comments on goldoz report.

Hmm a juicy read that addresses many issues raised on HC. Lots of interest in the report although I disagree with some as outlined below it is worth a read if you are serious about FML. Please also take the time to read my own contentions below.

This report does not appear to present a neutral viewpoint and is in fact sponsored by FML so in all fairness could not really disagree with them. There are a lot of numbers hidden in the text of the report, which makes it hard to analyse compared with a detailed ledger sheet comparing costs and value under different scenarios. There are some good points concerning the valuation if the offer works out as detailed. The question I ask then is why this report, which is neither independent, nor is it the management committing their own intentions and valuation analysis to shareholders? We have to take an analyst opinions on how the money may be best spent, but the management will not say for sure?

Contention 1 - Risk of controlling interest
The report discusses the issue of 51% majority control with some relevant points, but I believe fails to account for the risk inherent in this issue and possibly confirmed by the markets significant drop in valuation of FML post offer. It claims Shandong Gold could have launched a takeover bid for about the same cost of buying 51%, but chose to invest in the company instead, and is therefore not likely to use this control in the future, even if it represents better valye for SG to own all of FML. I believe this first of all significantly underestimates the cost of a takeover, and secondly, any money on a takeover would go directly to shareholders, they would STILL have to pay the $250M extra for development after a takeover to the company as required to optimise and development the assets on top of this.

There is really no way to know what Shandong Gold's future intentions are, we hear what everyone says, but really there is no way to know for certain, we can only evaluate the risk. SG may have no desire to control FML, only to inject capital to get a good return in terms of share price and dividends, as described in the report. They may (either now or at a later date) want the whole company as cheaply as possible. I disagree with the reasons given in this report and by management that the risk of a desired takeover now or later is minimal.

1.1 Cost of Takeover Now
Firstly, I disagree the share price was 3.7c at the time of negotiations, I understood from the letter sent this started in April, or between then and June. The 3 month average price then was higher and 6 month average price north of 5c. Spot gold was climbing ... With a minimum 60% premium gives a cost of $350 minimum, and maybe up to 90% premium suggested there to guarantee success (90% support) with gold going up and profitable production. It would be hard and expensive to ensure this worked, compared with a 51% capital investment with the support of management. Also the days before any offer or takeover was released to market the share price had reached a high of 4.6c, which shows the risk of a takeover price.

1.2 Cost of development now and takeover later
Secondly, the implication that Shandong Gold could have done a takeover if they chose to, but instead used the money to invest. Therefore there is less risk of a future takeover. Really this seems to me to be completely flawed as any money spent on a takeover would go to shareholders never to be seen again. $250M invested now in capital with FML is money they would apparently need to spend on developing production and reserves anyhow. So let us look at the hypothetical possibility that SG wanted the possibility of a take over of FML, but the cost of a direct market bid now was too much. This is extreme and I am not saying at all this is the case, but lets see if it would make sense.

To really get production up significantly fast, and add new resources from exploration or takeover needs capital, so $250M for a controlling interest. However this is an investment in assets owned by the company. FML need only continue the way it has been, perfectly legitimately investing cash produced back into assets, the share price continues to fall slowly like prior to May. Although the report describes the protections against abuse by a majority shareholder, there is nothing wrong done here, just the value shareholders get from the company. Without cash flow staying in the company or paid as dividends why would the price go up? In 12 months the share price would be a lot lower but a takeover could still proceed if the margin was high enough. If the price in 12 months had halved like it has in the last 12 months then ...

1.3 Market reaction evaluating the control risk
Again I am not at all saying this will happen, but it is like the worse case scenario to contrast the best case scenario put in the report. Now it seems to me the market has evaluated the risk of this in the share price, as FML dropped from a high of 4.6 cents before the announcement to 3.7 cents now. That is they value FML without this capital raising as 24% more than after the announcement. Shandong Gold could buy on market now and save themselves 1.3 cents per share, or sell back to the market when the price gets to their 5c fair value to make a 35% profit, which is greater than the margin on the gold. But looking at the volume traded now, there are no strong buyers out there. Is this because of the risk the market associates with 51% control?

It gets worse though, if you consider, after this offer goes through, each share in FML will have roughly an additional 2.5c cash backing, which should be priced in to the market. Is the market now only valuing the rest of FML's assets (mines and gold) at 2.2c, which would mean a drop in value of 50%? Now what has the market sees the value of FML changing due to this offer.

The above analysis considers that the drop in value could be the risk perceived by the control aspect, but the market could be wrong, and FML could prosper under SG. Another reason the perceived market value could have changed, is due to the price of the capital raising. That is it saying that we sold assets at 5c per share that the market previously valued a lot higher, so now the net value has dropped.

Contention 2 - Detailed financial plans and analysis should be provided directly by management, not paying an analyst to give estimates and hypothetical situations.
Well this post is already too long, but there is a lot in the GoldOz report that really shows the potential value of FML under the offer. It is a bit long to follow as the numbers are all hidden in text rather than a balance sheet directly comparing things. The trouble I have with it is there are so many different numbers between this report, the expert report on reasonable value, and the managements last quarterly. These are estimates of gold values, capital required for mills and production etc.

Now I think the consideration of valuations in the report is great work, shows some real details of potential values in spending the money. The trouble is this is only an analyst report, it is not like the management is saying this is the case for accepting this capital raising offer. Management are not accountable to any good numbers in this report. Now I could go over and work my own analysis with different numbers from each report, and get different results, but that would mean even less. In this case I am not criticizing the report, but really ...

WHY ON EARTH has the management not presented their own detailed analysis of Plan A and Plan B. Why not reconcile all the estimates for what the current production forecasts are under Plan A, (no capital raising steady as she goes), and explain and be accountable if these are different to the impression given in the last two quarterlies? Why not then present us with Plan B, showing their cost models for how much the need to spend on refurbishments or acquisitions. A simple future value calculation and cost benefit analysis would show us all the value of this deal. On top of this could be the extra benefits of partnership with Shandong Gold. Of course their can be cost overruns at a later date etc, it is not like the plans are set in concrete. Why is it that the management recommending the value this deal are not willing to commit the numbers showing this to us to a published report, the numbers should convince us all as they do not (often) lie. If it is as clear as they say why not commit and show us what good value this deal is. PLEASE.

So in conclusion...
1) Thanks, good report lots of interest in it even if some points are contended
2) The risk of a takeover following seems to still be significantly understated in the report
3) The market has priced in a significant discount since the announcement, either due to take over risk or perceived loss of value in the deal
4) The potential value of the deal may be shown in this analyst report. But it should be clearly outlined by management, in the form of a detailed financial analysis of the value in their Plan A and Plan B