Hi again Franmore,
Wow, I thought my posts pushed the envelope of length and detail but you have outdone me, that was War and Peace. It seemed easiest to just run through and make my comments in blue through you original post for continuity. Hi 2ic, pointtaken, I apologise again.
I’llcarry on where I left off in my previous comment, which was about to explainwhy I believe that a capital raising of $200mil at sub 50c is “as good as offthe table”.
Why is this discussionimportant? 1)I feel that the share price has been heavily influenced by an ongoingassumption that a large on market capital raising is on the cards. Agreed
2)as soon as an investor can rationalise that a capital raising at sub 60c (oreven 60c) will in most likelihood never be the superior option for managementto pursue, the sooner it will become evident that a 60c share price is notsustainable. Agreed, assuming that rationalisation isrational.
Inmy opinion a market price of 85c-90c is where the price deserves to be giventhe current market information and state of play.Why 90c? because:
- if a takeover comes in and two or three parties fight over the asset (and it’s an asset worth fighting over, let’s keep in mind the industry’s supply/demand dynamics as forecast by ALL the research houses, which is why I suspect the big boys are playing it so coy) then the upside is $1.80-$2.20.
- If a low ball takeover happens then it's $1.20.
- If a partner is found at 50% discount to NPV then it’s $1.50+,
- If a fire sale deal needs to be done I simply can’t see ILU passing it up at 90c. All the above valuations and takeoverprices are predicated on Iluka or similar strategic player taking an interest. Ifsuch players baulk at paying SFX a JV or control premium then the upside disappearsand 85-90c price is a pipe dream. We all keep our fingers crossed for a TOthough obviously.
- And if it is trading at 90c (which to my mind is not just wishful thinking but a fair bet based on the upside downside scenario) and a capital raising is the only option then it can be sprung on the market by putting the stock into trading halt and pitching it at 70c, or maybe it will need to be 50c, and then the upside is 80c-$1 after that is finished, but before that can be completed then watch ILU come out to prevent that from happening because ILU won’t want this strategic asset secured in a competitor’s hands, and then it 90c.Sorry, that allsounds like wishful thinking. SFX is not trading at 90c now and will not tradeat 90c until the CR is off the table one way or another. Too late for SFX tospring a CR on the market at 70c now, that boat has sailed. The market clearly has no appetite to buy up SFX ahead of a possible large CR. Either a JV or takeover occurs, and the shares jump in value overnight, or they go to market for a CR discounted or at best around current share price levels. A bimodal outcome.
So why is a capital raising tofund the remaining capital requirements "off the table"?Mysimple answer is that a raising will simply be too dilutive to existingshareholders (including management) and therefore even the unattractivealternative of selling the asset at a “give away prices” (one which a buyercouldn't refuse) will generate a better outcome for existing shareholders, and thereforeif push comes to shove then that’s what will be pursued. Incidentally I don’tbelieve that this will need to be the case.SFX has an asset in a market which has steady to slightly increasing demand and a falling supply profile. This is the dilemma faced by juniors fortime immemorial. Swallow the bitter pill of an unfairly cheap and dilutive CRor postpone the project pending a takeover or better market conditions. Historically,management (who usually own free performance shares) choose the pragmatic routeof a cheap CR and get on with building the project. That said, I agree TB is agood strategic fit for Iluka and at a cheap enough price they will take the decisionout of SFX management’s hands. If Iluka does not movebefore a large, dilutive CR now that the project is essentially being offeredup for sale then probably never. Maybe the share price has to wallow low enoughlong enough for shareholders to be receptive to a lowball takeover offer as I’vepreviously postulated.
Inorder for this statement to make any sense we really need to rethink your valueproposition of Thunderbird and dilute any ideas that may have sunk in about theasset being marginal as a result of the recent capex increases and based on theupfront capital that an investor would need to invest to fund the project. I never said it was marginal, it has a high operating margin and goodfree cashflow return. I said that the extra capex and corp costs reduce theattractiveness for a JV partner to pay a lot to buy-in before also paying forthe mine development etc. I agree that the TB valuation is critical to thestructured sell-down process and what sort of deals can be done by SFX.
Solet’s move onto that topic.
Didthe announcements in October - December regarding changes in capex and othercapital requirements negatively impact the “real value” of the project?
