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It is true that in most cases, due to dilution the share price of a company will be lower when a replacement is made. Casa said (20 Dec 18) that “IF it were by a placing that's £400mill/1bill ie 28% of the current market cap. At an SP of 21p that level of dilution equals a post-placing SP of 21x(100/128) ie 16.4 pence”. I believe that your calculation was made under the assumption that the total value of the company keeps the same, hence to end with a low price per share.
However, due to the fact that the coming replacement/open offer is to be made together with a large debt element (3 billion), which will increase the enterprise value of company. Assuming $3 billion new shares will be added in a stage 2 deal, the total money raised by SM will be $5 billion (0.2b pre stage 1 + 1.2b stage 1 + 3.6b stage 2) and the total number of shares will be roughly 8 billion (current roughly 5 billion + the 3 billion). Before stage 2, the cost per share is 1.4/5 = 28 cent (or 21.6p per share), which is largely the current per share price. After stage 2, the per share cost will be 5/8 = 0.625 cent (48p = 0.625/1.2986).
I believe the reason for the current low SP is due to “the existence of material uncertainties which may cast significant doubt about the Group's ability to continue as a going concern” (Dan McCrum September 27 2018). I believe that the main uncertainties are the 3 billion debt, rather than the additional 400-600 million budget. Given now that the banks have tentatively indicated at least 1.5 billion senior debt and the government guarantee has become very promising (given the recent comment by PM at the PMQ), I believe that such uncertainties have been greatly reduced. The odds of a successful stage 2 becomes higher. Therefore, we may now make a better informed bet on SM.
Casapinos, could you please comment on the above contrasting your lower per share price calculation; if possible I also wish to learn whether you believe that SM is more risky at the time you first brought the share or at this moment given “The good news is that it is now likely that whatever happens, ST2 will be achieved” (hence the mine will be built).
Hi WWG have read your post , busy today but will respond later this am or late afternoon.
Hi WWG just assembled my thoughts in response to your midnight post.
While it is true that the EV of SXX might become £5 billion as a result of the funding there are several reasons why that does not directly affect the SP. First is that the ST2 funding will be a COMMITMENT to lend from the banks (some part of which will be subject to IPA Guarantee), NOT a deposit in the SXX bank account.It will be drawn down as and when needed to fund the mine engineering activities, so SXX Enterprise value does not immediately rocket to $4-5 bill.
Second is that while Enterprise Value would essentially be the value if , for example, a takeover bid were mooted because a putative buyer would be expected to buy the equity in SXX (ie the market cap) AND accept the debt burden.SO yes a prospective buyer would need to fork out for the value of all the shares and the debt ie ~$4-5 bill.That , though does NOT imply that the company's market cap equals $4-5 bill.Money committed or lent does not immediately enhance the market cap and thus the SP, you wouldn't for example count your mortgage as an asset(though of course the house you bought with it is)
My calculation is based on the standard City way of calculating the "mechanical " effect of a share dilution through either a placing to "new " investors or an open offer to existing investors.What it cannot do is to measure the " sentiment " effect of such a fund raising. That depends to some degree on the reason for the cash call , if its a "distressed" call either because a company has short or long -term cash problems raising new cash is seen , usually as negative, in this case as it is planned and to pursue a hoped for profitable mine it should(eventually) have a positive effect on the SP.
My post back in dec was a simple way (or so I thought ) of illustrating why I felt the SP had fallen sharply in recent months, and why it would remain depressed until the full details of ST2 were public.
My estimated SP of 16.4 p was, and is , based on a simple mathematical , knowable and standard calculation of a possible outcome - I am glad you included my "IF " before it and would also stress that i said "leaving aside sentiment effects" which might be positive and thus ameliorate any SP fall.
I hope that my summary above illustrates why your arithmetic calculation is based on a misconception,and that it is far less likely that the SP will head straight for your figure of 48p than my estimate of 16.4.
It is quite conceivable that a very positive outcome to ST2 will drive the SP upwards but that would be by way of "relief" rather than the arithmetic outcome you describe.
Finally , let me encourage you again , IIRC this is the second thoughtful and analytical post of yours I have addressed and it makes a pleasant and positive change from some of the less well- considered and wildly optimistic chatter which fills this board.
If anything I have written is unclear or if you disagree fire away , I will respond (event
casapinos, I take it your not invested here, am I right?
Casapinos-why convince other's about it ,When you can't convince your self,
“If for example, a takeover bid were mooted because a putative buyer would be expected to buy the equity in SXX (ie the market cap) AND accept the debt burden”
More comedy, now Casa implies a takeover could be successful at the current SP. You couldn’t make it up.
