raising still occurs in about 8 months, but revenues may take substantially longer than previously envisaged, to arrive. We will here assume revenues commence in about 25 months (but we will ignore the fact that the CR may occur substantially in advance of the previous 12 month assumption).

Current shareholders now have the opportunity to contribute a total of $64m of fresh equity capital (ie, a total of $114m of capital to be raised) at incremental rates of return (debt adjusted) in the range 12% to 18% (0.7xEBIT/[$64m+$50]).

This delay in the earnings means that we should multiply the value equation by 0.90 (1/[1.1]^[13/12]).

So this time the option value to participate in the CR is somewhere in the range: $23m to $86m. Or, on a per share basis the value is somewhere in the range: $10 per share to $36 per share (if we desire a 10% rate of return).


Conclusion
Based on this simple (and as I say, possibly simplistic) assessment, the option value is most crucially dependent on whether or not EBIT's closer to $30m (than to $20m) are realistic.


Disclaimer:
These calculations are illustrative only. My estimated values are highly dependent on my assumed future earnings and capital needs. My assumptions may be wildly in error.