A while ago I posted some material on alumina and how it behaves in the tradeable market. This is important to understand as it will affect the BFS and IPO (timing). The last piece in the puzzle is what needs to get done before the IPO, which I will post up soon. From this information it should be clear as to why I believe the IPO will not occur in 2012 - but, as always, I could be wrong. I learned some important lessons from Oxiana/Oz Minerals which operates in LAOS (by all accounts, a pioneering venture into that country). This is also true of PanAust (PNA), which struck their MEPA and licinsing arrangement by allowing LAOS govt a 10% interest in locally registered company which operates the mine. ORD/SARCO will have to follow the same path, and its only a matter of time before this happens.
Yes, the most important developments will be 2+ years out, but what I am trying to highlight is that there are some early signs of improving market conditions. What we are seeing now, in terms of company activities and alumina fundamentals will be history. In fact its almost irrelevant, which is something I expect the BFS to show. It should show long-term Alu price assumptions, not current prices as SARCO will be selling into a market 2+ years down the track. Additionally, I would not want ORD to push for offtakes right now. While positive for the company and market they risk signing up to less than ideal contracts. It would be better to let the MOU expire or extend the MOU and await further project progress.
On Caledon and GRAM; for those who talk to management you will be familiar with the lengths they go to demonstrate the "no risk" strategy to their projects and corporate activities. The farm-outs/JVs and Caledon option is evidence of this. The problem with this thinking is that it actually introduces risk, and that is the 'opportunity risk'. The CF JV (GRAM) is a classic example. They waited for approval to fund SJ, with the added benefit of farm-out to GRAM for CF. However, the JV did not materialise and they were forced into the alternative which was to raise funds. They wouldnt have raised funds earlier because there was no reason to - they were expecting approval from GRAM. You can see the difficult position faced by ORD if they were to raise funds earlier; the inevitable question arises, why raise funds given drilling not scheduled until 2013 (better to wait outcome of GRAM before drilling commencement).
The same considerations are floating around the Caledon option. For such a basic concept its surprisingly difficult to extrapolate a value in the short to medium term. Thankfully, its related to a commodity that is in favour. China needs cheap energy and securing coal resources is the way to do it. It is preferable that the option is exercised now as the exercise will be cheaper due to the fact that the AUD/GBP is strong. There is a risk that longer-term, the AUD will weaken and hence make the purchase more expensive in AUD terms as the T/O consideration was based in sterling. This may be offset by the upside risk that caledon is worth more in the future.
GRAM being bidder/owner wants roughly $50Mill from the exercise to pay down debt. This is a lot of money and will assist the business.
FX rate, and GRAM preference are two considerations or pressures on ORD. GRAM is our partner so their requirements need to be assessed as well.
Then, there are ORD's requirements; how to raise the money to exercise. ORD have been engaging parties for exercise, which range from wealthy chinese individuals, SOEs and local investment banks and brokers. There is interest there but it has to be done right as it affects GRAM. Eg: if we partner exercise the partners will become direct owners of Caledon. GRAM has to be comfortable with this as they are the owners. GRAM know ORD, they do not know the partners that may exericse the option. Additionally the bidders statement specifically outlines the right to ORD to exercise the 5-10% option - not anyone else - so the structure has to be right by both parties as the outcome may deviate from these terms. In addition to third parties stumping up money for the exercise, selling the option outright, is another alternative. I see it as one of the same thing as it all involves zero risk. i.e the option could be sold to the right partner for, say $1Mill, and exercise occurs. The premium (sale price) would represent the increase in value from T/O price to current valuation of Caledon. The exercise price obviously remains the same as per terms "any time in future at the T/O price".
The difficulty in doing this is commissioning a valuation on Caledon, paying for it, and then marketing the option for sale. i.e you must have some sort of proposition to entice exercise and hence sale. The good news is that ORD are thinking and working on such activities, but as with anything, it involves negotiations. These activities take time - too much time in some shareholders opinion. In summary the exercise can be done, and it can be done short-term. As I have posted earlier I am expecting conclusion or at least an update by FY-end. ORD recognise the need to clarify the status.
VAN Price at posting:
2.6¢ Sentiment: Hold Disclosure: Held