No,I don’t believe they did, why?
1)the capex increase due to the owner operated infrastructure decision willresult in savings of $7,500,000.This is equates to an NPV saving of about $114mil (assuming a 2% inflation on the annual figure of $7,500,000), or $90mil if the savings figure is not adjusted for inflation. DFS used all ‘uninflated’ inputs/outputs,you can’t selectively introduce inflation now. You say $90M I said $65M NPV savingsfor extra $65M debt capex, which carries interest. I called it a wash but Iagree it is probably net positive some $20M of NPV to the DFS. Not a big deal.
2)the capex increases of stage 1 and 2 which equate to an estimated $74mil in mymodel will have a negative effect on the company value, however as detailedbelow the sensitivity of the “real value” of a long mine life project is nothighly sensitive to capex increases in the same way as that of a short ormedium project is (this comes back to the point of shifting away from lookingthrough the NPV looking glass). I get $83M givenstage 2 spend starts 2023 (4 years) but lets split the diff and agree $80M hitto the NPV from capex increase. However, putting aside the appropriateness of anNPV valuation for now, no getting around the fact DFS decreases by $80M NPVbecause of new higher capex. It’s a DFS, not a magic pudding.
3)capital requirement to fund the company through the 1.5-2 years of construction.These cost were always bound to be there, they are not a new cost and apply to any entity which is bringing into production a large project which requires construction.This has no negative effect on the value of the project or on the NPV.The Bridge St analyst was surprised and thought it “excessive”. Maybe itshould have been flagged earlier by the company. I do understand some workingcapital and corp finance costs are required, but I never saw mention of it inone earlier presentation. It’s not surprising that investors were taken abackby the requirement of an extra $141M of equity required on top of the increasedcapex requirement. This doesn’t affect the NPV because workingcapital and corporate costs are not part of the DFS calculation. That does notmean these costs are not real, important or affect the project’s value. Forexample, 2 projects with same capex, same $100M NPV, same IRR etc but onerequires extra $150M in working capital before operating revenue wipes it’s ownface, the other requires only $1M (none of which is repaid in the DFS). What projectis more valuable to an investor do you think? More to the point, for a junior withoutany money it certainly cares about all the extra funds it needs to raise forworking capital as do the shareholders being diluted to do it.
4)capital guarantees required by Taurus. This is a contingency which given an EPCcontract is in place for 80% of the stage 1 construction, which has recentlybeen revised to give satisfaction to the EPC contractor,should not be assumed to be a capex requirement and has no effect on the NPV value or real value of the project. On the contrary, capex slippage during a large mine project build inWA during a min resources boom should be expected, a surprise if it doesn’t.The capex contingency is just that and is up for grabs by the EPC contractorwith over-run cost increase claims until the job is finished. Again however, whatmatters right now is that SFX needs to raise this extra money with extra dilutionbefore we find out if the build comes in on budget. What does Taurus know to demanda higher than expected capital cost over-run facility?
IS THUNDERBIRD MARGINAL?Ifwe look at your assessment tabled on March 3rd it’s understandable thatinvestors may have started to question whether optimism towards an investmentin SFX is still valid (on the basis that the asset is worth a lot more to aCorporate than current prices). I stand by thefact that capex increases and larger than expected working capital, corp costsreduce the attractiveness of TB as an investment. It certainly reduces theability of a partner to pay overs to SFX for the right to pay higher capex fora lower NPV return (strategic value aside for now). That is just common sense.If the capex doubled maybe the project becomes marginal, if capex trebles it dies.Surely one cannot keep move out along this increasing cost curve withoutreducing the valuation attractiveness of the project?
Ididn’t like the assessment of the project value in that post because I thoughtit was inappropriate on several counts, primarily because it uses the NPV asthe main benchmark of value, and then compounding that issue proceeds to adjustthe NPV by increases in capex and other capital requirements in a way which Ididn’t agree with. Like it or lump it Franmore, allcompanies use NPV to measure their feasibility studies with and compareprojects against each other for a reason. NPV is not perfect but it’s still very useful and popular for a reason.
