Pellet Price, page-784

I bought a little more this morning. May continue purchasing in coming months.

This is my understanding so far, so please correct me if I'm wrong, all based on what some of the more knowledgeable posters have put up on here:

- Historically Shagang has been paying based on Metal Bulletin prices
- The new offtake agreement would be based on some kind of average between Metal Bulletin prices and Platt prices
- Other customers have been paying based on Platt prices, plus in some instances a premium on top of this?
- Metal Bulletin prices have historically been lower than Platt prices
- Based on some postings, the difference seems to have increased in more recent years?

Some questions around this:

- Why is the Metal Bulletin prices lower than Platt prices? (Should they not be very similar?)
- Does the difference fluctuate? If so what is the cause of the fluctuation? Is it possible for the difference to reverse, i.e. Platt becomes lower than Metal Bulletin?
- Intuitively I would expect the difference to shrink when prices are low, is this the case?

Some thoughts:

- Based on what I've read, this new agreement would result in better prices for shareholders than the old agreement (assuming Metal Bulletin is indeed lower than Platt and remains lower).
- I would actually be ok with a very small discount to a customer who will take a good percentage of our production, it will mean less mucking around with marketing etc and underwrites some of the production. As long as it was very small, perhaps 2-3%.
- I'm not sure why Metal Bulletin would be lower than Platt (haven't researched it at all), but depending on how the indexes are calculated the difference may average out to a lower level over time.
- Having said all this, if this agreement results in a big ongoing discount, say 10%+ compared to other customers, then that is not acceptable.
- From a valuation perspective, we are probably being doubly discounted for any discount. Say it is $20m npat per year, that is approx $200m off our valuation under normal circumstances, however it's probably worse if it is not transparent the uncertainty will mean the market apply a lower multiple again to an already reduced profit. So getting clarity and transparency on this issue alone may improve the valuation, if the market understands it they may be more accepting and give a more reasonable valuation, even if profits are a little lower than they could otherwise be.