TTC,Thanks for the reply, you have obviously put some time and...

TTC,

Thanks for the reply, you have obviously put some time and effort into it and I appreciate this - Now if I may state my rebuttal

1. Assets are only good if they are producing positive cash flow - so any valuation on them as a "going concern" basis will obviously overstate them if they are insolvent (ie negative cashflow). Ion carbide had a great NTA just before they went bust. With regards to PEM's cash, I think you're been a bit picky but anyway, the point I make is when you continually roll out "PEM has $77m" you are implying they've got the $77m just sitting there in the bank that they can do anything they want with (like funding negative cashflow operations - sorry couldn't resist) ;-) ). This is false - $25m is reserved for the performance bonds and they will need $10m to repay debt. So they effectively have only $42m at their disposal. Which leads me to:

2. You state "PEM is currently borderline profitable. You are forgetting their hedging (both currency and metal), which is $80M in the money". Well may I take a little quote (seems not have been mentioned in previously in the PEM thread) from PEM's update on the 24th June 2008.

"Production at Broken Hill has continued to improve and is on track to meet full year guidance of approximately 90,000 tonnes of contained zinc and 55,000 tonnes of contained lead at a cash operating cost of approximately US$0.95 per pound zinc (net of hedging)"

Now what is those three words in brackets at the end? Yep that's right - "net of hedging" ie the Lead. So even with this marvelous hedge book they still produced at a cost of $0.95.
FACT - Zinc price is currently $0.7643

But here I concede a point - with the zinc they HAVE hedged for 2009 they will make good money:
They have:

17996 tonnes @ $3,655 AUD
5,000 tonnes @ $2,109 USD

Using the current exchange rate of around $0.887 to convert the AUD hedging gives an 22,996 tonnes at an average of $2,995.64 USD. Or in pounds, 50.7m pounds at $1.36.

So assuming 198.4m pounds production (90,000 tonnes), if their costs are $1.03 then they make $0.33 on 50.7m pounds ($1.36-$1.03) or $16.73m but then lose $0.2657 on the rest (which is unhedged) ie $0.2657 on 147.7m pounds which is $39.244m. So a net loss of $22.514m USD or $25.4m AUD at todays exchange rate on 09 production.

Now as for the $80m hedging gain as at 30th June 2008 (does the fact I mention that date give you a clue as to what I am going to state next?)

For the currency they had $155m hedged for 2009 at $0.8210 and $112m hedged for 2010 at $0.8917. At the 30th June the AUD/USD was $0.9586 giving a currency hedging gain of $0.1079 or $28.8m on the $257m total. But wait, whats happened since then? The AUD/USD is now $0.887. So the 2010 put options are now out of the money (cancel them off) and the 09 options are only $0.066 or $10.23m in the money. So the $28.8m hedging gain is now only $10.23m So there goes $18m of the $80m hedging gain.

You say "Your hedging maths is laughable. Hedging doesn't effect their Net cash costs"

Ehhhh (sound of buzzer) wrong answer. It DOES affect their net cash costs. Why? Because the credit they get for their lead production reduces their cash costs. See below from their 4th quarter activities report:

CASH COST & OPERATING MARGIN (US$/lb zinc)

Jun Qtr MarQtr 12 Months 12 Months
2008 2008 07/08 06/07

Average Price Received 1.04 1.08 1.19 1.47
Direct Cash Costs 0.96 1.10 1.07 0.80
By-product credits (*)(0.26) (0.23) (0.35) (0.49)
Zinc treatment charges 0.31 0.33 0.31 0.43
Net Cash Cost 1.01 1.20 1.03 0.75
Cash Operating Margin 0.03 (0.12) 0.16 0.72
(*) Silver and Lead production net of treatment charges, freight and handling and lead hedging gains and losses

See the by-product credits is from their lead and silver - The lead credit is obviously affected by their lead hedging which for 09 is sh*te.(33,242 tonnes @ $1,748 AUD)

Regarding the metal hedging you say "You seem to ignore the put options of 38,701T (Lead - I had to add that in) at $2,186US in 09, or the 16,246T Zinc in 09 at $3,768AUS. Or what about the 2010 hedges of 14,710T at $3,276US or 11,625T at $2,990US. If you are going to quote numbers, quote all of them.... Otherwise, you are trying to be deceptive."