Just for the sake of NPV adjustments(although I’m not condoning NPV as a representation of real value) here is whatI put forward:
Let me know which parts you don’t like and we’ll go from there. You know I willlol
NPV adjustment
2017 BFS NPV 8 620mil
increases in capex (stage 1) 50mil -49mil $1m?…splitting hairs really
increases in capex (stage 2) 45mil -25milI get $33M ($12M reduction) on 4 years stage2 spend delay. Let’s call it -$30M
owner operator infrastructure 90-65mil+25milI’ll wave that through to be friendly
Taurus overrun contingency 50mil0milLet’scall it -$25M halfway. To assume no cost over-run in this environment is moreunreasonable than to say the entire overrun will be spent.
increased in pricing compared+62mil with 2017 BFS.
Av 14% increase assumed 10%increase in NPV
Whoa, slow downthere. I was always and ever only talking about what the capex changes did tothe 2017 DFS, now you want a new price deck to add $62m NPV? I was going totalk about pricing assumptions in another post unrelated to our discussion asthings have it but you cannot change a 42 year DFS price deck after 18 monthsto suit your argument now. Yes, prices have risen this last 18 months since theDFS was released but largely due to Richards Bay strikes and disruption. I amhappy to debate the long-term min sand prices but for our debate it’s not fairand it’s not right to take a recent price spike and add it into 42 years longrun.
adjusted BFS NPV8 633mil
I see it as$620M, -49, -33, -25, +25, (no pricing NPV increase) for final adjusted BFS of$541M. Readers can add orsubtract from that figure based on our disagreement of what the cost over-runwill eventually be (I went with half what is put aside). Pricing increases arealso a personal view, but only muddy the waters of your re-working of myprevious NPV analysis. If you go there then what about the very substantial dieselcosts in the DFS for example? Long term oil price expectations have jumpedsubstantially from that of mid 2017, How many other opex costs have also risen asWA comes out of the 2016/17 recession and into a 2019 boom. I’m sure you get mypoint.
exploration assets+40mil(highly debatable, happy to have thatdebate.)
corporate costs (build) -89mil -79mil (please stop deflating costs that have tobe funded from Day 1. Try telling the SFX shareholders that $89M that needs raisingnext month is really only worth $79M)
corporate cost (build) tax credits +26.7mil+23mil (??Youare flipping between project level analysis (NPV calc) and company level analysisagain)
corporate cost (LOM) -100mil (assumingit already includes tax credits)
NPV 8 (adjusted for corporateasset/liabilities) 579mil
I get $541M +40,-89, +23, -100 for final adjusted $415M NPV using your corp asset/liabilitynumbers but no re-pricing of product.
*note I added in the exploration assetsbecause I feel that a buyer will want to include those assets in any deal done.Whatis the NPV of a too deep Night Train discounted out 42 years to the end of TB?Not $40M I venture or anywhere near it. I’ll leave it for now but I did have anotherlook at the exploration ‘success’ to date and I only see marginal value so far.
Capital requirements
Stage 1 463mil
Corporate costs 89mil
Taurus capital guarantee 50mil
Taurus debt funding -247mil
$0.65 capital raising-20mil No sorry. SFX only raised $16.5Min Dec qtr, had already spent that and only had $13m cash left at 31 Dec. Expectedspend of $7.5 for the march qtr, they will be almost out of cash by the timethe finance equity funding is put together. You may say some of this is pre-workscapex which may be true, or it was all spent on completing the engineeringreview and EPC contract design work that was only 30% complete in November.Regardless, I will counter that SFX needs a corporate cash buffer separate toproject cash buffer, so any actual capex deduction from this spend needs to betopped up in any case.
NAIF Funding-95mil
2017 BFS contingency-24mil This is controversialbut I’m going to say no also. SFX had plenty of opportunity to transfer thiscontingency out of the BFS and reduce the reported capex figure during thewhole capex increase confession period but pointedly chose not to. Slides andslides went into explaining the capex increases, where they came from, wherethey are going to and that a large amount of money needed to go into a Tauruscapital guarantee fund. So why didn’t management simply state that the capexreduced by $24M because the contingency component was moved across to the Taurus‘contingency’ guarantee fund? Why double count such very large contingencyfigure twice if that $24M was redundant? The cynic in me says that the new,higher capex figure took account of that contingency in the re-stating of totalfunding requirements. Unless you are privy to company info the market is notthere has been no suggestion from the company that the $24M is surplus and redundantcontingency to the Tuarus capital contingency. We have to assume that it needsto be raised and held for the mine build, whether it is still a contingency orit was quietly appropriated to cover for other capex increases.
