Roundtable Discussion; The Future of Mineral Sands. Watch the video here.
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Ta - its a very civil and quiet board here and always a good place for a proper debate on matters of substance rather than prices to trade! We have so few trades and so little free float we couldn't cope with volume.
The dynamic here is clearly how IOG major stakeholders will view this. I suspect the LOG administrators in particular with 30% will be having kittens with this. The higher risk profile I think means they could not proceed at too high a price - RRE offered them 20p - they are here for 1 year at most not I feel beyond that and more shares in the market allocated with a discount premium mean harder to shift their own paper. Hence CalE come into play I feel. I do wonder if they could yet come in from the side with an offer and cut IOG in using IOG as the vehicle or even take the LOG holdings.
IOG share price is remarkably stable and Deltic has drifted back this week - so no sign of anything sudden.
Mole, it's always good to discuss. You say 2.5p I say 3.5p. In the end I expect as you say it will come in somewhere in the middle. Hopefully bot long to find out either way.
I'm sure IOG and DELT will have a prosperous future together or apart. I trust I will profit from both in time.
Mole - i think you are correctly observing that the risks ( ie uncertainties) surrounding DELT are relatively higher than IOG. The range of outcomes for IOG is narrower and does not include any downsides due to inability to develop/monetise assets as IOG has mitigated all of these in getting to where it is. On the other hand, DELT may have upside asset value scenarios, but it also has much larger downside risks. The coarse broker NAVs don't really capture these fully as analysts don't generally use Monte Carlo models to look at the full range of possible outcomes - they use rule of thumb $/bbloe as a proxy. This can also be misleading when trying to value a company (with associated balance sheet constraints and tax issues) as opposed to valuing a group of assets.
Ok just in between work tasks. Plug some of your numbers into my model (reduce IOG value and inflate DELT) and you get 1 for 4 swap - premium of £38m above current share price. 3.45p a share. 46.25% Delt and 53.75% IOG of new market capital.
That's way too high in my opinion in the risky environment we are now in - the puzzle remains if its so good at DELT why is it trading so far below value. 85% below the risk NAV and thats after the bump increase of the offer.
Even at that price £56 m - CalE could just buy the lot anyway.
We probably won't agree - I see this at nearer 2.5p - you think 3.5p. That's why its a market and why I have a model to test the sensitivity here. A middle would be 3p.
Below is the broker notes I used.
IOG
The latest Arden report on IOG released at the time of the recent license awards had a NAV of £130m / 27p per share for IOG, commenting:
"No change to forecasts or valuation. We have not yet added the new awarded fields into our NAV."
Given the early stage of development of the new licenses I do not anticipate the IOG NAV moving markedly on these additions.
DELT
The latest Allenby report on DELT released at the same time as the IOG Arden report and taking in account the upragdes on Sellene had a risked NAV of £192m / 13.7p per share, commenting:
"We have upgraded and revised our presentation of Deltic’s risked valuation to focus on the three most advanced projects. For these we now show the valuations using the same valuation quotient of $5/boe as in the success case. For the other earlier stage projects, we have used $2/boe. The risked valuation across the portfolio for Deltic is now £192m or 13.7p/share. This compares with 9.8p/share previously. Our success case valuation for the three most advanced projects remains unchanged at 17.5p/share. The risked valuation on this basis is £120m or 8.5p/share. The share price reflects a very cautious view of valuation and stands at a c. 90% discount to our risked estimates. ."
Personally I think the upgraded valuation quotient on Pensicola, Sellene and Dewar from $2.5 to $5 per barrel is premature. Maintiang the Previous $2.5 valuation quotient for Pensicola, Sellene and Dewar gives these 3 a NAV of £60m. With the less developed assets accounting for £72m combined gives to a total NAV of £132m or 9.4p per share.
Surprisingly similar, arguably balanced, NAVs.
Difficult to understand how this can be with IOG progressing the core project. However what value does the in the infrastructure have if there is no resources to produce through it. You need to realise that the massive prospective resources DELT have on their books have a lot of value.
What boker note did you use?
