Future Cashflow & Rerate!!! ( cashflow projection @ 12 September 2017 )

DYOR. Not qualified for advice.​

Summary

Today's announcement allowed me to update my forecasts of inventory value for the first two auctions. That statistical analysis resulted in estimates of USD $201/ct for Auction 1 and USD $242/ct for Auction 2.

Taking into consideration a detailed set of assumptions on clearance rates, costs and tax/royalties to develop income forecasts and share price estimates based on a conservative P/E ratio. This P/E was extrapolated from my analysis using Independent Investment Research assumptions and conservatively approximately 50% of the Gemfields P/E in July 2017 of 16.0 ).

Mapping the two auction results to forecasts, the results indicate Year 1 share prices in the $0.430 to $0.739. If inventory quality assumptions are consistently applied to Year 2 with higher overall inventory volumes spread across 4 auctions then significant share price potential is indicated.

Derisking & Rerating of shareprice

When looking at the charts below, take into account the following completed and upcoming derisking activities.

• Auction inventory @ 300,000 carats ( announced today )
• Auction date confirmed ( announced 16 August )
• 27 to 30 October - Auction to be held in Maurtius ( inaugural rough ruby auction )
• 31 October - Auction results expected to be announced ( significant event for the company )
• H1 2018 - Ruby JORC ( confirm life of mine )
• Q2 2018 - Second Rough Ruby Auction ( consistency and cashflow )
• FY 2018/19 - expected transition to 4 x Auctions per year ( consistency & cashflow )

Assumptions

I have used a conservative US foreign exchange rate of $0.75 to arrive at AUD figures.

I have factored 14.25% dilution of the share issue caused by the financier's convertible note facility. The first two finance tranches have been used.

Cost assumptions used in the analysis are conservative and derived from assumptions presented in the Independent Investment Research Report (see this thread for explanation/references ). The company (CJ) indicated at the last general meeting that the cost ratio is about 50%. This suggests my cost assumptions/calculations may actually be too conservative.

Mustang Share Price and "Baggers"




Analysis Overview

Based on today's announcement I have rerun cashflow projections and forecasts developed through my earlier analysis. That analysis is detailed here. The company statement lead me to revise assumptions for Auctions 1 and 2 as follows:

• Auction 1 (October 2017) - 330,000 carats
• Auction 2 (Q2 2018) - 250,000 on the assumption that the wet season will reduce operational efficiency at the mine site, however increased recovery rates in the last couple of months suggest a more bullish production target than my previous analysis for Auction 2 is feasible.

These assumptions are the main inputs to the cashflow forecasts presented below.




Note in the second chart below, the figures I have provided which show projected income as a proportion of current Market Cap. On acceptable auction results, this significant income stream will commence in only 7 weeks.

In the third chart below, Mustang's profit margin should be much better than that of Mustang's main competitor Gemfields last known profit margin.

The company, or more directly CJ has expressed a view that a dividend policy is a great way to reward shareholders. The most recent indication of such a policy was in a group discussion with CJ following the General Meeting on 1 September 2017. Specific dividend rates or a policy have not been announced so at this point it is only a possibility. Even if dividends were paid the company would be able to use retained earnings to bankroll other projects.




The following charts present a comparison of Mustang Resources income with similar small-cap peers in East Africa. Mustang has will be generating revenue in just 7 weeks. KNL and TON cannot be expected to generate revenues for 18-24 months at the earliest.

Note in the first chart below the proportionality of projected incomes to current Market Capitalisation. Which company do you think is significantly undervalued???








The following table provided some the detailed numbers used in the analysis as well as other assumptions used.



I have factored 14.25% dilution of the share issue caused by the financier's convertible note facility. The first two finance tranches have been used.