Net capital required stage1 216mil
I think it morereasonable to take the net capital required form the recent March SFX marketpresentation (slide 22). $463M capex stage 1, plus $141M incl contingenies,less $342M debt from Taurus and NAIF, which equals $262M. Lets reduce that by$12M pre-start capex spend, leave some cash in the corporate kitty and say the equityraise needs to be $250M.
One on the biggest issues I had with your assessment was the section whichlooks at the return on investment for JVCo’s buy-in.With the stroke of a key your numbers makes it seem like the investment potential is “terrible”. No wonder we are still thinking a deal will not get done (and therefore a capital raising is a real possibility), who on earth would want to stick their money into this project with such ordinary “terrible” returns? Indeed.
In actuality, if a party buys in at a 50% discount to post tax NPV8 they aregetting a fully compounded 14.6% (fully franked) return (really, you’regoing to gross up the NPV for franking credits lol. Otherwise, correction, 8%grossed up for franking credits is 11.4% not 14.6??) over the enormous timeframe of 42 years.IRR’s, just like NPV are heavily influenced by the life of the project and getting a IRR of 25%+ for that period of time is not at all common when buying a fully developed “shovel ready” project.
Even buying in at NPV is arguably not abad investment, that’s essentially what an NPV is suggesting, that this is thepresent value you should pay for the asset.In this particular case the only cost of getting almost double the 8% (fully franked) return is having to pay an upfront capex component (which incidentally is internally fully funded, essentially meaning it will cost the buyer no more than the investment risk and the opportunity cost of not being able to use the secured part of your balance sheet for other investment purposes). NPV analysis discountsthe risk, high NPV for more risky projects, such that different investmentoptions can be compared. 8% return might be appropriate for the low risk of aDFS in Tier 1 jurisdiction etc but that doesn’t in any way mean investors arehappy to take on the project risk, build risk, commodity risk, etc for only an8% pa return. Granted though that 8% after tax is not a bad start for projectsuch as TB. This discussion is a pretty subjective smoke and mirrors attempt tosay the buyer is getting a bargain. I’m happy to admit that NPV and IRR allhave limitations, but the reality is whoever buys into this project still hasto stump up their share of equity funding is up to writing a very big checkoverall. You can’t debate NPV calculations and then start talking about the “upfrontcapex being internally funded”, or “secured part of your balance sheet”. NPVanalysis is funding agnostic, sure companies with strong lazy balance sheetmakes finance easier but that means little to SFX and nothing to “un-geared” NPVor IRR analysis. My assessment was made analysing changes to the NPV withsubsequent observations on strategic value etc.
This equates to a pre-tax IRR of over 20% for a 42 year LOM. Clearlyon my figures the IRR is sub-20%. Lets keep it simple. The 2017 DFS before acirca $80M increase in capex reported a 25% IRR on the pre-tax NPV of$676M. There is no way the post-tax IRR today can be above 20% after increasingthe investment capex and decreasing the NPV accordingly then making deductionsfor tax. Only a completely new DFS with a much higher price deck could pull offthat trick, which you have not considered just cherry picked.
let’s work off a 33.33% sale as you did.
NPV valuation (33.33% of 579mil) $193mil
Our figures have obviouslyparted company some time ago. I was and still am working on a new NPV circa$420M because I have not selectively increased the product prices over 42 yearswhile leaving costs unchanged, nor included or excluded a number of other figuresdiscussed above. The company made no mention of reduced opex outside of theNAIF infrastructure, just large capex increases which I worked with. I’ll justjump down this segment and comment on your valuation workings and implications.
apply buy-in discount of 50% $96.5mil
purchase cost $96.5mil
stage 1 funding requirements $154.5mil
(33.33% of 463mil)
corporate costs(33.33% 89mil) $29.6mil
Taurus contingency $16.6mil
TOTAL capex contribution $200.7mil
(JVCo will debt fund their capexrequirement using their own balance sheet as collateral. The above capitalrequirement of $200.7mil are included in the adjusted NPV calculation and havetherefore been accounted for in the negative cash flow calculations in the NPVmodel.The loans are essentially self funded and will be paid down as specified in the NPV model.)