Major t.
No I plugged both NAV values from the current broker notes and worked to a parity number to find the premium.
How have you worked it out?
That's not how this I'd going to work mole. Seems like you've gone to a lot of work to come up with a figure that fits your your hopes for an offer rather than what can reasonably be expected.
IMO the discount in the market at the current time is irrelevant. All that matters is the NAV of each company.
Also where do you get your 42p NAV figure from?
Easier in a spreadsheet but here goes:
Mcap shares in issue Risked NAV NAV ratio £ priced unpriced Discount to NAV
Deltic 18,980,526 1,405,964,855 0.076 34.64% 106,853,329 0.0135 0.0625 82.24%
IOG 67,200,000 480,000,000 0.42 65.36% 201,600,000 0.14 0.28 66.67%
========= ==========
Total 86,180,526 308,453,329
Combined
Mcap shares in issue Risked NAV NAV ratio £ priced unpriced Discount to Nav
Del 35,623,000 254,450,000 0.42 34.64% 106,853,329 0.14 0.28 66.66%
IOG 67,200,000 480,000,000 0.42 65.36% 201,600,000 0.14 0.28 66.67%
=========== =========== ===========
Total 102,823,000 734,450,000 308,453,329
premium £16,642,474 = 2 x current Mcap or equivalent to 0.025337049p per share
Conversion 5.525505423 shares per IOG
The problem Deltic has is whatever people think the NAV is of the asset your current shareprice and mcap is more heavily discounted at the moment. The new combined entity MCAP will inflate the value - if the market does not believe the price then IOG price could fall back post issue a bit. Above 2.5p you get more than your share of the risked NAV! If you think the risked NAV is too low you need to justify why its so low and convince IOG it should be higher. The current heavy discount and risked NAV must be where they are for a reason. I personally think we should be higher so it cuts both ways.
Example
shares value premium
Del 100,000 £1,350
IOG 18,098 £2,534 £1,184 +87.68% to current share price
MT I'll post some calcs later and we can debate them......
Mole, how do you come to a equivalent price of 2.5p
They are in an interesting position having @9% of DELT and 25.38% in IOG. They would not cross 30% in the enlarged entity but they will have a say here having such a large combined holding. They would have been consulted on this along with LOG admin with their 30%.
LOG admin position is a difficult one - they would not want to be dilluted down to detriment of creditors and would not want to be see risk increased. Lombard likewise are weighted heavier in IOG than DELT - so they would be interested in a realistic price closer to current share prices than a higher NAV split short term.
The wildcard is CalE and hence the option of a cash element with IOG issuing paper and imediately farming out and getting cash to fund a cash element presumably.
That would complicate things for DELT as then they would have to chew over how to value future prospects against a cash and equity element now - they may prefer to stay with a full equity position - rarther than a lower cash element.
Its a hard one to call - but a high price for DELT seems not to be how the market in my opinion rightly sees it at the moment. At a time of great global uncertainty IOG must not overpay for an asset.
I notice oilriches on DELT board has the 2.5p number I get to using weighted NAV's and a bit extra. I think that's where its likely to be around if an offer comes in. Else they will not be able to reconcile Lombard/LOG and the 3p man on DELT side. There is a logic too that balances each sides risk/reward.
The question of balance of interests in any merger is interesting. There is a bit of room to carry on with a bit of separation between the operational and exploration activities and accommodate roles around that. Chair then becomes key role and how the two "arms" sit with a CEO. There must be a bit of cost to strip out in things like general expense roles such as finance and leases but in this case I don't think that's the rationale - short term terminations can cost more than they save.
So all in all wait goes on for the next move but IOG carries on its low volume trade - so everyone is watching so we are in good company.
our old friends Lombard have been selling healthy chunks of DELT, where they are also invested. It has helped to take the fever price down and looks weak at present, whilst we are hardening up on fairly slight volume. That tells me that the market is guessing a bid will come before deadline. We had a similar experience last year with the RRE derisory bid which was rightly refused, so think we would need to open at a fairly realistic level to get their full attention.