The recent Bowen Energy Shareholder’s Group letter was...

The recent Bowen Energy Shareholder’s Group letter was informative; however I have little faith in valuations where there are no Resources and consider them useful only for making accountants happy. Although I do not have the valuation expertise of Macrae I have been trading shares for the past 50 years and have seen many valuations. I have now sold my stock but offer a few comments about the letter.

I can find no reference to the EPC 930 valuation of $10-$20 million in the Bowen files so presumably it is pre-Bowen, in which case it is before the Bowen drilling and based on projections of coal extending down dip from mines to the west. These valuations are notoriously inaccurate. They dream up a possible tonnage, say 500 million, then conservatively cut this in half for what might be mineable, and then conservatively cut the value per ton to say 10c and bingo, a very conservative $25 million is the resultant valuation, which, after all the conservative cutting is almost believable but is highly suspect; there might even be no mineable coal there at all.

Book value -- you have only to recall that ABC Learning cut their book value by $600 million last week to know that this valuation methodology is not much better than the above. Check the AusIMM “Valmin 94 Symposium”, Bruce, Clarke and Bucknell: “book value is not used by companies determining value”. No self respecting valuer would use it.

Subscription Agreement. This would have been useful if it had happened.

Multiplier Method. Multipliers above 3 are pretty rare and imply bonanza intersections. Based on shareholders expectations of a billion tonnes and the results to date I would be inclined to choose a multiple between -0.75 and +1.25. Multipliers in the hands of different experts lead to widely varying values by their very nature.

“2009 metrics”. With due respect to the previous valuer and his 240Mt “excellent chance” or whatever, we have so far seen very little sign of it. Valuing the possibility of finding 240 Mt at 50c/t is the same school of thought that results in the promotional $10-$20 million value for EPC 930. Until coal intersections are identified, correlated and their quality determined, this method can only lead to false hopes.

Put Option. Unfortunately this option is not protected for inflation and after 5 years at 7%, which is probably the minimum time to drill a Resource out to Indicated status, it is only worth 70c/t, not $1. Consider the scenario where Bowen drills to Inferred Resource status but then decides there are better projects to develop via JVs with other companies. The effect on the share price will probably be quite negative as the shareholders get nothing until maybe 10 or 15 years later when or if the drilling is ever completed. By this time the coal might be worth $150/t or more but the shareholders will get 50c or less for their 10-15% interest. If you allow for the opportunity cost lost in the put and call option it might almost be considered a liability rather than an asset.

Missing from the Shareholders group methodology is the JV over EPC 930 which values it at $1.75 million. This begs the question that if there is a valuation out at $10-20 million why did Bowen get their 40% so cheaply and why didn’t Rocklands, who had 60%, move to 100%? If they didn’t know of the valuation surely they would have run the figures themselves? Either way it indicates that no one believed in a $10 million + valuation and it further emphasizes that pre-Resource valuations can vary hugely over the same ground, hence my conclusion that they can’t be taken too seriously. Bowen shares are purely speculative and to believe that a valuer’s figure at this stage is going to change or reflect the long term future is unrealistic.