KfW IPEX-Bank UFK Financing Example

The last hurdle before significant share price appreciation is financing. It's encouraging to see that in June 2015, KfW IPEX-Bank lent USD 194 million to German firm PCC SE using an Untied Loan Guarantee (UFK):

KfW IPEX-Bank provides financing for a UFK-backed silicon project in Iceland.

- Loan amount: USD 194 Million
- Material: Silicon
- Production Amount: 32,000 metric tpa
- Off take agreements: "distributed to various German companies from different industries on the basis of long-term supply contracts."
- Untied Loan Guarantee from the German government.

Compare this to Kibaran Resources:

- Loan amount required: USD 77.5 Million
- Material: Graphite
- Production Amount: 44,000 tpa
- Off take agreements: distributed to various German companies (ThyssenKrupp and a German Graphite Trader)  from different industries on the basis of long-term supply contracts (10+ years).
- Received "in-principle eligibility for cover" from the German Government for an Untied Loan Guarantee.

As detailed on page 14 of this presentation, Kibaran has completed step 3 of an 8 step process to secure the Untied Loan Guarantee. Based on the similarities between PCC SE's silicon project and Kibaran's graphite project, I am overwhelmingly confident that Kibaran will secure the Untied Loan Guarantee but we need to be patient because the following steps need to be completed (and are presumably occurring behind the scenes):

4) KfW IPEX-Bank submits a formal application for an Untied Loan Guarantee to PricewaterhouseCoopers Aktiengesellschaft Wirtschaftsprüfungsgesellschaft (PwC);

5) PwC assesses the formal application and submits a report to the German Interministerial Committee;

6) The Interministerial Committee gives preliminary approval;

7) KfW IPEX-Bank informs on signature of loan contract/raw materials off take agreement;

8) PwC notifies the Interministerial Committee, informs KfW IPEX-Bank of its final decision and issues the Guarantee Declaration.

Patience required:

Although Mr Spinks has implied that financing could be completed in 1-2 months, PCC SE received their provisional cover note from the interministerial commission of Germany's federal government on 25 September 2014, made progress in January 2015, and announced that financing was concluded on June 11, 2015. Hopefully things progress faster for Kibaran but it's possible that they won't and investors should not let the passage of time dampen their enthusiasm for what is a compelling investment.

Dilution

Today's closing price of 21.5 cents multiplied by 167,629,223 million shares gives a market capitalization of AUD$36 million. The independent Bankable Feasibility Study listed a Pre-tax NPV of US197.4 million which equates to AUD$280 million. Here are some dilution scenarios:

	Column 1	Column 2	Column 3	Column 4	Column 5	Column 6
0	Financing Required (AUD)	Debt raised (AUD)	Equity raised (AUD)	Debt/Equity ratio	Post-financing Market Cap (AUD)	Post-financing Market Cap as a Percentage of pre-tax NPV (AUD$280 million)
1	110 million	110 million		100/0	36 million	12.85%
2	110 million	71.5 million	38.5 million	65/35	74.5 million	26.61%
3	110 million	55 million	55 million	50/50	91 million	32.50%
4	110 million	28 million	82 million	25/75	118 million	42.10%

  
I don't think that the debt/equity ratio will be lower than 65/35 because the Debt Funding Interest received in March was for 65/35 before the August Offtake Agreement with ThyssenKrupp (is in addition to the 10,000 tonne binding off-take that Kibaran secured with a European Graphite trader). But even if the debt/equity ratio was lower at 50/50, a security trading a 1/3 of it's pre-tax NPV presents a significant margin of safety.

Why have I  held around 1 million Kibaran Shares since February 2015?

1) I think that Kibaran is grossly underpriced relative to its fundamentals and should generate significant capital gains for patient  investors.
2) Graphite supply is going to be a lot lower than most people think, I'll be surprised if anyone in Australian or Canada, other than Syrah Resources and Kibaran make it into production. Investors in Magnis and Triton should do some cautionary research into Lamboo Resources (they may get funded but the risk of this not occurring is quite large in my mind). If the Chinese don't come through on funding, which bank is going to fund a graphite project purely dependent on Chinese demand at the moment?
3) I want an investment that isn't linked to Australian domestic demand because we have a credit-fueled economy.
4) I want an investment whose fundamentals improve as the Australian dollar falls.
5) I want a simple business with good management containing a margin of safety.

As Warren Buffett wrote, "Our stay-put behavior reflects our view that the stock market serves as a relocation center at which money is moved from the active to the patient." May the patient make money as the fearful look a gift horse in the mouth.