cc email response

Morning Chris,

Looks good from my read. Thanks to you and your team for all the hard work and please pass that onto them. Roll on production and more results / discoveries



RESPONSE

Thanks for the positive feedback. The whole philosophy of the feasibility was to do what was in the best interests of our shareholders and we remain convinced that the outcomes will result in less dilution, less debt and the best value for shareholders.

Below a preliminary note from Cathy Moises on Integra post-Feasibility release. She now has IGR at 38c. A full note to follow today.

The reason for the panic on Friday was a note from Euroz, their analyst Andy Clayton has put out a note on us as Sell to 21c.

What bothers me about Andy Clayton’s note is that:

1. The changes to the scale of the project and the expected grade has been flagged to the market for quite some time so to imply the difference between the PFS and the FS is a shock is a bit rich.
2. That on an industrial ‘widgets factory’ valuation Andy sees 21c – that’s fine if we made rubber gloves. However, the rubber glove maker does not have the capacity to find a previously unrecognised source of free latex in the back paddock behind their plant. Clearly Integra does have the ability to make an additional discovery in our back paddock. The impact of another Salt Creek (not asking for any more than what has been discovered by us in the past) equates to another 220,000 ounces of production at a cash cost of $574 and little additional capital for a net profit addition of another $130m. This is more than the company’s current market cap and is something an ‘industrial’ cannot achieve. In my view, Andy’s disregard for this attribute makes his valuation patently misleading – and not consistent (point 4 below).
3. Before Integra made the Salt Creek discovery, the company had a ‘discovery premium’ built into the market price – as do all explorers. While the magnitude of that premium can be debated, I would argue that now Integra has demonstrated the viability of a stand-alone operation, the likelihood of the company being able to monetise the value of such a discovery - in an area that previously was not considered prospective, where we have derived significant understanding of the controls/predictive capability to find more and in which we have enhanced our ground holding - is much greater and there should be a premium to reflect this. The irony is now that a spreadsheet analysis can be done on an industrial-style NPV, it would appear that Andy feels we no longer justify any discovery potential premium.
4. If that analysis method was universally applied by Euroz, I would not have a problem. While I do not expect an additional discovery to be fully priced in, we should have some reflection of value there. On the other hand, Euroz’s valuation of Avoca would appear to take verbatim a 10 year mine life not currently justified by either their resources base or their reserves. The requirement for future discoveries or extensions to known deposits and the production of those future discoveries modelled at ‘target’ cost of production, is fully valued in the Avoca model and NO discount is applied; for either those discoveries not eventuating or production of any reserve additions at a much higher cost base (given that the current deposit grade / width is not replicated at depth and the cost of production at depth will be higher). A combination of the two is in my view the most likely outcome. So on the one hand we have the Integra analysis with no upside value and Avoca with a big stretch of future success fully valued. Quite frankly, it does not appear to me to be a level playing field and seriously calls into question the objectivity improperly implied by Euroz’s NPV valuations.
I have attached below the financial sensitivity analysis chart (prepared independently by Optimum Capital) from the feasibility. It is worth noting that – in a worst case scenario of 20% under-performance in grade at Salt Creek – the project IRR for Phase 1 goes from 71% to 40% and remains higher than any other development project we know of. In the opinion of these ex-Rothschilds bankers, the project is robust and easily financed. If the same grade under-performance was modelled for any other development project, it would kill the project (including Saracen’s project mentioned in Cathy’s note below). Sure, Randalls is not the biggest nor the sexiest but it is the most ‘bullet-proof’ and does provide excellent returns at low-risk.

The exploration opportunities could get very exciting in the not too distant future.

Regards,

Chris



Figure 136 - Project Internal Rate of Return (IRR).



From: Cathy Moises
Sent: Friday, 24 July 2009 10:21 AM
To: researchin
Subject: Integra's Feasibility study results - a little disappointing, with valuation reduced as a result

Integra have announced a feasibility study for Randall’s in 2 stages. The first stage is low cost at $A574 per ounce, but carries almost all of the $65m capital expenditures, resulting in total costs a relatively high $A795/oz. The second stage appears fairly marginal, with operating costs (before admin tax etc) of approximately $A855/oz. Inputting these numbers into our valuation reduces it from $0.43/share to $0.38/share. Our preferred advanced development gold project is Saracen, with Carosue Dam, whose average operating costs and total costs are currently substantially lower than that of Integra, with capital costs less than half.

The upside for Integra still remains toll treating rather than incurring the cost of rebuilding the old New Celebration Plant

We recommend switching from Integra into Saracen for exposure into the smaller gold space

Regards

Cathy