response, page-13

Very true, Maigret and Lenni.

I agree that there's a bit of an issue with cost escalation with no revenue escalation - and compound it with an in-built discount of capital in the NPV equation as well, and you do tend to trim the sails a bit excessively.

Maigret is right, too. People don't want to see a broker come out an say "five baggers for everyone!!" on a stock, not in a market with this mood. However, maths are maths. In my mind, better to put the math out there for people and then set a price target which is realistic and explain why you think it's not going to $30 a share in 12 months!

Reasons I could use, were I an analyst, to discount a share price target to below what arbitrary maths say;
- use a 15% NPV discount rate. This takes into account higher inflation (ie; the higher inflation the better your profit margin has to be to preserve capital) and also squashes the NPV handily

- discount the project equity properly for the government involvement. Assign revenues to GBE at 85% of the project and don't take out the government contribution at the end. The way its done here it's arse before cock in my opinion. The way these things work in the real world is as a Malawian incorporated JV between a government corporation and GBE. This means that GBE would be assigned 85% interest in the Malawian incorporate JV company, and we can deal with it like thus, so we run the whole math and then give out 85% of the NPAT to GBE and 15% to Malawi. Having GBE pay Malawi 15% of the NPAT is specious. Its a 15% royalty in effect, atop the existing royalty.

- simply say to your investors "we set a $1 12 month rice target conservatively based on perceived market downside risk, credit and stautory limitations and a political risk discount from Malawi's neighbours as a consequence of Zimbabwean issues." You can work out BMN, PDN, GBE, GXY, whatever you want to come up with an in-production EPS estimate but the reality is investors will be flighty with speculative stocks and $1 is fairly reasonable and conservative. Diddling the maths to justify your price target is disingenuous and doesn't reflect the reality we are dealing with.

- you can work out the NPAT as it stands and then, as they have done, run a few scenarios on equity vs finance funding. But basing your 12 month price target on 100% equity dilution which occurs 2 years down the track, at your 12 month price target is ridiculous.

However, I think we should get, on average, above $1 for the next 12 months. Which brings us to the next point - given the stock has doubled in a week, what's to stop us exceeding $1 in the next month when the company's official NPV figures are put out? StateOne's $1 price target, the way I interpret it, is a ballsy call on lowballing it so they don't overcook things and can back up the truck.

$1 May 2009, and then $2 May 2010.