valuations

Andrewe, just read your valuation of UCL and thought I would pull the discussion out of that thread started by trade4profit.

If I was going to criticise your valuation it would be on the dilution assumptions however it is challenging to estimate the likely dilution here from here.

Assuming eventual success it certainly won't be anything like what trade4profit suggested - his post unfortunately betrayed a lot of inaccurate or out of date (i prefer not to use the term ignorant) assumptions about the project.

At present the company owns 25% of MZC under the original shareholders agreement and holds convertible notes for another 13%. Further expenditure approved and insured by the Ministry of Finance (Central Bank) would theoretically convert to 48% total maybe more.

At this point the path to production is via the staged approach utilising heap leaching in the first stage. The capital expenditure for that will be no more than
US$100 million. This is where the 'acid' question (pardon the pun) of dilution comes to the fore. ie how much will UCL have to dilute to meet its share of expenditure.

Let's make a starting assumption that capital will be raised on the basis of 70% debt:30% equity. This is a reasonable and very feasible scenario if the company's assurances of capital waiting on the sidelines are correct.

The next assumption needs to be what will be our ownership percentage going forward? Note the company has been assured by Imidro that our rights of ownership are not being challenged - I think trade4profit might not be aware of this, or of the nature of the dispute nor the stage of resolution it has reached. Anyway the minimum bottom line is the 25% original shareholding. It we were restricted to that 25% then the balance of our expenditure ie approximately US$10 million would have to be credited to the capex of the first stage.

The middle scenario would be going forward with the 38% approved so far with balance of expenditure, approx US $6.5 million being credit to the capex.

The high scenario might be 48% going forward and maybe US$4.5 million being credit to capex stage.
(Figures based on expenditure to date of US$14-15 million; $10 million being responsiblity of UCL/ITOK to earn 50% of project. Further assumption that we won't be allowed more than 50% of the project).

Ok now taking these 3 scenarios into action how much capital will UCL have to raise by equity on the 70:30 mix or US $100 million?

25% share, equity capital required = US$7.5mill (25% of $100million * 30% equity). However on the 25% scenario credit for expenditure = US $10million therefore UCL would go forward with a further $2.5 million credit ie no need to issue any equity therefore no dilution.

38% equity capital required = US $11.4 million. Credit =$6.5 million therefore equity raising = US $4.9 million to maintain 38%.

48% equity capital required = US $14.4 million. Credit = $4.5 million therefore US $9.9 million required to maintain 48% stake.

Ok now what level of dilution would the latter two represent? This of course depends on the share price at the time. I am going to be less conservative than I usually am and say that if it is clear the project is moving forward then the price of UCL will not be in the 2 cent range. So what is a reasonable price? Who knows??? So lets pick a few figures and be a bit on the conservative side. I am going to suggest 3 cents (as price Lundin bought in at), 7 cents as range Merrill's investors were comfortable buying at and 13 cents being spike area in Sep 2005 when things were going smoothly before Ahamadinejad's nonsense started. It is not impossible it could be higher but these will give us safe ranges.

To maintain 38% stake raising US $4.9 million or AUD 5.9 million at 82 cents:
3 cents = 196 million
7 cents = 84 million
13 cents = 45 million

To maintain 48% stake raising US 9.9 million or AUD 12 million at 82 cents:
3 cents = 400 million
7 cents = 171 million
13 cents = 92 million.

From all of that the two outer parameters are:
25% holding with no further dilution. Fully diluted existing roughly 1.3 billion shares.
48% holding with additional dilution of 400 million shares on top of fully diluted existing for a total of roughly 1.7 billion shares.

Plugging those into your other figures of total profit $540 million US p.a = AUD 658 million at 82 cents conversion. (Personally I think $3k for zinc is too high over that length of time and 82 cents is generous). I get following valuations for the 2 outside scenarios of:

25% share = earning 12.5 cents per share. PE of 5 = 62.5 cents per share price
48% share = earning 18.5 cents per share. PE of 5 = 92.5 cents per share price.

So yes I think your $1 per share price is reasonable on the assumption that we get the project up.