Casapinos have a bottle of Newcastle brown, And then when you are convinced,invested in the spring if it's make you Feel better
and it makes a pleasant and positive change from some of the less well- considered and wildly optimistic chatter which fills this board. I'd rather read alan g's ( im in over my head so need to remain wildy optimistic ) posts over your stagnant Outlook on this share casapinos if I'm honest......
you would think by now he'd leave us to our ill-considered thoughts and go and haunt somebody else, he's like a bloody albatross attempting to drag us down with his well considered thoughts, he,s clever enough to be in someone,s pay........all adds to the churn ATB Jesse
Casa, thanks for your detailed responses. The point I want to make is that the share price of a company after “dilution” (i.e., placement/open offer) could be higher, e.g., in case there are additional money (such as debt) added to the numerator (in addition to the current market cap and the money raised in the placement) to be divided by the total number of shares (including the newly increased shares). Your “standard City way of calculating the ‘mechanical‘ effect of a share dilution” can only be applied to normal placement/open offer without such debt raising at the same time. As the debt is the largest part in the stage 2 package (i.e., 3 out of 3.6), how can this be excluded from the calculation. Therefore, such standard city way is not applicable to estimate the share price impact of the SM stage 2 fundraising.
I agree with you that the Enterprise Value of SM will not increase to 5 billion immediately after the stage 2 is closed (as not all the 3 billion would be transferred to SM immediately). I did not use Enterprise Value or Market Cap in my calculation, as they both are dynamic and can be affected by sentiment and many other external factors. I used basic cost analysis, as it is a method suitable for early stage companies.
The 48p is the cost per share to build a mine and ramp it up to 10 mtpa. It is not an estimate of the share price after stage 2. I did not provide any hint on how fast the share price may reach this value (but we all know that if the mine is to be profitable, the value of the mine is going to exceed the cost to build it). Nevertheless, I believe that this cost per share value can be used as a cost reference value for us to see if we can get a good price when we purchase the shares from the market. Common knowledge tell us that to buy something good at factory price is a good bargain, and if we can buy it at a half of the factory price, it is a great bargain. Given the stage 2 uncertainties have been greatly reduced recently (this indicates that ST2 will be achieved and the mine will be built), the current share price seems to be a great bargain as it is less than a half of the cost per share to build the mine. Such opportunities are rare, and may only be available for a short time.
Recommended wwguk!!
Hi GK,
Thank you for the cost view - it does complement the picture (although I usually stay away from using it as my benchmark pricing, ....as you know, cost ... does not reflect value, hence many mining projects end up challenged or written down in value, as future high production cost and product sales value give less profit, and future value are based on future cash flows). Lucky for us, our future production costs are low (due to higher investment upfront) and sales are at a good pricing (which would also get better once Poly4 established and ToP come up for renewals 5 yrs down the line).
I am getting the same 50p-ish / share, from a different angle:
Project NPV is roughly GBP 10 bil today (and again, we are using 10% DCF, which is huge and badly wrong for evaluations ... just read what Buffet said about this 10% and the biggest error he made in the past decade). But, let's stay with GBP10b.
Let's say we end up in a worse case Scenario with 7 or 10 bil shares (say 10).
So Project NPV / share = 100p.today.
Discount this to reflect 2-3 years or construction delay risk only (no funding risk as this is fixed by ST2), is roughly 40%.
Therefore the share price after ST2, based on 10 bil shares to be in issue after conversions etc, is 60 pence. Allow error in estimate, fear factor, etc, say 20% more discount, we end up with .... 48p.
If we end up with less than 10 bil shares = wow, that is the icing on the cake. Personally I see a 7-8 mil shares outcome, but, let's see shortly what it will be and end all this speculation.
Also consider that the II stayed away because of the risk on funding and their perceived risk of having to cough up more in future. If they feel now that the ST2 is sorting this out, then Investment managers will try to add to their portfolio few shares, on the CHEAP, now.... so yes, there are few (what some on this board will call idiots) II that are starting to build their SXX holdings (after ST2, if done as above, they will pay x2 for the share), hence you see 2mil share purchases here and there...
But, hey, what do the Investment managers know, or me etc ... compared to the 'Superlight' personalities on this board.
IMO
DYOR
GLA
M
I’m so glad there are people on this board who take the time and effort to write in threads like this especially in answer to posters like casapinos who also spends a lot of time writing posts while he waits to get back in?
After the September RNS I ran my own calculations (and nothings changed since!) and also using 10% discount rate, late finish and 7 billion shares arrived at SP= 48p. Back at stage 1 the 20p placing was based on the logic that a fair price was 25p but a discount was needed to tempt institutions - so post stage 2 the SP becomes 39p
Of course the usual summer exuberance will probably get us to 55p
Personally I have been in SXX for over 3 years and won't be selling at 22p. 39p or 55p
Verde
Yes if the dilution is via an investment from a strategic partner we probably will see a rise in the SP.
