Valuation of Rex

We'll today was one hell of a ride for Rex shareholders. I believe we'll all agree the message wasn't handled particularly well this morning.

Rex has chosen to go the same way the Majors are going, by constraining capital in the development of their project. Rio Tinto has done the same and been lauded in the media for putting the interests of shareholders first. Rex has not (yet) been lauded.

Today's news of constraining capital will likely benefit Rex shareholders in the long run in four ways:

Firstly, if the project can start delivering for a lower project cost, then either the capital raising will be lower with less shareholder dilution, or the project loan will be less with reduced future interest payments. The strength in this strategic approach is that the operation can progressively expand into the future once the project's returns prove to be robust. In some ways this incremental increase in project output is a lower risk option for shareholders.

Secondly, the higher throughput plan of the Mark Parry era remains valid: it just needs more capital. If there is a less capital constrained suitor out there, they could value the acquisition of Rex on that basis when they open up the data room.

Thirdly, the fixed costs for Hillside should be relatively low given the proximity of the project to Adelaide which negates the expenses associated with FIFO arrangements. If this is the case, then a reduced throughput plan should not see any significant increase in the production cost,.

Fourthly, it seems too coincidental for this epiphany to occur within a week of the granting of the conditional mining lease for Hillside. If this happens to be the only way the Board can navigate through the conditions, then so be it. Positive future cash flows from this project are preferable to none at all.

Now that the dust has settled following today's announcements, it is critical that the board delivers the lower throughput plan with minimal delay, to protect existing shareholders value by getting positive cash flows as early as possible.

Today's closing price Suggests Rex's value is just under $64M. Cash is ~$20M, suggesting the value of the reduced throughput Hillside operation, plus the expanded Hillside operation, plus any further extensions in mineable resources is less than $44M. Only time will confirm whether this is too low a value for a defined copper and gold reserve in a known copper producing province.