knl vs lmb, page-23

I'm certainly not depressed, although I agree with an earlier poster (duke, furniture? I can't remember, sorry) that we haven't even begun a serious move yet in the sp, because we are still only recovering back to where we should have been. 20 should have been reached (it was) and held (it wasn't) when the off-take was announced, and on any NPV should have been a multiple of that. And so while the recent move and significant new buyer has been welcomed, it's also incredibly frustrating (including for management).

If KNL today announced a non binding MOU for an off-take, in this climate, the sp would likely be where it is already. If it then announced a binding off-take subsequently, the sp would have a massive jump. However, because we've already got it, because we got it at a quiet point of the year and a non attractive point in the graphite market, and because people don't truly understand the quantum of work that went into getting it, or the level of risk that is taken out of the equation by having it, we haven't got it truly factored into our sp.

I think the JORC reporting rules make it difficult also. I can't imagine undertaking a property development without being able to tell my banker exactly what I'm planning, and what my expected sales rates are, how many townhouses I'm constructing, and all my assumptions and metrics. If I didn't, my banker would kindly look at his watch and show me the door, and ask me to come back when I know what I'm doing.

Yet as a shareholder, the company can't even legally tell me their assumptions, lest they be deemed to be giving me too much "bulldust" for me to be able to make an informed decision. We own the business, yet are legally kept in the dark about some of the companies plans.

Anyways, that's by the by. The flip-side of the current situation, however, is that the explosive growth in the share price is still to come. When I think of the numbers involved, I know that in 2 years time, we will be looking back and wishing we'd mopped up more and more shares at these levels. We've currently got:

1. Epanko - binding off-take. Scoping study for 20,000 tpa mine, but quite likely for the mine size to be increased at feasibility stage (probably by 50% to 30,000 tpa, which does not have a 50% additional cost of the mine). Environmental application process underway, and drilling commenced for JORC delineation. Flake distribution is 1st or 2nd best among global graphite companies (in terms of having the largest percentage of large flake sizing). The recent TC research put a conservative NPV on it. With a increase in the mine size, the NPV on this deposit alone is well over $1.

2. Merelani - I'm combining our existing tenement with the potential JV with Richland. Even though our Epanko flake sizing is fantastic, I understand the flake distribution at Merelani is even better than Epanko. While a 15,000 tpa mine within a JV agreement is never going to make us a BHP of graphite, the cashflow for our size of company is going to be significant. On the basis of a $1 NPV for Epanko (coz I like round numbers, but if it's a 30,000 tpa mine it will more likely be a $1.50 NPV by the time we start production), then our share of a JV with Richland might be an NPV around 25c per share, once we get to production stage.

3. Tanga - A top 3 prospect when management first started looking for graphite in Tanzania. Geologically speaking, Tanzania hosts a number of large/jumbo flake deposits, hence why management took a focus in the country. It's too early to start putting out any numbers here, but the upside potential is significantly material, and there is zero premium in the current sp to recognise it.

4. Nickel - well, it sounds good, we have lots of work to analyse ($12m worth of BHP's old work), and it's adjacent to Xstrata's existing world class nickel mine. Again, zero premium in the current sp, although I don't think nickel is quite in favour at the moment, and I don't really understand it enough to talk about it. But, when I buy KNL shares, I get this potential for nothing.

What's the upshot?

If you are buying shares in KNL today, you are paying significantly less than the NPV of the significantly de-risked Epanko deposit alone. You are getting a free swing at the Epanko upside as we move closer to production. And you are getting a free swing at the potential cashflow from a Richland JV, and you are getting a free swing from any economic deposit they discover at Tanga.

I topped up a fortnight ago, and am about to top up next week again. With the whole market to choose from, I just can't go past the upside potential of KNL. Of course, you can all undertake your own assumptions for your own "sum of the parts" valuation, but when I add it all up, it means any investment at the current share price has a massive margin of safety for me.