Saracen I broadly agree with what you are saying - I've been a...

Saracen I broadly agree with what you are saying - I've been a MAK holder for stretches over the past two years - but I'd suggest that a FOB RP of US$160/t odd with OPEX of US$110/t would only give an EBITDA figure of US$50m based on reaching 1m tonnes production. NPAT would be more like US$25m allowing for interest, admin and taxation. Lets say $30m AuD. Being generous and assuming all CAPEX outside of cash reserves is met via debt and no further dilution nor exercise of MAKO, this could roughly equate to an EPS by the end of 2011 of 12c while allowing MAK further time to ramp up to 3mt - within a year of starting production is too ambitious. This could still very comfortably see MAK trading back toward the $2 range within 2 years with strong upside potential if RP prices head back over $200/t.

So were it possible to have confirmation of the following three things (which for the purpose of this quick back of envelope valuation I've assumed are independent variables and the only things standing in the way of MAK meeting its initial target) then we could be fairly confident of that $2 plus SP:

1. OPEX being as low as $110/t for a DSO operation including roadtrain to Darwin. (This remains amongst my biggest concerns - MAK continue to delay detailed OPEX breakdown numbers and I foresee transport costs alone accounting for as much as 70% of this figure. I'm still somewhat skeptical but have given it a likelihood of 60%).

2. RP stabilises at or above $150/t. Realistically this will require DAP of around $450/t - most analysts are currently using numbers of at least $400 in their longer forecasting and I think this is quite possible (notwithstanding longer term historically stable RP pricing pre 2007 well under $100). While MAK is obviously highly leveraged to further price rises I wonder whether any prices above $250 will be sustainable longer term. I've left the likelihood of RP stablising in the 150-200 range as undefined for the purposes of my valuation - it is obviously the subject of much debate.

3. CAPEX for DSO can be met by MAK via existing cash plus debt without the need for an additional CR. This again depends on trusting managements assessment of the capex of c. $130m and, more controversially that it could raise $90m via the debt markets. I've assigned this a 62.5% likelihood - not as I think it is that likely but I think an alternative of equity dilution (which has the same effect for the purpose of this valuation) is very realistic. Ie. MAK could, were it to release DFO OPEX of $110/t plus at least a partial offtake agreement around $160/t, raise $90m via 170m odd shares at 55c giving it a total of 400m shares and, on 30m NPAT, EPS of 7.5c. (or 62.5% of 12c).


So on a valuation basis assuming a 15% discount rate, MAK could be 'worth' $1.50 now ($2 discounted at 15% for 2 years) were points 1; 2 and 3 to come to pass. Given it is currently trading at 40c, we could say the market sees the likelihood of these 3 simultaneously happening of around 25%. Assuming the three events are independent and the are only barriers to production; that my assessment of 60% for 1 is reasonable and 3 can be assigned at 62.5% via a CR at 55c, then I could suggest that the unknowable variable of RP prices 'x' can be expressed as :

(0.625)*(0.6)*(x) = 0.25.

or x = 0.666

So, were one to be happy with the implied likelihoods of 1 and 3 I have above, then you could argue that MAK already has around a 66% likelihood of RP prices meeting the $150/t target upon which the initial 1m t valuation of the shares is based. Of course one is open to argue that this discounts further RP rises and more importantly ramping up to 3mt etc but investors should also be careful pricing in running before a company has demonstrated it can walk.

This silly little valuation exercise suggest to me that MAKs short term upside potential lies more in confirming OPEX numbers; organising debt/better equity terms and then executing successfully beyond 1m/t rather than simply upon confirmation that RP prices stabilise above $150/t.