Member Info for extrader

Hi MarcusG71,

…"Good work MM, did you ever get to see Extrader's figures?"

No, the dog ate my homework.

Seriously, my thanks too to MM for posting. Unlike dfens, I think (surprise, surprise) that the discount rate applied - 10% - is ambitious. Here's why :

- you should use the sum of the risk-free rate + project-specific risks, including in this case execution risk, commodity price risk and country risk.

US 30 year RISK-FREE is currently 3%, China 20 year risk is 4%, India 10 year risk is 7.75 %. A surprising to me outlier (on the low side) is Ghana which has apparently got 30year money (some) at 7.75%. This is lending backed by the full faith and credit of the country concerned., in a world where credit is (still) easy to come by, but tightening.

The last project finance I was seriously involved in - an aluminium smelter in the Arabian Gulf, now one of the world's largest - coincidentally used a discount rate of 10 % when making the business case for financing an UPGRADE ie a brownfield project with an existing cashflow, minimal execution risk, established routes to market , etc. It also had particularly robust economics - like ZIOP - because in its case it had subsidized gas feedstock, energy being the main cost input.

So I think 10% as a discount rate doesn't begin to take account of the project-specific risks that ZIOP faces. Especially going out 40 years , for which it's hard to find ANY risk-free rate anywhere. And which exceeds our likely concession terms, in any event. You could plug in 15% - which would give you an NPV around £ 6 after 20 years- but still...……

Warren Buffett's view (that of the potential buyer, so perhaps of greater relevance than what the 'seller' thinks he's worth) is relevant : "“We don’t discount the future cash flows at 9% or 10%; we use the U.S. treasury rate. We try to deal with things about which we are quite certain. You can’t compensate for risk by using a high discount rate.”

The second observation is the elephant in the room : the spreadsheet doesn't address the issue of credibility : how ZIOC , with a market cap of £50M and £3 M in the bank persuades lenders to stump up its share of £ 2144M so that we can get the benefit of ZIOP's mouthwatering margins for the next 40 years ? And if somebody stumps up for us (in whatever shape or form), they're going to want a big share of the spoils, I would suggest.

So forget the longer term, why would any buyer or banker/venture capitalist want to indulge us ?

Our best bet as a minor player is surely to do what we've been doing, getting our ducks lined up as best we can and then - when we get to the short strokes - wait for a major to take us out. It's what happens all the time with junior explorers in the oil sector who have issues like ours and I think that's what will happen here.

ATB

Hi again,

And 'oops !' again... the writedown value by analogy is 12 x 0.2/1.3 = £ 1.85, not the £ 2.18 I mentioned. So even less attractive, IMO.

ATB

Hi scottology,

I'm not sure how good the analogy with Rio/Simandou works :

AIUI, Rio has reached Heads of Agreement with Chinalco, under which they will receive up to $1.3 billion, payable WHEN Simandou starts commercial production AND based on certain output targets being met. I don't know how far they are from production (or if they're even materially under way), but Rio wrote down the value of Simandou by $ 1.1 Bn in 2016, which doesn't suggest to me that they expect to get 'sale proceeds' any time soon....

The Guineans supposedly don't want to grant Chinalco the concession for the other 50% of the resource, they do want to see support (so far unforthcoming) from the Chinese for the associated $ 7 Bn est. infrastructure including 650 Km of rail and a new deepwater port. Guinea wants iron exports to diversify its economy, largely dependent on bauxite export. Chinalco's main business is aluminium. Yet even with these apparent synergies and commercial win/win, it's not progressing.

If someone offered you £ 11.95 for ZIOC on that basis, say £ 12 to make the arithmetic easier, that would (post Rio writedown) be suggesting a realistic 'worth' at 12 x 0.2/1.1 = £ 2.18 , payable at some unspecified date in the future .

I'd rather have a 1: 1 GLEN share, myself ;-> !

ATB

HI AJA 5,

You have misinterpreted or I have miscommunicated.

There will be the cost of 1 x port (abt. $ 2 Bn country risk ?) ) 1 or 2 power plants (same again) + the capex associated with the other 4 projects. To the extent not financed by corporate equity, these will all count against lenders country risk limits. If the lenders are all Chinese, then it will use Chinese country limits, if the French or Italians are involved, then their country limits. But you look at other countries' exposure when considering how much exposure you yourself are willing to have.. So you look at things on an aggregated basis.

You can use the credit card analogy : you might think someone is good for £3-5,000, you would probably think again if you were aware that the person had 10 or 15 cards...

Don't understand your point re C-B's min 10%. Who, if not Jumelles, pays the 10% of capex that C-B doesn't have to contribute ? That's what a free carry is : somebody else pays your share.

Hope this clarifies where I was coming from.

