bongo project analysis, page-7

Hi thejase,

there is one major flaw in your analysis. It assumes that all of these revenues and expenses occur on the same day (as it implies, in three weeks). This is incorrect as realistically we will only make these profits over the next 10-15 years (while the costs are incurred now), so effectively there needs to be some discount rate applied to future earnings which will lower your overall value per share.

Lets make all else equal and assume the following:
1. that all cash flows will be received over the next 10 years (not sure - fairly optimistic)
2. we will have made $46,963,800 (481,680,000 x 9.375% (VILs interest)) at the end of this period
3. 10% of $46,963,800 will be made each year: $4,696,380
4. 10% of these profits will be removed each year for administration costs ($4,696,380 * 10% = $469,638)

So our earnings per years are $4,696,380 - $469,638 = $4,226,742

If we apply a discount rate of 15% (this lines up with the current rate of our borrowing facility), we get the following net present value of:

NPE = $4,226,742*(1+(15%))^(-1 year)) + $4,226,742*(1+
(15%))^(-2 year))+...+ $4,226,742*(1+(15%))^(-10
year))
= $21,213,040

This valuation obviously has a few issues such as:
1. It assumes that there are no capital expenses or extra costs between now and 10 years other than admin costs (unlikely)
2. we hit exactly 108,000,000 MMBTU of gas and gives no value to potential upside or downside movements

Next,

Lets subtract the initial costs listed in Thejase's post:
1. Funding of $1.1 million
2. Corporate advisory of $101,200
3. Admin expenses: removed above
3. Total costs = $1,201,200

Net present value = $21,213,040 - $1,201,200 = $20,011,840

Current ordinary holdings (12/02/2010 announcement 3B) = 631 million
Mincs entitlement = 50 million shares
AIAs (advisory) = 4.6 million shares
Net equity position = 685.6 million ordinary VIL shares.

Value per share = Net profit / ordinary equity
= $20,011,840 / 685,600,000
= 0.0292 cents per share

Also remember that there is only a 50% chance of this amount of gas being in the hole and as a result we need to factor that in also - so the actual value per share is lower than this.

Although it is not quite as good as Thejase's in initial estimates, lets not forget that at our current price levels, not much value is given to our fausse point investment which will be the company maker.

Hopefully this clears a few things up and im happy to discuss my findings.