sdl valuation

The Net Present Value released by SDL on 6th April 2011 is USD 4 billion. Based on the 2.87 billion shares issued, each share is valued at approximately USD 1.39.

Please note, this valuation of USD 4 billion is based on the assumption of 100% ownership. However, Sundance only has 90% of interest in the project of Cameroon, while a local company owns the remaining 10%. The Cameroon government also has the option to purchase a 10% free carried interest at a price of 50% of its pro-rata share of sunk costs, which it will reduce the company's interest to 81%. Furthermore, a local company owns 15% of the project in ROC, whereby the ROC government can also purchase a free carried interest of 10%. Should both governments exercise the options, overall interests of SDL in the project would be reduced to around 80%, representing a revised NPV of USD 3.2 billion.

The stage one?s CAPEX is estimated to be USD 4.6 billion. However, as per its mining peers such as GBG, Murchison and Midwest, CAPEX for Junior and Mid Tier miners are very likely to be blown out. Even Moly Mines (an entity controlled by Hanlong), which contracts its infrastructure development and equipment to the Mainland China enterprises, facing a funding gap of more than USD 200 million for its Spinifex Ridge Moly Project (see the announcement released by MOL on 29th June 2011). MOL?s revised CAPEX in May 2011 is USD 720 million, 45% higher than its earlier estimate of USD 494 million. Also, Murchison confirmed a 36% jump in CAPEX to USD 5.94 billion in June 2011.As a result, SDL?s CAPEX estimate of USD 4.6 billion is over optimistic. It is not unreasonable to assume the overall CAPEX for SDL to increase by at least USD 1 billion (20% cost blow-out). By including this potential cost blow-out of USD 1 billion, the NPV of SDL would be reduced to USD 2.2 billion.

Project delay is also common to the miners. It appears that the Mainland Chinese banking institution is the only funding source for SDL. Due to the bureaucratic style of Mainland China Authorities, it generally takes at least 12 months for the Mainland Chinese banks to approve the loan. Project delay of 12 months or more is expected, potentially reducing the NPV by USD 700 million to USD 1.5 billion. Value per share is hence estimated to be around USD 0.5. (If taking into account the assumption that transaction usually occurs at 50% of NPV, value per share would be even lower at USD 0.25).

Of course, one could argue that the above methodology has not taken into account the potential resource/reserve upgrade, hence might not present a fair valuation for SDL. However, based on all the available current information, the value of SDL is USD 50 cents per share, matching to the offer price of Hanlong. The take-over premiums for ASX companies over the past 20 years are around 20%. If applied this 20% take-over premiums, a fair and reasonable take over price for SDL would be around USD 0.60 (USD 0.50 * 1.2), unless a new resource/reserve upgrade is being announced.