JVCo
Purchase cost $96.5mil
Debt Funding $200.7mil
TOTAL Capital invested $297.2mil
NPV value $193mil
debt cashflows (loan repayments) $200.7mil
NPV return $393.7mil
My originalassessment which you dislike so much needs to be kept in perspective. It was alook at answering why the share price was falling into the structured saleprocess and what it meant. The obvious answer to the share price sell off wasthat no good offers from JV buyers were forth coming, otherwise insiders wouldbe buying up shares not selling down. My assessment of the NPV implications ofthe capex blowout, the apparently surprisingly high working capital and corporatecosts, was to explain why a good offer might not be forth coming despite highexpectations. Factually I believe my analysis was correct as per the NPVadjustments of higher capex etc. The conclusion, logically, was that theproject was financially less attractive with the new higher costs, and thereforepotential buyers would not offer as much to buy-in as they might have pre cost increases.
Discussions thatuse new 42 year pricing inputs, or that replace NPV analysis with moresubjective balance sheet driven benefits, strategic valuations etc are all fineand valid things to consider, just not in criticism of my clearly 2017 DFS NPV adjustmentsand analysis. Any factual errors I made are factual errors for what they wereworth. Let’s agree that any buyer will ultimately use their own set of valuationcriteria including strategic considerations. This taken from a recent Iluka presentationslide “Industry leadership through disciplined approach to capital allocationand sustainable product pricing”. Disciplined approach to capital allocation includesnot overpaying for an asset and keeping in mind what the financial return isfrom an asset investment perspective. It is an immutable fact that TB became financiallya lower returning investment once the capex increased over 15% from the DFS,all things being equal, which was my point.
Frankly theinvestment case looked poor, terrible may have been a stretch, when oneconsiders what a buyer has to stump up to SFX if only looking at the financialrisk/return equation. When I say poor I am ranking the NPV against otherprojects with am IRR 25% or higher, with NPV’s more than the capex, of whichmany good projects do. Iluka would have used NPV analysis to consider SierraRutile before deciding on a takeover for a whole range of reasons. It’s simplyhow corporates operate as you would know. However, I also waxed lyrical aboutthe strategic value of TB to Iluka. There are other compelling reasons somewould want to invest in TB and NPV analysis is not a strategic tool. That said,strategic value is only of value to a few industry players for whom ownership providesa value beyond merely a financial return.
We both agree thatmuch rides on Iluka flying in with a takeover offer. If in Iluka’s wisdom they don’tsee compelling financial or strategic value and let this structured sale opportunitypass, what will that do for the share price? If the most obvious buyer with themost to gain strategically won’t stump up north of $1B for SFX and TB then exactlywho else will? What signal does it send other would be buyers or investors if theynegotiate with SFX management if Iluka hasn’t bothered showing up? Not saying Idon’t think Iluka will show up in some form but I don’t think it’s the givenyou think, neither is it a given that someone else will come to the party either.The share price action, for what it’s worth, certainly doesn’t scream “greatoffers are on the table, just going through due-diligence now”. If Iluka isgoing to make a takeover play it needs to be before a binding JV sale or investmentor CR is done so we won’t have to wait that long to find out. Another monthaccording to Blue Ocean’s McIntyre.
Thunderbird is not a project that can bemeaningfully be valued by using on NPV’s . This is primarily because of thelong life and the way that earnings in years 20+ are not given appropriateweighting. In 10 years time the project will have an NPV of over $1billion andin 10 years after that it will still have an NPV of over 1 billion.
It also has a much greater strategic value, not only to a player like ILU, butalso to any company which ends up with this cashflow positive asset, it couldbe viewed as a company maker.
Thunderbird is a project that can be a stand-alone underpinning asset for agrowing resource company, it can easily be the company’s base asset onto whichmore and more earnings can be added using it’s cashflow.BHP started somewhere, Rio started somewhere, and once a company gets established it’s then on the lookout for more and more investments using its positive cashflow and balance sheet to grow shareholder’s return on investment.
