Ann: WAK - Stage 1 Progress / Delay in Full Production Rate, page-28

There is an error in my model, but it is irrelevant to the gist of my approach to valuing WAK.

The theoretical yield of WAK's kaolin is 50%, but because of: 1) a mining loss of 2%, mainly occasioned by the slope of pit walls; 2) removing moisture; and 3) some loss of kaolin not recovered, the commercial yield is deemed to be 37.5% in the Breakaway analysis, and that makes sense. Consequently, each 200,000 tonnes of kaolin requires 200.000/37.5% = 533,333 tonnes of kaolinised granite, rather than the 400,000 that I used. In my model, the only impact of this change is to speed up ore extracted, but as Wickepin is a multi-generation project, it is inconsequential to my model. The cost of mining more or less ore is accounted for by the EBIT $ margin selected.

Breakaway's analysis mentions a PER of 16, which may be high. In loose terms, Breakaway's ratio of EBIT/NPAT is 3/2, so converting PER to an EBIT multiple is 16 x 2/3 = 10.7. I used 8, which may be a bit low, but I'll stick with it.

I am not so bold as to suggest a $ EBIT margin, so I used a wide range. It requires a very low $ EBIT per tonne to justify the current price. As the model stands, and is likely to remain, it is very much like those choose-your-own-adventure apps that Apple had many decades ago. One can select a tempo of plant installations, a $ EBIT margin, an EBIT multiple, the base year to derive an SP, and the rate of interest used to reduce that SP to Present Value. If one changes the base year, one must change the parameter set to be used by the NPV calculation, which is 1/(1+r)^n, where "r" is the interest rate, and "n" is the number of years.

I often find that all I want to do is either buy, sell or hold a stock. Consequently I often change the assumptions to get a sufficent result in which I have a higher level of confidence. In concept, it is similar to using a fixed formula, and attaching a margin of safety.