reasons for a bounce, page-62

To start with, I have seen some posts on the MAE thread talking about current QTR "expenses" in the context of the current QTR "Cash Flow Report". We need to clarify the distinction between a "cash flow report" and an "Income Statement". An Income statement is prepared on the basis of accrual accounting i.e. Reporting as Income or Expenses any item which has been "incurred", but not necesarily paid for. This is why we have a balance sheet item reflecting Trade Payables, which includes items already reflected as Expenses or purchases of Balance Sheet items but not yet paid for. The actual Receipts and Payments of Cash is included in the Cash Flow Report i.e Movements in Cash, which e.g. could arise from Payments of Balance Sheet items or Cash paid for expenses in the current QTR. So it's possible for instance to not have any revenue or expenses in the current quarter but still have Cash Outflows as a result of payments for Liabilities and Receipts for Debtors in respect of items incurred and reflected in the Previous QTR Income Statement. Hope this makes sense... lol

My reading of the latest QTLY Cash flow:


3.1 Loan facilities
Amount available AND used
$A’000
51,400 ALL of which is due sometime in June

With $3.9 mil in the bank plus a stated committed cash outflow in the next QTR of $1.5 mil for Development, leaves $2.4mil

Loosely extrapolating the current QTR Cash outflows for the likely Admin and Interest costs of $1.8mil plus $1.3mil respectively for the next QTR, leaves a shortfall in the next 3 months of $700k. This would mean that the directors would have planned for a cash shortfall, so is probably unrealistic. In that case we can probably more safely assume Interest costs of approx $1.3mil and Admin costs for the balance of $1.1mil leaving NIL cash in the bank.

This makes renegotiation of finance /or capital raising critical in the short term. Hopefully a sale gets done before June 17 or so, which will greatly assist in the negotiations to roll over their debt, but these things tend to take time, so I'm not holding my breath on that one. As such we could expect any savvy potential buyer to drive a really hard bargain on Price. If it was me, I would hold out till after the refinancing is due, knowing that I would be able to drive a hard bargain.

On the development costs, I have seen many here ask why they would be spending on development costs. It should be bourne in mind that this is "Cash Flow" and is most likely a payment that will be made in respect of a commitment that they have already incurred, even before December QTR, as the directors have all but ceased operations in MAE, obviously as a result of a cash shortage.

If one analyses their financial position a bit further, and does an extrapolation of their Dec 09 Half Yearly, I get:

Current Liabilities, consisting of Trade and Other Payables were $15.8 mil. If we assume no additional liabilities were incurred in the last QTR (unlikely but conservative for these purposes)and that all current QTR cash flows for development costs were exclusively to settle Trade Payables, we get

Trade and other Payables at Dec 09 $15.8mil
Less:
Dev Costs Paid $8.3mil
Admin Costs Paid $ 0.6mil

Balance Due in the next 9 Months $ 6.9mil

This leaves MAE in a very precarious financial position, which I know is obvious for all to see, but quantifies it to some extent. Bear in mind that the Directors have a legal liability in situations of insolvent trading, and as such there is an elevated risk that should any sale negotiations not go as smoothly as hoped, they would cover their butts and go into Administration or Liquidation. Likewise, Fortis could initiate the same.

Based on the analysis above, any sale proceeds would be reduced by approx $60 to $140mil (factoring in potential GS costs etc)as a result of present/future financial commitments.

As to a potential sale price, no matter what view one takes on a sale price, it will all be purely speculation because no one really knows what any potential bidder will be prepared to pay or what their investment criteria are. In MAE's case it could go either way, i.e a dissapoiting result or the price could exceed even the best of expectations. In any event, in my estimation, the sale price needs to exceed $200 to $250 mil to support the current share price of 33c, taking into account unknowns regarding GS fees, Tax Implications of a sale etc. In addition, do not be surprised if any sale is subject to staggered payments based on certain performance hurdles being reached. If I was purchasing MAE's fields e.g. my due dilligence would raise lack of steady production as a key risk and any deal I negotiate would include an Escrow provision for amounts due once certain production targets are met etc. In fact the best deal for both MAE and the purchaser would probably be to offset the risk of unproved consistent flow rates over a long period of time for both the purchaser and seller by negotiating royalties based on future production, probably on a sliding scale. In this way both the buyer and the seller share the risks and the upside. Unfortunately this would delay any immediate increase in Shareholder value, but would probably be a way to get an attractive deal over the line.