Are you been a little deceptive (and a touch hypocritical perhaps) by not including above the hideous 09 Lead forwards - 33,242 tonnes @ $1,748 AUD to the above comments? And where did you get the "16,426 Zinc in 09 at $3,276AUS" and the "2010 hedges of 14,710 at $3,276" I can't find those anywhere. Their hedging as out of their June 08 quarterly activity report is as follows:

Financial Year
2009 2010 Total
METAL HEDGING
AUD Zinc
Forward Contracts tns 17,996 315 18,311
A$/tn $ 3,655 $ 3,738 $ 3,656
USD Zinc
Forward Contracts tns 5,000 - 5,000
US$/tn $ 2,109 - $ 2,109
AUD Lead
Forward Contracts tns 33,242 16,310 51,402
A$/tn $ 1,748 $ 3,216 $ 2,268
USD Lead
Forward Contracts tns - 11,625 15,140
US$/tn - $ 2,990 $ 2,990

Put Options Purchased tns 38,701 34,080 72,781
Strike Price US$/tn $ 2,186 $ 1,900 $ 2,052
CURRENCY HEDGING
AUD
Call Options Purchased A$M 155 112 267

I have worked out given the 30th June Zinc and Lead prices and the level of the AUD/USD at that date, the PEM hedge book was in the money $116.256m AUD. This was done using a $0.9586 AUD/USD exchange rate, $1912 a tonne for Zinc and $1765 a tonne for Lead. The company itself has said its book was in the money by only $80m so I can only assume the difference was due to option costs etc (If anyone could give a reason I would appreciate it).

At todays prices with Zinc at $1685, Lead at $1974, and the AUD/USD at $0.887, the hedge book is currently in the money by $67.58m. This reduction is mainly due to the appreciation of the USD against the AUD and the strengthening of the Lead price (reducing the value of the hedges). So in little over 40 days the value of the hedge book has almost halved - The thing to get from this is that PEM's book is very negatively exposed to the AUD in particular dropping and the Lead price going up.

Now I'm going to have to knock this on the head for the moment but to answer the other bits

3. Redoing the maths - would take a while considering the intricacies of hedged and unhedged production and hedged and unhedged revenue - Safe to say, not pretty when 75% of your productions is unhedged, and your costs of production are 20% above the price of the commodity.

4. hopefully explained by all the above hedging calculations

5. Yes CBH aren't exactly flash either - But crucially their liabilities are not due until the middle of 2012, a long way away - Yes people wouldn't convert at this level but again, 2012 is a long way away.

6. Yes a company self funding itself is ideal, but if PEM keeps a burning da cash like I think they are then that won't be an option soon. and there's no one to step in and support them like CBH has got with TOHO.

7. I bet if you offered PEM $100m in a bank loan they would take it in a second. The copper mine looks good, but even the copper price is dropping now which may make potential JV partners, predators somewhat wary. And it will take a huge amount of CAPEX and would be a number of years before production.

8. See previous discussion on hedging

9. Debatable both ways, although I would be the first to say I'll believe it when I see it with CBH. However the paste fill HAS opened up significant high grade secondary stopes and has the dual effect of stablising the mine. PEM on the other hand is still mining primary material and hasn't spent $100m on Capex like CBH has done to streamline its operations. Anyway it doesn't matter what you're cash costs were like 2 years ago its what they are NOW.

10. eerr come again? Yes TOTAL costs are $0.85 and the TOTAL zinc price at the moment is $0.764 (no lead credits sorry) - so simply not viable at these levels = zero value.

11. 10 years with every mangy bit of 3% Zinc thrown in. Wait till they do their "less production, higher grade" announcement this month and we'll see what their mine life is. As for the open pit stuff, I'm not sure of the details but wouldn't that take a bit of CAPEX to start up with (plus mine approvals, environmental approvals etc etc). And how much net cash do they have? hmmmm....

12. Yes they've got the copper mine, but CBH has got their own copper play Panorama which is potentially a sulphuric acid producer (off take pending, sound familiar?), Rasp, Hera etc.

Every point of mine was NOT flawed, happy to have pointed this out to you ;-). As for PEM's decision to break off the merger. I guess they wanted to screw CBH and CBH said "p*ss off we've got more cash, more reserves, and a supportive shareholder so we'll see whose laughing in 9 months time". CBH came back with the 3.5 offer because I guess they realized that a combination of the two Broken hill operations was the only way for both of them to turn a profit - Now no one wins. I myself was happy for the merger to fail, so long as CBH delivers at Endeavor. (not guaranteed I'll admit but life's full of risks)

Hopefully the Zinc price does recover nicely and both companies make phoenix like comebacks but my money would be on the one with the most cash, most reserves, and a shareholder with deep pockets

I eagerly await your reply (especially if you could explain the PEM hedging discrepancy - because you can be damn sure if it was $116m in the money, the company would have let us know about it!)

Cheers

James