I remember some time back, at the time when the mining...

I remember some time back, at the time when the mining construction boom was at its peak, debating on HotCopper about the cottage industry of "mining service" and engineering construction companies that had mushroomed almost overnight.

Companies, that had not existed just a few years earlier, were suddenly valued at many hundreds of millions, and even billions, of dollars.

People thought you could simply take a shotgun and shoot at any old "mining service" company target and make money.

Trouble is, people never really understood the inherent business risks in the engineering construction business back then, and they still don't today.

When you have to commit hundreds of millions of dollars in fixed capital that generate billions of dollars in revenue (which, prima facie, sounds appealing from an investment standpoint) but yield only tens of millions of dollars in profits, and when getting just one project wrong, means that the entire company's profits get wiped out (and then some)... then that is a seriously risky business, I reckon.

Yet many unsuspecting investors bought into these sorts of business because they saw the demand for their services being so robust. Which I think emphasises the flaws in investing based on macro-thematic sentiment. It invariably masks the risks.

It might sound counterintuitive, but some of my most successful investments - i.e. that I have perceived to have presented the best RETURN opportunity per unit of RISK - have been made against very weak macro-thematic backdrops.

But back to the all-important, almost always neglected subject of RISK.
90% of investing, I believe very strongly, involves understanding risk.
If you don't "get" risk, you are going to lose money.
Period.

Which is why a forum such as HotCopper can often be a bit dangerous for the novice investor.

Because - and it no one's fault, it's merely a function of human nature - most people are innately wired into the prize of RETURN, and not into the problem of RISK (after all, it is a natural psychological instinct to think more about the joy of the prize than the unpleasant thoughts of the potential pitfall).

When have you ever seen posters talk about risk-adjusted returns? Basically, never.

I often see people making valuation statements such as, "the stock is on a P/E multiple of 8 times or 9 times, which looks very cheap compared to other stocks in the market".

Sure ASL or BLY or BKN or MAH or BOL or IMD might indeed be trading at valuation multiples half that of WES or WOW or RHC or CBA, but how much more risk do they carry than those "boring and overvalued" blue chips?

Double the risk? Treble? Fourfold? Tenfold? Twentyfold?

Sometimes the risk is so high that no matter how low the "valuation multiple", it makes no sense to invest.

But getting back to FGE, and it's capital position

Even though FGE had almost $80m in net cash at the last June 30 balance date (which, incidentally, I think is prudent... businesses like this should NEVER be funded by debt), recall that they signed a $43m cheque on 3 July for the Taggart purchase, and they have also won almost $1.3bn in additional work since then, for which working capital has to be mobilised.

And then there's the potential damage from the projects-gone-bad. I have seen these sorts of situations before and think the market will be surprised at just how big a hole a few bad projects can blow in a company's capital base. I would not be surprised if we see a $50m to $70m loss on these two problem power projects.

(Note: it might provide a little consolation that these projects where "inherited" by FGE through the acquisition some 18 months ago, of a private company, so the current management team could be said to be somewhat blameless in not having signed off on the original budgeting for these projects, but I'm afraid that modestly redeeming fact is going to get lost in the pain of the upcoming equity issuance.)


Now, to the potential size and pricing of any raising.

Mike, I think your number of $3.00/share as the potential issue price is way off the mark, I'm sorry to say.

Given the potential size of the capital deficit for 2014, and the nature of the issues at hand here, I think that the pricing would have to be far, far more enticing than the mere 28% discount you are suggesting.

I suspect they will be looking to raise about $75m, and to get it away I reckon it will almost have to be priced very attractively, at something like at least a 50% discount to the Theoretical Ex Rights Price (TERP).

Do the maths on that an you get a 3 for 5 issue at a price no higher than $1.50/share, which would be at a 53% discount to TERP of $3.20/share and a 65% discount to the last traded price.

Cam