rfc ambrian update, page-8

Meso,

I've made a few comments on the other thread you started today, but thought I'd make a few other comments on this one. Bear with me please, it's not totally straight forward.

When I read the RFC Ambrian note in detail something else struck me as odd. Page one lists ordinary shares in issue as 1,407m, and fully diluted shares as 2,333m. The fair value of 2.2c is calculated using the estimated fully diluted number of shares, i.e. estimated fair value of the company is implied to be 2,333*0.022=A$51.3m.

The trouble is, this share data appears to be out of date, and appears to be taken from the Annual report dated 30/6/13. That report shows ordinary shares of 1,407m (as per RFCA), listed options of 402m, unlisted options of 323m and performance rights of 32m. Post the balance sheet date, the Bergen deal saw 42m shares and 98m options come into play. Add all this up and you get 2,304m - close , but still not exactly the RFCA fully diluted figure.

Now, since the last annual report, we've seen the Bergen deal as referred to above, but also the Share Purchase Plan and the expiry of a large number of options. Taking the data from the H1 financial released last week, as of 31/12/13 there were ordinary shares of 1,535m (including Bergen and SPP effect), listed options of 402m (unchanged), and unlisted options and performance rights of 115m (including Bergen increase, and the BIG option expiry late last year). Add all this up and you get fully diluted shares of 2,052m, somewhat fewer than assumed by RFCA.

Divide the A$51.3m by this fully diluted number (2,052m) and you get fair value of 2.5c.

There's another problem though. To get to the fully diluted number of shares, we will need to see lots of options exercised. The good news is that will bring in cash, which hasn't been captured in the RFCA note.

If the 402m listed options are exercised at 4c each that will raise A$16.1m.

If the 98m unlisted Bergen options are exercised at 0.014c each that will raise A$1.4m.

If the remaining 17m unlisted options are exercised they will raise essentially nothing since they are employee share options with zero exercise price.

So, full dilution of the number of shares will also see the coffers swell by A$17.5m (16.1+1.4). Add this to the initial corporate value calculated by RFCA, and you get 51.3+17.5=68.8m. Divide this by the fully diluted number of shares (2,052m) and you get fair value of 3.4c.

Now, to me, this still isn't at this stage realistic. The listed options have a strike price of 4c, so we won't see any exercise till we have a share price above this. This seems unlikely until we have strong positive news flow, which is quite possible, but by no means certain. So, to me as things stand at present, the cash from the listed options seems unlikely, but then so does the dilution from them. The Bergen options are much more likely to be exercised (strike is only 1.4c), as is the case for the other unlisted options. So this scenario sees corporate value of 51.3m swollen by 1.4m via Bergen option exercise to give A$52.7m, leading to a diluted number of shares of 1,535+98+17=1,650m. The equates to a per share current fair value of 3.2c by my calculations (c.f. 2.2c as published by RFCA).

Now, the disclaimers: these are my calculations, assumptions and logic, based on RFCA figures, but adjusted by me. I have approached RFCA for comment, but so far have had no reply. Do not rely upon any of this if you choose to invest - do your own research and calculations.

I hope some of you have read this far and understood what I've tried to explain (explaining calculations in text ain't easy!). Chartists and traders, sorry, this was probably a waste of your time. Fundamental investors, what do you think? Any comments?