What I mentioned in the previousparagraph is assuming that the asset stays as a stand-alone company, however ifyou add this sort of asset into a company such as ILU which already has astrong business with a balance sheet to support the operation then thestrategic value is even greater.
On top of that, if we look at the value of this strategic asset for a companylike Iluka whose earnings profile is currently vulnerable due to existingassets being expended then the acquisition of supporting assets such as TB ismuch more than just a new income stream and would instead serve as being anunderpinning asset for the whole company structure and setting it in play foranother 20+ years of growth.
INCREASING RESOURCE BEYOND 42 YEARS
Another important point about using the NPV number as a benchmark for value isthat it underestimates that there will be increases in the size of the resourceas time and needs progresses - it’s quite obvious that the tenements containmore high grade mineral sands which sit outside of the current resource. Butfor now the company need not put money into proofing up a resource beyond 42years, it can be done, but what would it prove? what would it add? it is nowself evident that the tenements aremineral sands rich and that there will be plenty of addition stock feed to satisfy a longer mine life and/or support higher levels of production. Sorry, it is not at all self-evident that exploration to date has added anything of meaningful value to SFX. One might argue that the drilling results have actually taken exploration blue sky off the table, and as an ex-mineral sands geologist I ‘m in a position to make that argument.
HIGHER LEVELS OF PRODUCTION
Speaking of higher levels of production, let’s also not under appreciate thatwith more available capital (as would be the case with a company with a solidbalance sheet), the project can be easily redesigned to condense the revenueswhich are currently spread over 42 years into half that time, this will have awhopping effect on the NPV numbers.
What's on the table in the NPV calculations is what is determined to be theoptimal mix in order to meet certain requirements ie, a small resource companygetting a project into production optimally, however it is no way indicative ofthe real worth of the asset when it comes to selling the project.
To further demonstrate the short comings of thinking that an NPV numberrepresents the value of an asset regardless of its profile (especially one withhigh positive cash flows, early capex payoff, and a long life) then considerthis:what will the NPV of Thunderbird be after 6 years of production when most of stage 1 capex has been repaid from positive cashflows and there is no longer a capex component to be paid off from the future cashflows?
answer: the project will then have a NPV of over $1.2 billion dollars 6 years after production starts, and in ten years from then it will probably still have an NPV of over $1.2 billion. Many shorter life projects after 10 years have an NPV which is a fraction of what it was in year 1.
NPV valuations are much more useful for valuing a 4 or 8 or even 15 year minelife projects, however when it comes to a monster like Thunderbird you can'tstick to that model and just add and subtract increases in capex.
So, when you say that you note the point that NPV is not everything, I wouldhope that people start to realise it’s actually not very much at all when itcomes to the sort of sale process which is happening at the moment. It’s a big beastof a project no argument from me there. It’s why I invested in SFX, the projectwill get built and it will have meaningful production in a world context.
HOW A DEAL WILL BE DONE
Obviously each player will want to get the best deal they can, meaning payingthe lowest price possible.However this is a real asset and at the end of the day there is real investment merit in buying the project or at least becoming a cornerstone partner which enables the project to become a foundational asset in a growing resource company.And the real likelihood is that there is a diverse group of international and national investors looking at this investment, entities ranging from sovereign funds, specialty funds, industry majors, and possibly even financing companies.There will be those who want it lock stock and barrel to add to existing operations, those who see the value in buying into a strong cash flow positive asset, and those simply looking to get a return on idle money which needs to be invested. There will be groups redesigning the models, redesigning the plant just to extract what is most valuable to them. Don’t think anyone will be re-inventing the wheel here.Enough time to review the DFS and independent experts report and run differentiterations based on changing variables in the NPV model maybe.
All of them will know what the asset is worth to them and they will need to becompetitive if they are going to win the prize.The fact is that if you offer someone $1 for 50c its very attractive, so much so that someone else will probably jump in and offer 60c in order to get it, and then a counter of 70c and so on until a line is drawn. Doubt it will be an auction style sale. Best and final I’d say, withsome room for wrangling over conditions.
These companies will not be relying on the companies NPV valuation, they willbe remodelling the project in order for them to suit their requirements, to getwhatever components are most valuable for them, some want the zircon, some wantfeedstock, some want LTR others just want to maintain their market control, andothers just want a cash return on dollars invested. Going too far now,offtake is already signed away for some time at least, the mine is what it isand what comes out comes out.
