Hi all,Xin Nian Hao!  Long time, no comment.  Samo was...

Hi all,

Xin Nian Hao!  Long time, no comment.  Samo was disappointing but SP has been more so...none of us are happy about it either.  That's enough of the obvious.

I dusted off my old ECM hat and FAR model (yes, I have one) and had a look at what challenges our FAR team are facing.  The good news is that there should be no equity raised for the project below 9.5c.  That's my calculated cross-over point at which the dilution of a 100% equity raise equates to what FAR needs and what they could get for a partial project sale. 

Lots of my professional assumptions here so please feel free to make your own.  The point is not to debate the specific absolute numbers but to understand how various financing options may get ruled in or out.

First:  what does FAR need (at a minimum)?  Ok...we know the project (phase 1) cost to first production is US$2000m (using Cairn's US$800m stated figure) of which 50% is expected to be project debt funded (CN quote).  So this leaves FAR looking for US$150m equity (A$211m at 0.71).  But FAR will also need a minimum of A$40-50m for ongoing admin and exploration outside of SNE (might allow for one other exploration well before SNE spits).  So all up FAR need a minimum A$260m to equity finance their 15% WI and some spending coin.

Second:  Value the project interest at what it could be realistically sold for in today's market.  Everyone here has at least 20 opinions on this but for what its worth, my model is currently spitting out a median possible sale price of A$556m.  (Note: this is of course lower than a full life NPV10 given buyers CAPM require a higher return).  Whether right or wrong, this equates to A$37.1m/% (which my gut feel says could be a tad optimistic in this market to be honest).

So the question becomes....At what SP would an equity raising equate to a sale of project interest?

Quadratic equations always look messy on a forum but the upshot is that the cross-over SP is approximately 9.5c.

A CR at this price would (raising A$260m) dilute shareholders by approximately 33%.  On the other side, if FAR sold a 5%WI (also diluting shareholder's project interest by 33%) for A$37.1m/% they would/could get A$185m.

The quadratic solves that this would provide the A$141m FAR would require for their remaining 10% And provide $44m for extra spend.

So, bottom line is...its much less dilutory to sell a Project interest if SP is below 9.5c.  So the boys, girls and advisors (no doubt acting more so than usual in the clients best interest. Hah!) at 530 Collins will be pulling all stops to get a competitive bid process going which I hope is being coordinated with any possible/rumoured CNE sell-down.

This is, of course, only true if you can get $37.1m/% in a sale.

So, IMHO, ordinary share capital is currently out of the picture for project equity.  

But I do see the possibility of a duel project sale-down with either a premium placement (10% at 9-10c) or a rather complex mezzanine/off-take.

FWIW, I still dont think a T/O is a material option.  All industry players will attempt to negotiate a project sale first and use a corporate bid only as a last resort.  I dont believe FAR's 15% interest is strategic enough to warrant the uncertain and drawn-out public hassle for a major who will have to get Farjoy and Meridian onside (>15c) first.

This is by far, the worst performing 'successful' investment I've ever had over the past 6 years (8c entry).  But it is a fantastic and rare 'privilege' to follow such a world-class discovery.

Cheers,