Good pick up on the discount rate No_8. If that is indeed the...

Good pick up on the discount rate No_8.

If that is indeed the rate used for any potential project valuation and take-over price, it sure looks far too high when comparing to pretty much every other project I've seen of late. If I was the cynical type I would be very suspicious..

Generally you would see around 10% for conservative analysis, and less when it comes to smaller ASX players who are perhaps trying to make their project look a little better..

For example HCH released a PFS recently and had real discount rate of 7%. OZ Minerals used 9.5% in their recent presentation for Carra.

And here's the real kicker...ZIJIN mining and Ivanhoe used 8% for their FEB 2016 PFS for Kamoa project!

Now, one might argue that being in South Africa a higher rate should be used.. Well, Kamoa is in the DRC (Congo) so I don't buy that argument.

http://www.ivanhoemines.com/projects/kamoa-project

In case anyone is missing the significance of this, a project valuation (NPV) is greatly influenced by the discount rate selected. And in particular, a project that has large capital outlay and a long mine life is particularly sensitive to discount rate. And, of course, Garatau is a 30 year operation so it is very sensitive.

Just to give some numbers for comparison, understand the profits from the earlier years contribute greatly to project NPV. The further out the profit is generated, the more that profit is discounted when adding it to the project NPV. For example, in year 1 ~100% of profits (or costs) are added to the NPV for all discount rates. In year 3 say, at 8% discount rate you contribute ~79% of profit to your NPV compared to ~68% for 13.6% discount rate. Not a huge difference. However by year 9, you get 50% for the 8% case, and only 32% for 13.6% case. In year 15? 32% compared to 15%. By year 20 it's 21% vs 8%. Hopefully you get the picture, that is by incrementally increasing the discount rate you can dramatically effect the NPV of longer term projects.

I note in the 6 month financial report (ASX release) they state "future cash flows were discounted using rates based on the Group's estimated average cost of capital". Really?..some cheap money from Chinese government is going to cost you anywhere near 10%?? And of course the catch all disclaimer that allows them to do what they like.. "when it is considered appropriate to do so, an additional premium is applied with regard to the geographic locaiton and nature of the CGU".

Gee, if only we had the "additional premium" that geographic locations like Congo had.

They can't possibly argue that 13.6% is appropriate to G when the (more typical) 8% is applied to Kamoa.

Finally - and this may be just a cynical view - but the 0.6 decimal accuracy in of itself looks suss. If they had just put a round number like 12%, ok maybe you buy that. But they landed on 13.6%? Some might accuse the 13.6% being an after-the-fact number that provides the valuation that suited them.

If anyone wants a challenge, research similar African projects, and other Zijin projects to find what discount rates have been used. I'll be surprised if you find many (any?) over 10%. Or you might be able to find Zijins WACC (cost of capital) corporate assumptions in some presentation somewhere.

No one will be getting my shares on the cheap. I'd rather go down with a fight and face the risks that come with it rather than get stepped on by big shareholders.