SFX is one of the few companies whereyou’ll find management with such significant skin in the game.They know what the project is worth, their consultants who have put the project models together and have done all the metallurgy and design know what the project is worth, and in the end I believe we will see some serious action over who ends up owning this asset and the result will be based on the real value of the asset - an asset with strong positive cash flows and 42 year + life. Sure, they want the highest pricepossible but largely irrelevant at this stage. The die is cast.
What I’ve written above is in part why I think a $200mil+ placement at sub 60cis in practical terms, off the table.
I simply can’t comprehend that those who actually know what a project of thissize and quality represents can for more than a moment consider not being ableto hand it over in an alternate form which would see existing shareholdersbetter off than having to resort to a $200mil raising at @ 50c. Nobody,especially management want to go the CR route. All depends on a decent JV offer,the price of that offer, or a CR is the only alternative.
Don’t lose track of the likelihood that someone like ILU would acquire theproject using scrip, they wouldn’t even have to fork out cash for theacquisition, and the additional capex requirement would be debt funded usingtheir existing balance sheet. I like it and I that is what I would expectif Iluka makes a move. Especially given how strongly their shares have bouncedsince Xmas. Iluka is still the great white hope for SFX best outcome.
SFX management have a lot to gain by selling to a buyer without the need todilute the existing capital structure.
So given that’s the case contemplate,and let’s be brutal,Iluka being offered the company for 90c a share through a scrip bid, can you see that getting passed up? that’s less than $250mil for the asset, an asset that will underpin their business for the next 20+ years and will have a project NPV of circa $1billion+ for the foreseeable future after the capex is repaid. I can see a major paying twice that figure if they found themselves in a competitive bid scenario, maybe more, and frankly I don’t think 90c is at all realistic, it just wouldn’t fly, I think low end would be $1.20 (and that would surprise me) if it came to a takeover scenario.But even if it turned out to be 90c which in my opinion would be too much of a steal to walk away from, that’s still a 50% return from current levels. One of mytheories was that the SFX share price had to stay lower for longer so thatmanagement could sell a lower priced Iluka takeover offer to shareholders conditionedover the last few years to be expecting something in the $2+ range. There isalways a chance Iluka just don’t see the project, it’s operational risks, or itsfinancial returns as worthwhile. Not saying they don’t but nothing is certain.
SO IS A CAPITAL RAISING CURRENTLY CONTEMPLATED OR HAPPENING?
You wouldn’t see 50,000 shares sitting on the bid at 61c for any extendedperiod of time as we saw on Friday, if it was.
SO HAVE NEGOTIATIONS FAILED?
I don’t even think they’ve begun.We’re talking about a big project and a serious commitment, a lot of the investors that UBS will be pitching to will need to do their due diligence, will need to re-model the numbers and maybe even the plant, even though the data room has been open for a year or more, many wouldn’t have really got serious until this process was commenced. I’m sure that SFX external consultants will be having meetings with any party who is really interested, it would be part of the due diligence, and from what I gather once the various party’s speak with the consultants there will be no denying the robustness of the project.All these things take time, and in many cases I suspect will have to be fairly tailored negotiations, that’s why we haven’t been given a time frame. A lot of supposition that doesn’t really makesense. What does make sense in a structured ‘best and final bid’ process isthat during the due-diligence bum sniffing exercise every potential bidderplays their cards close to their chest. Ie until the very end nobody will knowwhat/if anyone is making an offer. However, that does not preclude a takeoveroffer happening anytime. As they say in the real estate game “unless sold priorto auction” haha.
SO WHY IS IT ALL SO QUIET?
I feel it’s because there is a process to this sort of thing, there isprotocol.
The appointment was made on the 14th of January, that’s just over two monthsago, I’d be surprised if any formal figures have even emerged yet.Many interested parties will be staying as silent as possible, they would have needed to take a seat at the table, it’s almost certain that by now all parties who have any interest would have needed to sign up to the process.Even if simply to tick off that they have done their job for shareholders any company in the industry would have been compelled to sign up, so I suspect that cards haven’t even started being put on the table, and SFX management and the corporate advisers themselves still don’t have any meaningful indications. See above, agree.