ATB

Hi again Pawpawman,

Oops ! in (3) should have added ….so the timing of stage 2 (and 3) is surely more likely to 'underlap' rather than 'overlap' ?

ATB

Hi Pawpawman,

Thanks for this. A couple of points for clarification/discussion :

(1) You assume constant share nos. 280m. If buyco acquires our shareholdings, we (not ZIOC) get the money. ZIOC has about $3M cash. I don't see it having any equity buffer to support debt levels : even at 10:90, stage 1 capex of $2.2Bn would imply equity of 45% of $ 220M or $ 99M, where is that to come from ?
If buyco offers us, say $ 2.50 per share, it has to fork out $ 700m cash to us and same to GLEN, so is in the hole for $ 1.4 Bn. If we think we're 'worth' $ 5.00, that's $ 2.8 Bn etc.

(2) The 45% attributable to ZIOC is presumably based on C-B's 'minimum 10%' free carry. But the cost of this would surely have to be borne by us and GLEN, so our 45% would rise to 50% and therefore mean / require a credible equity buffer of $110M.
Same question as (1) , where is that to come from ?

(3) The 10 : 90 equity / finance ratio is already stretching it, I can't see lenders to stage 1 - having shelled out $ 2Bn - being willing / able (?) to commit another $2.2Bn without having seen any cashflow.

(4) This leads to Mynytho's point re country risk : apart from our capex , there's the port + power + the SEZs + the capex of the other 4 LoI signatories. That's a lot of longterm exposure , easily $ 10 Bn to $20 Bn, to an already heavily indebted, rescheduling basket-case country, even for the Chinese.

(5) Which brings me to the final point : if they ARE willing to take the risks (debt + equity) , they're going to want to take the lion's share of the reward - wouldn't you ? So, much as I'd like to see things play out according to your scenario, I can't see it happening.

I think our best hope /bet is that GLEN take us out (I'd be very happy with 1 GLEN share @ £ 3.20 or so) and use its financial resources and commercial firepower either to 'flip' the project to someone else or commit to the longer term.

My thanks again for sharing your workings and hope you view my observations in the spirit in which they've been made.

ATB

Hi all,

The only 2 valuations that matter are the informed and relevant opinions of the seller and the buyer and his financiers and whether there is a way of bridging the 2 valuations

On this board, Everitt's view is (possibly) relevant in view of the materiality of his shareholding; unless he's an insider and also 'informed' , he may have an opinion but not a basis for valuation.

My opinion, like pretty much everyone else's here - is both uninformed and irrelevant. I think there are a large range of possible outcomes - we've heard from 34p to £2.12 just today (and with a fair wind I can see how more is possible).- the starting point of my question was whether the opinions were at least informed.

From the defensive/aggressive nature of the replies so far , I guess not.

ATB

ATB

Hi allthatguff,

LOL. " Manners maketh the man."

ATB

Hi MM,

Yes, I do. A lot would depend, of course, whether I (ZIOC) was looking to (1) cash out or (2) get some kind of carried interest or (3) want a mix of the two.....and what the other side approached me with.

If the approach was to ZIOP, I'd also need to know GLEN's position on the above.

I'd have already run multiple spreadsheets, with sensitivities based on a mix of 'knowns' and assumptions, finetuning as and when hard info became available.

From this range, I'd have a 'min goal' agreed amongst the key ZIOC shareholders, with GLEN agreeing in case of a ZIOP approach.

For any serious discussion, I'd expect the other side to show how they arrived at their offer (and why ?) and challenge every assumption that didn't help my case.

I'd also accept that no plan survives first contact with the enemy.

ATB

Hi shaun86,

.."ZIOC obviously valued themselves, and so did others, at nearly 10x our current market cap. Taking into account the IPO price and the subsequent rise above a £2 sp."

That was 8 years ago. They then reassessed the situation, in light of prevailing conditions, and wrote their Net Fixed Assets DOWN from $189M (2012) to $37M (2017), their Book Value from $228M to $41M and their book value per share from 82c to 15c.

This was at FYE 2017. The s/p at year end was 12.6p, say 17.5c. So the market and ZIOC management were in broad agreement.

We can all agree that the outlook now is better, the question is : how much better ? Hence my interest in learning if any analyst has had a stab (simonthezealot ?) or if ZIOC/AT have disclosed their current thinking (MM ?).

As at COB today , the 'market' thinks ZIOC is worth about 26c.....I think it's worth a lot more, but I'm not privy to either the potential seller's or potential buyer's assessment. Maybe some of you are ?

ATB

Hi MM,

No, I'm not privy to their internal discussions. Are you ? Or have their 'internal discussions' been disclosed somewhere ?

