Roundtable Discussion; The Future of Mineral Sands. Watch the video here.
Hard to fathom the sp. It looks very likely that we will get positive news over the next 6 to 9 months and great value is on offer at 21/22p! It could well be a 5 or more bagger in the relatively short term!
There are risks which we all know about. First FID not yet in the bag although looking highly probable. Secondly the OP could collapse although with the expected shortfall in supply in a few years time that does not look to be a major risk. Add to which maybe OPEC has our back! Thirdly politics.
The risks are there but the odds at this time look favourable. So why the low sp? I suspect that there are many stale small shareholders who having seen the sp more than double from its low point then fall back again are now throwing in the towel!
Yes the sp could always go lower and the shares are not for widows and orphans but it is a compelling bet!
Hi Fernan
OK but it is just that the costs involved in exploiting the deposit would have been modest. The find is in shallow water around 10 kms from the coast so it would have been easy to run a pipeline to the shore - then there is a pipeline running south/north already in situ carrying oil to a refinery! The investment involved should have proven modest adding significant worth to the deposit.
We are talking around 35/40$ per barrel breakeven with SL whereas Ombrina Mare might have been done for around 10$ per barrel! At, say, $60 brent the lawyers could just be claiming 40 or 50$ per barrel! Even after all the arbitration etc I would hope that the settlement will turn out to be very significant indeed!
Back to basics. From what I have gleaned the Oil Treaty was conceived to protect oil companies from confiscation of oil/gas assets by the host nation. That is to ensure that any oil company would be fully compensated therefor and in particular loss of profit.
I do not think we are talking about the market value of any oil deposit which could be very substantially less than the asset could reasonably have been expected to produce in profits. On that basis one can expect compensation very much higher than the figures being banded around! One can suppose that the price paid by RKH for MOG is irrelevant.
We have to wait and see but the defence case looks very weak and the compensation could be much greater than supposed. In any event it is all in the sp for nought!
CitizenTS I cannot imagine that the project finance would be provided by the banks without recourse to both RKH and PMO! The Banks would first and foremost be looking to ensure that the project stacks up but at the same time that the borrowers shape up. We can see that the project stacks up but RKH whilst OK does not make much of a guarantor. Therefore the lenders must be looking at PMO. It is experienced and has serious income but on the negative a lot of debt.
Overall, with supplier finance of around $350 million and UK Government guarantees the finance should come through ok. ( I do not believe we need to be concerned about any possible EU guarantee - it almost certainly will not be there!)
Spencer Dale, chief economist at BP interviewed yesterday on Squakbox. Pointing to ongoing world demand for oil for multiple uses, there is a clear necessity to find and bring on very substantial new oil and gas fields over the next 3 years or so.
My take is that the risk of FIO becoming a stranded asset must be very low.
Our main worry is that PMO is heavily indebted and possibly overextended financially. Against that the risk of rising interest rates has moderated and with oil up around $65 one can suppose PMO must now be selling oil forward to show their banks that monies are coming down the pipeline!
Chances are that all will fall into place with FID a racing certainty.
I still think that expectations are very much on the low side. The oil treaty is basically to prevent host nations purloining, for whatever reason, any oil etc after discovery. The gross value of the probable oil in situ is in excess of US$1 billion. That simple calculation made from discounting the various risks and after adjusting for the various costs of production, taxation etc. (It needs to be understood that the cost of production to exploit Ombrina Mare should have been exceptionally low! )
In arbitration it may be that RKH's lawyers will make concessions but, as indicated by RKH, we can expect a 'very significant award'.
There are of course, risks that RKH will never get to ever produce oil in FI. A collapse in oil , politics etc could mean that the FI oil becomes a stranded asset but in a neutral market there must be at least a 75% + chance of getting to production. In saying 'no brainer' I mean that the risk/reward is strongly skewed to the upside. How much of ones portfolio to put into RKH depends on one's taste for risk and one's overall financial situation!
It does look that the FI which is the main prize is in the sp for nought. The Monte Grosso prospect which has been farmed out to ENI could in itself be a company maker! That was perhaps a big factor in the purchase of MOG!
What value RKH?
If or when FID declared SP should quickly rise perhaps 4 or 5 times to put market cap at around £500 million. (There would then be a similar further potential upside as the story progressed to say £2 billion!)
In the meanwhile there are sundry assets which do have value which might be estimated as follows:
£25 million in cash + £10 million Egypt + £150 million Ombrina Mare + £20 million Monte Grosso prospect.
Of course RKH might fold but with no debt and all the potential upside it is a no brainer!
Were a judgement to be obtained in favour of RKH I believe it should be possible quickly and easily to monetise the same! One could expect that a financier would be happy to take the risk - it is all a question of cost. RKH would weigh up the cost thereof against the benefits of cash in hand! Looking at what RKH might gain by having money immediately might make such a deal attractive? Investors are happily accepting Italian government bonds yielding ony around 3+% pa.! No worries!
Ovets. Much as the Italian State may end up, in one way or another, de facto welching on its huge debts these are mostly in euros and rather a problem for the EU and the Germans in particular. As I understand it much of Italian paper is either being held by the Italian banks or the European Central Bank. There is a possibility that matters will come to a head but it is more likely to be kicked down the road.
