Why is the SFX share price so divergent from theoretical value?, page-8

You're welcome Mad Max.

Below is a chart from the DFS which shows the ramp up assumptions made in the DFS. Bruce told us that KMS will not be setting production targets for at least the first four quarters due to the fact that the mine is in ramp up stage during that time. I believe that KMS have chosen to not set production targets to give them a buffer from market expectations in the event that there is a bottleneck or ramp up delay somewhere in the first 4 quarters. Bruce did however refer to the below chart which as I mentioned was used in the DFS as part of the modelling, I believe he was happy to use that as a benchmark because it's probably a conservative ramp up profile and in reality it's quite possible that we can see the mine in full production quicker than this.



However the main point here is that being in full production is not relevant to determining a theoretical value of the earnings streams that will come over the next 4 quarters or over the next 36 years. The DFS makes assumptions of each quarters revenues and costs and it includes this gradual production ramp up in the overall NPV calculations. The relevant point as far as valuation goes is whether the earnings are ahead or below the forecasts, and the overall value change is likely to be relatively immaterial overall. Where it becomes mch more material is when their is a working capital constraint and a delay of 1 or two quarters may mean the need to raise more equity, which when done at cheap sp valuations can lead to excessive dilution and an eroding of existing shareholder value. KMS has $60mil of working capital and cost overruns left in its budget.

In other words, if the theoretical forecast NPV today is $550mil (as is shown in the dividends to SFX NPV chart) and is based on:
forecast production for Q4CY2023 at 0 tons,
forecast production for Q1CY2024 at 130,000 tons,
forecast production for Q2CY2024 at 148,000 tons,
forecast production for Q3CY2024 art 184,000 tons etc

then:
- if the actual production is above the forecast figures (forecast figures are used in the DFS NPV and roll into the dividend to SFX NPV) then the forecast dividend NPV today calculations (ie the $550mil) will have underestimated the value of the earnings stream and given a lower dividend NPV than should be the case.
- if the actual production isin-line with the forecast figures then the forecast dividend NPV today (ie $550mil) will have accurately predicted the value of the earnings stream and given an accurate dividend NPV; and
- if the actual production is below the forecasts figures then the forecast NPV today (ie, $550mil) will have overestimated the value of the earnings stream and given a higher dividend NPV than should be the case.

This is going to be one of the main points of the next post which focusses on looking at what a reasonable theoretical value for SFX is given the current state of the future earnings stream.

I hope this helps.