rfe mcap analysis

G'day folks

Thought I would share a different type of analysis that I like to do on some of the companies I invest in. Imo its very useful for understanding what's happening ROI-wise for small cap miners & oilers who tend to raise capital regularly. Of course the 1st reaction of most people to a CR is "dilution!", but imo, CRs are a regular part of the funding & growth cycle for small cap miners & oilers. The key is to understand what part of the cycle we are in, and whether or not the company has made effective use of the capital invested through CRs.

The data has been obtained from the company's 3B & S708A statements, quarterly reports.

The chart below is a daily chart of RFE's mcap (the blue line) - calculated as the closing SP x the number of shares issued as at each day.

Plotted on the same chart are two other lines:

1. The red line, indicating what I call the base mcap taken at an arbitrary date for the purpose of the analysis (in this case, 2/1/2011, to cover the last 18 months basically). The red line is simply the benchmark measure - what was the company worth 18 months ago.

2. The green line is the base mcap (at 2/1/2011) plus the capital invested into the company through each capital injection event, whether that be a CR, SPP, or issue of C notes which later get converted to shares. The green line is a measure of the amount of capital funds injected into the company since the base mcap date.

The analysis ignores any discount rate to measure the time value of money, to keep things relatively simple. But the chart still provides a very useful picture.

So what can we see from this analysis of RFE?

1. RFE had 139M shares on issue and now has 385M on issue, an increase of 236M shares or 176% increase in shares on issue

2. The mcap has increased from $61M to $271M, an increase of $210M or 344% in the mcap

Very simply the above numbers tell me that management have added shareholder value rather than diluted it over the last 18 months.

Looked at in terms of return on funds invested, the capital injections since 2/1/2011 have totalled $118M, while the mcap has increased by $210M, so a return of $92M on the $118M invested (including the recent $50M - if you take that out, it was an injection of $68M up till September, and the mcap increase at that time was about $172M).

The blue mcap line stays ahead of the green capital injection line quite solidly since early 2011 just prior to the 1st of 3 major capital injections (the 3 main steps in the green line). This indicates the company's value (as assessed by the market) remains positive or surplus compared with capital invested.

What I am always keen to look for is what happens to the mcap after a major capital injection. A lot of traders will shy away from a stock if they've just done a CR, because of the "dilution" and the overhang of shares for a period of time as some of the CR shares enter the market for a quick profit return - as is the case now with RFE. But what I look for is how the mcap responds after that short period of time - as the company's value should start to increase as a result of the funds invested and employed into projects.

If I look at the RFE mcap chart, I can see after the 1st two major capital injections:

1. After the May 2011 capital injection, the mcap trends progessively upwards until late 2011 just prior to the 2nd capital injection

2. After the 2nd capital injection, the mcap responds even more strongly in a positive manner

So now we have the 3rd capital injection and the shares have just hit the market and now washing through. The company's mcap jumped when the capital was injected - in other words shares were not devalued by the dilution amount. Importantly, the mcap respected that dotted trendline I included which was drawn from lows in the mcap dating back to early/mid 2011 just prior to each capital injection, and we have yet to see the full deployment of the $50M just injected, i.e. the benefits of that cash turned into successful wells which will drive the company's value (mcap) for the next period of time.

What I see here is that this company had provided a solid return on capital invested, and past performance being an indicator of future performance, this suggests we should expect further positive shareholder value generated from the fresh funds just injected.

Hope this provides some of you with a useful perspective. This is why I have been making the comments about its just a matter of time before we see the end of this washing out of CR shares, before results start driving the SP.

Cheers, Sharks.