why stone are buying into cre

The discussion on this forum completely misses the point as to why Stone are likely investing in Crescent. All of the discussion is about the possible short term benefits and valuations, whereas when you consider the medium term much greater value and sense emerges.

Stone want a chunk of CRE because it is an excellent investment. I assume that they have done their numbers and understand that an efficiently operating CRE is worth many times more than what FML are currently paying.

I believe that they expect Focus to turn CRE around with that FML will have pulled off a massive bargain. Stones goal is to go along for a low risk high reward ride play.

To see why this is the case we must assume that the original CRE business plan made economic sense. They planned to make money out of the gold production margin. The business is inherently viable, especially with todays elevated gold prices. We must also acknowledge that events beyond their control (weather) took CRE off the track to financial success and down the road to ruin. Focus,s brilliance has been to identify this, to exploit CREs financial vulnerability and to believe that they can get CRE back on the road to financial profitability.

CRE aims to produce 42k ounces of gold in the current half and I assume 50k in the second half. At a POG of $1700, production of 92k ounces will generate revenues for CRE of $156m i nteh current year. Assuming production costs come in around $1000/oz then CRE will make a margin of $64m. This will ensure that they are cash flow positive for the year and may even generate a profit of $20m. If they can get their act together for four quarters together, and I cannot see why they will not, financially they will have been transformed.

FML are also getting their share of up to 3million ounces of gold in the ground.

As at the end of June 2010 CRE had accumulated losses of $173m. In the six months to December they incurred losses of $12m and no doubt a similar figure in the half year to June 2011. Their accumulated losses to the end of June 2011 look like being circa $200m. This is a massive tax asset for whoever has the rights to it. My understanding is that while Stone hold over 10% of CRE, only CRE profits can be written off against it. If CRE make $20m profit a year going forward, they will pay no tax for a decade. This is good for FML but not as good as if they could also write their other profits off against it. How much should FML be prepared to pay for this asset?

What would be a fair price for all of these assets? I value CRE as the sum of:
1. Annual profits of $20m. Apply a factor of 10 to get $200m
2. Resources of 3m ounces of gold. Apply a valuation of $50/ounce to get $150m
3. Accumulated losses of $200m. Apply the tax rate of 30% to get $60m
4. Ignore any upside that may come from business improvements and efficiencies
That?s a total of $410m or just under 40cents per CRE share.

And what are FML paying? About 6 cents in script!!!! Potentially FML will pay out a total of $70m, all of it by issuing their own shares and none of it as cash. Bargain, bargain, bargain!!!!

Stone are currently paying on market up to 7cents for each CRE share. Stone, although paying a little more, are essentially getting the same bargain buy as FML.

The idea that Stone have nothing to gain from having 10 million bucks tied up in an unlisted company seems to me to be patiently wrong. Stone have little to loose and a lot to gain as the CRE turnaround story unfolds. As the fruits of FMLs efforts to turn CRE around materialise so too will the value of Stones shareholding. As this value mounts so too will the incentive for FML to buy them out. What will FML ultimately pay? My guess is that at the end of the day FML pay will pay Stone a fair price for their shares ? what they are really worth ? about 41cents.

The above is meerly a view, not financial advice.

Cheers

K