We all know how things work, once something even mildly concrete presents, then the share price will move accordingly, and having said that we may be surprised to find that an announcement hits us out of left field.
I really don’t think that its all that sensible to read a lack of news as well as a lack of share price movement as bad news.After all SFX are probably just as bound to non-disclosure as those parties who sign up to the process.I wouldn’t imagine that they couldn’t really put out an announcement saying that 18 parties have signed up to the formal process and so on. There is no problem updating the market with what stagethe sale process is at or how many parties are currently involved I would havethought. Hardly confidential news so long as names aren’t named. That said, ifthere was only a couple of bidders better not say how many were sniffingaround. I’ve seen a few companies talk about how the data room process was goingetc during similar structured sales.
Based on what I’ve written above it’s fair to say that I don’t suspect that theshare price will determine at what price a deal gets done, but rather it willbe determined by the assets real value and hopefully in a competitive tensionenvironment, which I think is realistic. Having said this the share priceis not entirely irrelevant, it will be looked at as a benchmark of what theshareholders have as an exit option, and therefore thinly traded is good and arising price is also not going to hurt. Agreed
The most dangerous thing about a lowshare price (which doesn’t represent value) is that it leaves the door open fora party to circumvent the formal process and launch a hostile takeover or bearhug, and then if no other suitors emerge the bid will in part be benchmarkedagainst the last 30 days trading price. Agreed, and it softens up holders toaccept a lower price
So, in closing, I believe the shares are trading at 60c because of the remnantsof sellers who had had enough and were afraid of being hit with a large capitalraising, as I’ve explained above I just can’t seea $200+mil raising eventuating because it will dilute existing holders down far too much to make it the optimal route.
I’m just a very long term share holder and my view on this asset remains strong, I recently looked at the price as a great opportunity and still do, even if the stock very gradually drifted up to 90c on very thin volume and it was clear that a corporate transaction was still unknown I personally wouldn’t think of selling given the upside under certain scenarios coupled with the limited downside in my opinion.
I hope that what I write gives people a perspective that becomes part of their mix of assessing how to play the game. Appreciated, thanks
Thanks for hearing me out.I don’t intend any of the above to be considered as investment advice, I am just highlighting how I see things at the moment.I don’t know anything with certainty, so please take everything here as just a relative opinion, however, having said that I can assure you that everything I write is for no other purpose than sharing my honest opinions of how I currently see things.
I will write another post later reviewing my TA and FA opinion after a few weeks have passed and some interesting points you have raised. In summary, you have clearly taken the glass half full approach to inputs into NPV analysis and your general bullishness that a 60c CR is definitely off the table. Maybe more than glass half full, you only choose toshift inputs and outputs in the project's favour throughout to the point that it is no longer a 2017 DFS post capex increase comparison. IMO my NPV analysis is and remains factually and strictly is more correct than your analysis. Your problem seems to be more that I was too jaundiced in pointing out the NPV reduction as being more meaningful than you believe it is. On this point I agree that the NPV reduction is not the be all and end all, although it is meaningful and insightful for the consideration of what a capex blowout means for a project. One simply can't waive away a $100M capex increase (excluding NAIF $65M capex increase) as insignificant when the NPV is circa $500M. Also, NAIF is still debt that requires repayment, the gearing levels are rising strongly from that envision in the DFS.
Obviously SFX bulls are welcome and expected to gild the lilly as it were and see only upside and screaming value. Myself, and I think the market also, do not see a large CR at 60c as "off the table" and nothing you wrote proves it is. Clearly the project is a good one, with a positive NPV and there is great strategic value to a few players. There is no strategic value to simply financial investors, to non industry players, non-offtake players it is simply a long term investment. The most illuminating point you raised IMO was that the structured sale process is quite possibly an "end date' affair that might preclude early indicative offers by interested parties. If this is the case that would explain why there are no insider's buying up on good offers, or selling on poor offers. That is, no offers from buyers keeping cards close to their chest means nobody has any real idea what offers and how good they are will be made yet. That means the recent share price action would simply be related to general sellers greater than buyers, of holders who want out for other reasons greater than buyers who want in.
Thanks again for your thoughts. Cheers
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