Hi JennyI saw your question regarding what I would consider to...

Hi Jenny

I saw your question regarding what I would consider to be the value of UCL's theoretical interest in Mehdiabad. I was previously happy to work off the projected Net Present Value (NPV) of the project. I think the most recent was in the March 2006 quarterly report.

At that time the NPV of the project was calculated as in the following quote from that report:

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ECONOMIC ASSESSMENT:
At an average metal price of US$ 1500/tonne zinc, US$ 900/tonne lead and US $
8/oz silver the Project’s average cash operating costs is estimated at US$ 291/tonne
of zinc metal (net of silver and lead credits). At the above metal prices the NPV is
well in excess of US$ 1000 million.
---

Now much has changed in the intervening 2.5 years that would change this calculation. Metal prices have changed significantly, the US $ has changed and costs in the industry have changed. However let's assume for the case that it is still valid.

On this basis the NPV value to UCL at 47.8% ownership should be minimum US $478 million or AUD $ 549 million at 87 cents conversion rate.

Let's say 900 million shares undiluted = 61 cents per share.
Fully diluted approx 1.4 billion shares = 39 cents per share.
Dilution assumes conversion of current oppies and no further issues - this is unlikely to be the eventual case.

So IF the NPV from 2006 held then we have an idealised full value target range of 39-61 cents on the basis of current capital structure for the value of Mehdiabad to UCL.

To these at any given time you would need to apply market discounts for stuff like sovereign risk, stages of derisk etc. For example even with an ideal resolution I would apply a risk factor for Iran being a political hot potato, still not completed BFS etc. Optimistically on these grounds I would probably sell a large portion of my holding, if not all of it, if it hit the 20-30c range in any reasonable time frame - that would represent a market cap up to $270 million on an undiluted basis which would surely be seen as extreme in the current market place.

(Note if you worked on a cash flow basis you would come up with higher values - in 2006 the figures used in calculating the NPV allow for potentially US $1200/ton free operating cash flow. Mehdiabad is potentially an extremely lucrative cash flow project. The numbers are viable but not conservative enough for me which probably sounds a bit odd given the risk I've taken holding on to this stock).

Problems:
- we have no idea where things stand with the project
- the NPV was calculated on the expectation of MZC holding the mine and plant. Will this actually happen?
- if the dispute is resolved but the outcome is that UCL/MZC run the plant while Impasco/Imidro mine the ore than past studies are worthless to us.
- there remains a possibility that UCL may be blindsided out of their full entitlements.
- even if a good resolution comes through it's still a significant way from production.
- financing will be a challenge but I think doable albeit with significant further dilution for existing small shareholders if unable to participate.


Conclusion: We don't have enough information any more to be confident of past valuations. Assuming positive resolution it would be wise to be guided by valuations being put on other zinc projects and apply a discount for the Iran factor. It may be that a market cap of $50 million could be excellent in the current market ie around 6 cents undiluted.

Another thing to keep in mind on any good news is that there will certainly be selling. The stock is actually pretty tightly held (78% top 20) but volume continues to be available - former MD may be an ongoing seller for one.