September quarter predictions, page-70

Its a ghost town in here lately. Meanwhile the stock looks incredibly cheap basically trading at 0x E/EV now when you consider they are probably sitting on 500m of cash and inventories.

I have increased my position from 5m to 6m shares in the last week.

I have contacted management a couple of times about a buyback but have heard nothing back. It is very clearly the best use of shareholder funds at this point but I worry the suggestion will fall on deaf ears. Nevertheless, it doesn't hurt to try.

Going forward there are three paths management can take:
1. Buyback: By far the best use of shareholder funds as they would be buying minimum 3 more years of revenue in Koolan Island (likely worth 1b in earnings) for free. In simple terms they would buy back shares at 43c but every share is backed with roughly 43c of cash and inventories, such that they get the earnings from Koolan for free. Such a buyback would mean shareholders do not sell see earnings increase whilst maintaining the cash backing per share.
2. Pay Dividends: The second best option. The bigger the better. With no franking credits though, they would be wise to structure this as a return of capital.
3. Reinvest funds to extend life mine of Koolan Island or buy another asset.

If management choose option 1 or 2 it is guaranteed the share price will rise 50% quickly. Selfishly, I would like the share price to rise! So I prefer option 1 or 2. Option 3 is the least preferable as they may overpay for an asset and burn some of the cash and shareholders may ultimately never see the returns. If management choose option 3, depending on the economics of the investment I see the share price being flat or even faltering 5-10%.

I think as shareholders the best we can do is encourage management to consider the economic returns to shareholders under every option. Hopefully management does what is right and also follow their legal obligations to do what is in the best interests of shareholders. Regardless, of what happens here I think the payoffs going forward look positively asymmetric to me.