I'm a newcomer to this situation and only found out about it a couple of days ago. I spent most of the weekend doing DD, and turbo lifted 550k shares this morning (avg 1.17). If the stock retraces below 1.1, I will likely double my position. I thought I would unpack my reasoning here since most of the members on the board have been following the story for years, so perhaps I am missing something. please correct me in any fashion if thats the case
I consider this one of the more compelling special situation investment setups in recent memory. the stockmarket always has trouble pricing in sudden, deeply-meaningful pieces of new information - as the Sep23 announcement clearly was. this is more so the case in small-cap, completely under-followed, no-sell-side stocks like KCN. I have often found when a stock rips 40% (or -40%), thats often just the beginning of the move as there is this natural lethargy as the early money takes the 'quick win' and moves on - even if fundamental value is actually 100% higher.
with that said, here's how i frame the situation. a lot of the value here is, i believe, in the qualitative assessment of management's portrayal of the facts of the case - more so than the actual numbers themselves. here's what I've gleaned so far:
1. this is not a promotional management team: they barely put out any press releases, I think maybe beyond the minium disclosure requirements there have been basically 2-3 announcements this year, in total. they have repeatedly - over a number of years - said very little, almost nothing, about the progress of the Arbitration proceedings. in fact they have gone out of their way to stay mum on this most crucial issue.
2. the announcement on Sep23 was incredibly detailed. In the context of the above, we need to consider the information given to us from this management team. whilst there are always execution risks, I would posit that given the historic conservatism, there's almost no chance they would include such a detailed, point-by-point exposition of the negotiations, without 1) at least these items being basically done and agreed; AND 2) the agreement of the Thai government to release these details. IMPORTANTLY, the key piece of information - that the Mineral Processing Licence had been re-enacted, pending fee payment - essentially is a huge tell. There is no way this piece of specific news would be included unless negotiations truly were in the 9th inning here.
3. the event pathway was outlined in the announcement: not just the negotiation details, but also the value realization pathway was articulated (restart of Chatree, or sale, or listing on the stock market locally). again, none of these would be contemplated unless final legal approval was very close.
this is the event/qualitative context. it seems to me the odds of a negotiated settlement, in a very short period of time, are incredibly high. almost 100% let's say.
if that is the case, we can then proceed to a quantitative valuation of what Chatree is worth, and thus, what KCN is worth. There are various ways to do this but a variety of methods all suggests, to me, a stock in the
$3+ range under very conservative assumptions.1. simplified DCF: if you assume they start the mine again, use spot gold ($1750/oz), $950-1000 AISC (conservative ie taxing them in a DCF for about $250/oz of non-cash costs), 120k oz per year, and the new reserve estimate (2.2mm oz given the higher gold price, as disclosed in the PR), and use a PUNITIVE discount rate of say 15%, then you still get around $96mm (USD) of annual FCF (pre-Aussie corp tax) and an NPV of $600mm AUD, or
$2.7 per KCN share.
Most all the pushbacks to this DCF should be bullish pushbacks. The DR should probably be closer to 10% than 15%; the annual production level should probably be higher (given what mgmt said in the announcement about expansion); and of course in a pure, pure DCF you should probably use cash cost not AISC. of course you would need to figure out what happens with Aussie corporate taxes (maybe there are loss offsets?). Still, this is not a typical mine where there is huge execution risk, basically the implied discount once the legal situation has been resolved should be much lower than other development stage projects. All in all its not hard to see
$3 per share in NPV - just on the reserve base alone, with nothing for the resources/optionality - very near-term.
2. EV/reserves basis: a quick hand way to value reserves in the ground is simply look at what the market/other companies paid for reserves in decent development/producing mines. We can debate Thailand as a jurisdiction post this fiasco - no doubt it will remain somewhat discounted - but I can't find many assets this quality south of $200/oz in terms of EV/reserves. Arguably the number should be higher as any acquirer (particularly a Thai corporate) could basically get a 'turnkey' operation post the legal resolution. $200/oz on the new reserves base - call it 2.2mm oz - again with nothing for the resources, implies
$2.72 per KCN shareThis approach assumes no value for Nueva Esperanza as well.
of course the downside asymmetry seems quite incredible here since if the deal actually isn't actually negotiated it seems the arbitration judgement could well be >$750mm AUD in compensation. I say this because KCN wrote off close to $300mm in impairment at Chatree post the dispossession; and they still had the right to mine for, what, 10-11 years on the licence they had at the time - which would have generated $70mm++ of EBITDA (at then gold prices) which equates to ~$40-50mm of post-tax FCF to KCN. So the NPV of that lost earnings stream, plus the impairment, plus other sunk costs, plus damages, could easily get north of $750mm AUD total. Again, even assuming a very hefty discount to this theoretical settlement amount (eg if they sold the award before attempting to collect, say 40% discount) implies
$2.04 per KCN share.
(20min delay)