RKH case is being brought in US dollars and the amounts involved are very small beer in comparison. The chances of not getting paid must be seen as only just below certain!
Ombrina Mare. The fact that the case is being handled by hard nosed US lawyers/financiers on a no win no fee basis tells you all we need to know ie that there is much better than a 90% chance of success! Question therefore is whether the compensation will be sufficient to facilitate FID.
Does anyone know the exact classification of the Ombrina Mare oil reserves? I had understood that 28.5 million were proven and 12 million were probable. Gross value at 60$ oil gives US$1.9 billion. If 28.5 million classified only as probable with 12 million as possible gives gross value of US$ 920 million. Cost of extraction less than $10 barrel plus overheads and taxes suggests awards of at least 50% of the gross values should come through to RKH? ( Italy certainly entered the 'Oil Treaty' with a view to protecting Italian interests abroad - think ENI)
One can imagine that RKH/PMO are pushing forward but FID may still be linked to the oil price. Finance etc may just about stack up at $50 oil but for comfort we need to see $60+ when FID would have a much better than 50% chance. I imagine UK Government through ECGD will provide some guarantees but probably expect the banks and suppliers to take on some of the risk.
The Italian Government gave a licence to explore for oil. Oil was found and then the Italian State in effect stole the oil!!!
(Forget that RKH took over MOG - shareholders change but any company has its own identity!)
It is 100% correct and normal that the Italian State should be made to fully compensate for MOG's loss!
Assuming that RKH are awarded compensation it is highly improbable that the Italian State would not pay. RKH's lawyers are based in USA and it is not just a UK problem!
Italy is a signatory to international treaty regarding oil rights which are clearly set out. Italy knows it is now on the hook and has, I believe given notice of its intention to withdraw from the oil treaty but can only do so in the medium term. The Treaty, as I understand it, makes it relatively simple and certain what we can expect. Basically full compensation!
The sums involved are, as far as RKH is concerned, very significant.
(The US lawyers handling the case on a 'no win no fee' basis are supposedly specialised in the oil industry by definition and are very confident of a positive outcome - I have read that the top legal companies only accept to take on less than 1% of cases offered them ie as far as they are concerned it must look a very clear cut case.)
For a country the size of Italy despite its debt problems any award would be small beer and the current politicians will almost certainly simply blame their predecessors!
That said there is a possibility that the arbitrators could reduce the settlement by 50%.
Marunam2 Arbitration blog 10.34 today.
My take, in the light of the blog, is that in a worse case scenario RKH might forego 50% of the value of their claim.
I work out possibilities as follows:
25.5 million BOO at 90% recovery say $55 per barrel less very low costs of say maximum $10 per barrel = $1.032 billion
15 million BOO at say 50% recovery less very low costs but say $20 per barrel = $262.5 million
Making very approximate total claim of around US$1.25 billion.
Should the Italian defense succeed in getting a 50% reduction which is not a given and after RKH's lawyers have taken their due we are talking very significant figures which is just not in the share price right now!
The settlement should be a multiple of the RKH's current market capitalisation.
Sam is not sticking his neck out very far in expecting ''very significant monetary damages''.
I believe programme as follows:
-Arbitration meetings between 3 arbitrators, all lawyers with detailed knowledge of the oil industry commence february next.
-The lawyers representing the litigants make detailed written submissions.
-Further meetings are held etc with a final decision before the end of April 2019. The binding decision can be based on a simple 2 to 1 majority verdict.
-The decision should be made public around the end of June 2019.
-Any award made to RKH can be made good by seizure of Italian Government assets world-wide. There is no doubt that any award will be paid.
Required to fund SL phase 1: Vendor finance $375 million (already agreed) + Senior debt $750 million (with export credit guarantee virtually assured) + Equity $375 million (PMO) total US$1.5 billion. Edison estimated 40% chance of success.
Edison's expectation for Ombrina Mare is very low. We are talking an asset of approx. 40 million barrels of which 25+ million proven with a further 15 million. Exceeding low exploitation costs ie RKH's lawyers must, we can imagine claiming something like this:
25 million barrels @65$ = US$1,625,000,000 + 15 million @ at say discounted 50% = $487,500,000 less, say costs $10 per barrel = minus $400,000,000. Net loss to RKH therefore $ 1,712 million. Other factors enter into account but many of these would support a higher claim eg loss of interest etc.
Certainly the award will be arbitrated down but RKH has top lawyers on the job undoubtedly expecting a bonzana!.Personally I cannot see an award net to RKH of less than $500 million but hoping for more. In any event the award may well enable the equity financing for RKH/PMO!
We can all see enormous upside but that's for tomorrow. Reality is that there are lots of stale shareholders and they are easily shaken out. Recent weakness in markets has a disproportionate effect and leads to doubts about funding. Share price is just option money and extremely cheap!
MOG still exists. The fact that RKH bought MOG does not change MOG's rights vis a vis the Italian State. How can it be a defence from Italy that RKH knew MOG's problem? I realise that in the abscence of any defence that Italy will try to use that in arbitration but strictly speaking it should be irrelevant! Am I missing something?