ATB

Hi again,

That's a good basic reason for NOT shorting : your max upside is if the share goes to zero (which may be unlikely), your max downside is if it's a 5-bagger or more ("the sky's the limit"), when you're toast.
And it is not just PI's who get caught out , see Porsche / Volkswagen : https://www.quora.com/What-are-some-of-the-greatest-short-squeezes-ever

Caveat vendor.

ATB

Hi Ironic,

…"This (ZIOC) is not shorted so the de ramping is to assist order filling ….."

Your comment (which I agree with) is kind of ....errm ... ironic, given the frequent allegations of shorting that have been made over the last few weeks and months ;->

Onwards and upwards !

ATB

Hi pijoe1212,

Here's the relevant bit of the CB RNS (wouldn't want you getting sand in your mobile !) :

...The Bonds will be issued at par and will bear interest in the range of 7.00 - 7.50 per cent. per annum payable quarterly in arrear in equal instalments. The Bonds will be convertible into fully paid ordinary shares of the Company (the "Ordinary Shares") with the initial conversion price to be set at a premium in the range of 22.5 - 27.5 per cent. above the placing price of the Concurrent Equity Placement.
Upon conversion of the Bonds, the Company may elect to settle its obligations by way of delivery of ordinary shares, payment of a cash alternative amount (calculated by reference to the volume weighted average price of an Ordinary Share over of a specified period) or a combination of the two.
On the Closing Date (as defined below), the Company will transfer to an account secured in favour of U.S. Bank Trustees Limited as trustee in respect of the Bonds a sum equal to the full amount of the first eight interest payments on the Bonds, which can be released in certain circumstances as specified by the Terms and Conditions of the Bonds.
Unless previously converted, redeemed, or purchased and cancelled, the Bonds will be redeemed at par on the fifth anniversary of the Closing Date (as defined below).
The Company will have the option to redeem all, but not some only, of the outstanding Bonds:
- at any time on or after the date falling 3 years and 21 days after the Closing Date at par plus accrued interest if the value of the Ordinary Shares underlying a Bond (calculated over a specified period) shall have been at least U.S.$300,000; and
- at any time, if 85 per cent. or more of the aggregate Principal Amount of the Bonds originally issued shall have been previously converted, redeemed, or purchased and cancelled (the "Clean-up Call").

Assuming the summary RNS details are a faithful summary of the CB documentation, it would appear that HUR can settle in cash (if it has the wherewithal), rather than face equity dilution; but that it would have to do so for all, by virtue of the Clean-up Call (ie not partial).

HTH and ATB

Hi Biffadog,

…"I see what you mean, the CBHs convert to equity before HUR have enough cash to redeem the CBs early. "...

With the EPS up and (partially) running, would there be a case for (partial) reclassification of reserves, allowing HUR to take out a Reserves Based Loan and pay off (a chunk of) the CBs ? Or would CB terms likely preclude new/substitute debt ?

If feasible, an RBL would be a ballsy way to alter the dynamics......but then, HUR does seem to like asking 'why not ? ' rather than 'why'.

Idle weekend musings.

ATB

Hi korvet,

From yesterday's RNS :

…"The buoy will now sit submerged below the surface, held in place by 12 mooring lines connected to piles, until the FPSO's arrival...."

It's probably a fair way down ….and fishing vessels will have been warned to stay clear of the area.

HTH

Hi Afric,

Thanks for that ! Clears up the 'independence' quibble and gives us access to his insights re current 'operational issues' in the area....

Onwards and upwards.

ATB

Hi Afric,

Re Howarth, once he ceases to be a PMDR, his obligation to report changes in holdings (currently about 5 % ?) will reduce.

Re Velloza, GEMD reports his experience as " in exploration, feasibility studies, opening new mines and running mines. Most recently prior to joining Gem Diamonds, Johnny held a General Manager role in the Pilbara region of Australia with BHP Billiton.", which is all to the good.
Curiously, the GEMD site reports him as being appointed to its Board as recently as last month, while the ZIOC RNS has him "currently completing his tenure as Deputy CEO and COO of Gem Diamonds Ltd. "
Maybe (let's hope) it's a reflection of his skillset being more urgently needed with us ;->
Not sure how, as Clifford's right hand man, he'll pass the 'independence' test required of a NED, though.

ATB

Hi IJWT,

A question for you, pls, re the possibe role of CB's in any corporate activity :

- wouldn't 'letters of intent' either to sell bonds to a.n. other or to vote same in accordance with a.n. other's wishes amount to a concert party or be otherwise RNSable ?; and
- wouldn't any such transactions be reflected in a hardening of the CB price ?

Appreciate your expertise in this - for me - rather arcane area !

TIA and ATB

Hi scottology,

Thanks for that . Were they 1 of the 5 LoI signatories, by chance ?

ATB