I know a lot of us here are not happy with the valuation of OZL’s offer, but we need to look at the situation with a rational mind, and not be clouded by emotions. Please refrain from attacking other holders who share their concerns. I know a lot of us have sat on AVB for years and wish to have a massive payday, but sometimes investments do not turn out the way it's planned.
I didn't wish to share my calculations (especially because I am waiting for the next quarter update), but seeing some level headed holders being hammered by irrational and emotional holders, I will share my concerns.
Lets say if AVB were to operate on its own (no OZL takeover), what is the expected cashflow for the next few years?
Assumed annual revenue (using the last 2 quarters to pro-rata):
14,000 tonnes of copper produced and sold for $6800/t ($3.1/lb) = $95.0 million
11,000 ounces of gold produced and sold for $1300/oz = $14.3 million Estimated Annual Revenue = $110.0 million
Assumed annual expenses (using historical costs from the last 2 quarters and Dec 2017 annual report):
Using $1.94 /lb (2017 YTD) = approximately $4280/tonnes. 14,000 tonnes of copper was produced.
All In Sustainable Cash Cost = $60.0 million (including production, sales, transportation costs)
Royalties and Taxes = $3.5 million
General Expenses = $8.0 million
Exploration (assumed $3m / Qtr) = $12.0 million
Sustaining Capital (assumed $1m / Qtr) = $4.0 million
Pedra Branca Engineering Team (DFS, then Execution until PB comes online) = $2.0 million
Centro Studies / Engineering Team (Scoping Study, PFS, then DFS, then Execution until Centro comes online) = $2.0 million
Pantera Annual Payments to Vale (annually for next 7-12 years) = $3.0 million Estimated Annual Expenses* = $92.0 million
*Not including the CapEx expenses for the Pedra Branca and Centro developments.
This brings us to an estimated annual profit of $18.0 million, which should take AVB’s cash to $41 million by the end of CY2018.
At this point I am concerned... To develop Pedra Branca alone, the pre-production CapEx for Pedra Branca is $158 million. If Antas expected life of mine is 5 years, and we continue with annual profits of $18.0 million per year ($90 million in 5 years), this falls short of being able to fully fund Pedra Branca, which is something the BOD had promised from the beginning.
Regardless, to develop Pedra Branca, we have to go down the following options:
Option A) debt financing with cash from Antas. With expected cash reserves by the end of calendar year 2018, we will be at around $41.0 million. This means we’ll need to take out a loan of $117-$127 million. AVB pre-takeover had a market cap of around $200million. This loan is well over 50% of AVB’s market cap, and will present significant risk to any banks lending to AVB. Antas Mine will be well depleted to pay off the majority of Pedra Branca and any interest. If this was to happen, we’re not going to be seeing much cash increase for a number of years. This is not so good to the share price until Pedra Branca or Centro is up and running.
Option B) credit raising to develop Pedra Branca. Whether it’s $120 million or $158 million needed to be raised, we were going to be faced with heavy dilution. Consider AVB pre-takeover market cap of around $200 million and approximately 2.46 billion shares on issue, you can do the math yourself. It was always going to be bad news to all current holders until Pedra Branca or Centro is up and running.
Option C) joint venture with another entity would have been a good option. However, it will result in potential dilution and sharing of future revenues, expenses and risks. We can only speculate what could be, but if we did go down this path, the amount AVB can multibag will be limited because of the JV partner.
Option D) being taken over and have the parent entity pay. This is the situation we're in and no point discussing about this any further.
The situation of funding options above doesn’t only apply to Pedra Branca, but Centro as well (pre-production CapEx of $108 million). Putting both developments in the mix, we’re biting way more off than we can chew at this point of time (combined pre-CapEx of $266 million). The AVB BOD would have looked at the above options over and over again, and they're stuck with the cards they’ve been dealt. No matter what option they took, it is going to be difficult and AVB's SP will continue getting slammed, and we shareholders will be grumbling day in day out in this forum of what could’ve and should've been.
At this point, you are probably going to talk about the market cap above. I keep reading everyone's comments that BR manipulated and suppressed the SP. I need to remind everyone - we're in a free market economy. If AVB is truly undervalued, then all financial institutions and investors would have jumped in and bought up all the shares on the cheap. This statement might not sit well with you, but you need to face fact.
Let’s pretend you’re a fund manager. You look at the situation that AVB is in. AVB is going to spend all its cash flow on developing a new mine site (which has not yet proven that it’s going to make money). Sure the NPV looks positive, but AVB needs to spend all their money from current operations and they need further funding to develop Pedra Branca or Centro. It’s a big risk. You as a fund manager have the responsibility to making sound investments in businesses that are currently making money and you have your own shareholders to look after. AVB is not going to be making much money for the next few years. Its a huge opportunity cost considering all the other investments available. As a fund manager looking at AVB, wouldn’t it be a better option to sell AVB and buy at a later date when it is certain that Pedra Branca or Centro is closer towards making money? This is the situation that faces fund managers when looking at AVB's funding situation.
Since last year’s peak, most of us shareholders were seeing positive news regarding Pedra Branca, Centro and Pantera. To a company with lots of money (such as OZL), yes this is very good news. However, to a company without the money, this can be bad news. Bad news is the increased certainty that we will commit to developing and we will need funding.
A lot of people miss the point when it comes to valuing mining companies. Having whatever value of ore in the ground means s*** all if it cannot be extracted for profit. For example, BHP has one (1) mining deposit that contains 1.2+ billion tonnes of iron ore (average of 65%+ Fe), which in today's market (of $60/tonne) is worth $72 billion. This is one (1) mine out of all their 72+ operations around the world, yet their current market capital is $90.6 billion.
What is the true value of AVB? It's the value that a buyer is willing to pay. OZL have made their offer, but it doesn't mean we as holders have to accept it.
All this being said, it does not mean I will immediately accept OZL’s offer, as I really do hope another company will compete with OZL and present a better offer. However, I do not reserve hope for the bigger players like BHP, Rio or Vale to come to the rescue. I have been involved with new mine developments for top mining companies including Rio and BHP, and in my experience and judgement, Avanco’s deposits do not fit their profile.
Please don’t get emotional over your investment and please don’t bully other posters here who are trying to express their concerns because they might be right and might save you from making a biased decision. I value everyone's comments here as some make good argument which leads to good informed decisions.
We're faced with a very difficult choice at the moment and both are not ideal choices (to accept or to reject). Please do your research and make sure you understand the numbers and what it means for you. Look after your financial situation. It is your hard earned money that is at stake.
AVB Price at posting:
16.3¢ Sentiment: Hold Disclosure: Held
