Wolfgang In a recent post, I wrote, "I do not remember where I...

Wolfgang

In a recent post, I wrote, "I do not remember where I got the idea of a 16% EBIT margin, but I think I had taken metrics based on CIF revenue, and adjusted EBIT margin % down to suit FOB revenue by excluding shipping from the CIF-based revenue." The underlined words are conceptually incorrect - switching to an FOB basis causes the EBIT margin % to rise, not drop. The dollar value is always common.

By chance I found that I had detailed my adjusting arithmetic and my reasoning in a 1/07/2022 spreadsheet, the contents of which I provide below.

On price per tonne, we know that CIF prices are above $300, and FOB prices must exclude shipping. The FOB price that I used could be too high. As I have later posted, the original 16% EBIT/FOB Revenue percentage should be circa twice that to start with, and the model calculates scaled-back scenarios.

I have split that 1/07/2022 working spreadsheet in two to avoid having comments cramed into a single cell when passted to HC. The comments have been converted to text.as numbered points.

WAK derive EBIT margin based on FOB Revenue​

1. The aim here is to get a workable EBIT/Revenue ratio, and convert it from a CIF basis to an FOB basis.​
2. I used the Definitive Feasibility Study (DFS) metrics for the year it presumed two K99 plants would be at capacity.​
3. The road-transport permit of 383,000 tonnes (.383MT) defined full capacity. The nameplate was 400,000 tonnes.​
4. That was DFS year 5, but we can estimate it as FY2024, being when Stage 2 plant would be fully operational.​
5. Year 5 is reasonably representative of tDFS 12 year. EBT/Revenue ratio grows from 26.6% to 30% in Year10​
6. The DFS was based on CIF prices. That was the basis of WAK's pilot-phase exporting.​
7. Exporters start with an FOB price, and add shipping to get a CIF price, which varies because of shipping costs..​
8. Shipping companies quote sea freight rates for various routes once a month.​
9. Customers may buy on an FOB basis, and they organise the sea freight, and pay for it.​
10. Exporters rarely add a meaningful margin to sea freight, because importers would switch to buying FOB, and be annoyed.​
11. Also, it is difficult for me to get an idea of sea freight. It can change rapidly.​
12. WAK has stated that it works on an FOB basis, and if a customer wants a CIF price, freight is added.​
13. Those are the reasons why I have converted CIF metrics in the DFS to an FOB basis.​
14. That makes revenue lower, but because sea freight is also removed from expenses, EBITDA, EBIT and NPAT are unchanged.​
15. However ratios of these to revenue must change, as one can see below.​
16. If the figures below were not rounded then 26.60%*113087/95276 should be circa 31.66%, say 32%.

	Column 1	Column 2	Column 3	Column 4
1	{colgroup}
2	{col=232x@}{/col}{col=97x@}{/col}{col=97x@}{/col}{col=144x@}{/col}
3	{/colgroup}
4		CIF	FOB
5	Sales kt [/SIZE]	383	383
6	$k[/SIZE]	113087	95276	Exclude sea freight
7	Average Sales Price A$ per tonne[/SIZE]	295	249
8	Cost of Sales (incl freight to port)[/SIZE]	-57527	-57527
9	Cost of Sales per tonne[/SIZE]	-150	-150
10	Gross Margin [/SIZE]	55560	37848
11	[/SIZE]	49.10%	39.72%
12	[/SIZE]
13	Overheads[/SIZE]	-4040	-4040
14	Corporate[/SIZE]	-1151	-1151
15	Transaction Fees [/SIZE]	0	0
16	Sales & Marketing [/SIZE]	-565	-565
17	Ocean Freight[/SIZE]	-17811	0	Excluded
18	Total Operating Expenses [/SIZE]	-23569	-5756
19	[/SIZE]
20	R&D Activities[/SIZE]	-240	-240
21	[/SIZE]
22	EBITDA[/SIZE]	31751	31852
23	[/SIZE]	28.10%	33.43%
24	Average EBITDA per tonne [/SIZE]	83	83.16
25	[/SIZE]
26	Depreciation [/SIZE]	-1690	-1690
27	[/SIZE]
28	EBIT[/SIZE]	30061	30162
29	[/SIZE]	26.60%	31.66%	Note difference *
30	Average EBIT per tonne [/SIZE]	78.488	78.751
31
32	* If the figures were not rounded then 26.60%*113087/95276 should be circa 31.66%[/SIZE]
33	26.60%*113087/95276 equals[/SIZE]	31.57%
34	Had I used a later year's CIF ratio of 30%, the FOB equivalent would be [/SIZE]
35	The valuation model could use a third (33.333%) as a high-end row in a valuation matrix, [/SIZE]
36	then test for sensitivity via a scale-down factor, and choose values that give a higher level of comfort.[/SIZE]