But is Sirius go back to shareholders the new shares will be offered at a very substantial discount to the current SP.
That is the gamble here at the moment.
Fred, thanks also to you for your inputs here. Appreciated!
BTW, I filtered the other poster, there is nothing he adds here that warrants me reading it ... I read and try to interact with him once, twice, and wasted 10 min of my life, and not one will give me back these 10 min. Never again.
M
“But is Sirius go back to shareholders the new shares will be offered at a very substantial discount to the current SP.”
—-
Hi Chilting. Whilst I agree with that, I’m not so sure about the terminology “go back to shareholder”. During the stage 1 finance CF gave existing shareholders the chance of collecting shares via a claw back from the II’s involved.
I see this as a true representation of CFs character. He is a man that rewards loyalty. He is a man is fully engaged with the financial structure of this company, providing everyone involved (PIs & II’s alike) a chance to benefit from the financial growth this provides and continue the journey.
I wouldn’t be surprised to see a similar plan for any equity raise required and a percentage being made available to us.
I’d like our 10% at a 10% discount to yesterday’s close SP and the II’s remaining 90 at a significant premium please Chris. :-))
Hi Milo, thanks for your input on coming up with a calculation of value based on an increase in shares through a possible dilution.
Whilst I agree wholeheartedly that the 10% discount rate is really arbitrary and MAY be (IMO) unrepresentative of the appropriate equity risk premium element within the WACC that should be applied to this project at this point in time (or more specifically straight after after a successful St2 fund-raise) to reflect future construction risk and product market risk, competition risk etc. nevertheless I don't concur with the what you have done with dividing NPV but number of potential future shares in issue.
This is because NPV in standard DCF analysis is a reflection of the present value of future cash flows BEFORE/WITHOUT taking into account how much of the cash outflows are financed through debt or equity, hence the cashflow model for the NPV is an ULEVERED set of cashflows. Your approach is not taking into account the huge debt load that would have to then be factored in to arrive at equity value which is divided but number of potential shares in circulation.
ATB,
LITC
Typo: ULEVERED = UNLEVERED
Quite apart from the large gap between Enterprise Value and estimated NPV at this point in time, consider also the anticipated tripling in that NPV by 2027 (page 95 of the April 2017 Prospectus) assuming we are headed to selling 20mtpa.
That gives me considerable confidence that, assuming a successful Stage 2 with no or minor dilution, our SP has a very long way to go indeed - the famous J-curve, as risks diminish and the build cash outflows become irrelevant to NPV because they are in the past. An SP no doubt boosted by II demand once the risks become palatable to them.
LITS / Cranleigh,
Yes, and no = in my opinion. But we are going in the right direction (as so to speak), but also looking at the mine site photos July 2017 and July 2018 ....
'You need to aim for the moon in order to shoot a star', and having done few deals and large scale projects in my life, as long as you are materially going the right direction, within reasonable variances, you take a 'vision' and execute the dream ...
On the other question - the NPV does include debt repayment and interest, it is 100 years worth.... and yes, going to 20m t / year, increases the value more, but what I try to do is show that without baking absolute all positives and no negatives, we see the moon in our sight.
And yes, there is risk ... we currently swipe under the carper the 40% construction risk .... which is there for a reason, and this is not a lego DIY job.
But good discussion and thank you for the contribution, this is way better than other split personalities tantrums seen around.
M
Thanks for your feedback Milo. But with regards to your "the NPV does include debt repayment and interest":
The company's own information has always stated that it's own NPV calcs are based on unlevered cashflows.
Eg. you can look at the most recent Investor Presentation Nov 2018 (and any others that preceded it) and see on the "NPV" page (pg.25) that in the very, very, very small print in the footnotes (always read the small print lol), it states:
"Cash flows are unlevered and discounted at 10% WACC".
Be that as it may, I fully agree with you that there is so much upside here for shareholders, even with a possible chunky level of dilution for the $400-600 m contingency, which is why I've got a stupidly overweight holding :-)
Have a great weekend,
LITC
Milo
In my experience, it's best to leave the hard calculations to LITC. He knows what he's talking about, nice try though.
Prost
SL
LITC, you are right. I oversimplified it.
M
Milo "there is risk" - exactly - $4 billion is too much to crowdfund and institutions are investing other peoples money so they have to be super cautious
Two or three years ago there were three huge risks - financial, construction and "will anyone want the stuff?"
All the crop trials and TorPs must have reassured over the last of these. Stage2 ,whatever any dilution, will cut the financial risk and the construction risk reduces every day that nothing goes wrong
BUT we still at least four and a half years away from profits so IMO the helter skelter of the SP will continue
and as you say, there should then be 100 years of good times to come
Verde