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Agree - timely update and strong update.
Conservatively allowing for commissioning time, maintenance periods and mining capacity next year they should mill 800,000 tonnes and so produce 45.000 ounces and free operational cashflow of $36million assuming $800 per ounce
The year after 960.000 tonnes (again allowing for downtime) and so produce 54.000 ounces and operational cashflow of $43.2million.
With potential upside from grade improvements and I think $800 per ounce is relatively conservative.
"On your theory they could buy the whole company at today's market cap, stump up the extra cash and own the lot fully funded for $250m.
La Mancha need to buy the remaining 73%, if they could do it at today's mkt cap that would be £50m x 0.73 = £36m, call it $50m. That's cheaper than buying 7% at 4:1 dilution, wow it is a bargain! Now they own 100%, so putting up the extra funding suddenly becomes a lot less painful."
La Mancha don't want to own a mining company though do they? Its not their mandate, nor do they want to be fully responsible for trying to fund the deal as $250million will be way beyond their interest in sinking into one asset. So this is not even part of their playbook.
Its highly likely the cornerstone investors here will participate, but they need to attract new money and I doubt they will have any interest in protecting the 50% of equity investors who won't pay to play.
I'm skeptical substantially more debt will be made available, I suspect the bank's will push for other solutions here, not least as 35% is only the increase in capital budget, there is also a delay in cashflow. I expect the majority of contribution by the bank's here will be through the renegotiation of terms, amendments to covenants etc, I'd be surprised if there is substantially more funds coming.
Maybe on the royalties you are right - I don't have much feel for that.
Best of luck though - I just think you are being very optimistic on the outcome and I can't think of many precedents, where as I can think of a lot of precedents for very heavy dilution and the NPVs of the underlying assets had no impact on the issuance price. The market here looks to be pricing in around a $200million equity raise with substantial dilution and I think that looks about right.
“But that's a 7% increase compared to what they have now, and cost them more than the current mkt cap to buy it. Does that make sense to you?”
The current market cap is discounting the fact that more funding is needed - so even if they bought the whole company they’d still need to solve the funding gap which would be now their problem 100%.
You seem to think there is a white knight out there willing to bail out existing equity holders, by paying way above current SP. Why would anyone do that?
The big holders will take their medicine through dilution, put in some more cash to maintain their stakes and ensure it is attractive for new money to come in.
At 80% dilution, those guys can all pro-rata invest and remain below the 30% and so maintain or slightly increase stake which then provides about 50% needed and the other 50% is probably priced attractively enough for new investors.
Assuming a $200million raise at an SP slightly lower than current SP.
“No it won't. You couldn't buy 10 million shares at the current price without spiking the market, why on earth would you be able to buy half the company?
The current price is a reflection of the free float price, dumped by PIs and small instis, less than 20% of the total. “
I’ve lost track of the number of times this mantra has been repeated with investors referring back to the NPV of the underlying asset.
If it was really the case that any new equity financing would be done with reference to the underlying asset NPV the share price would already be responding, when instead it is pricing in deep dilution. Those who will invest equity in the next round (most likely the cornerstone investors) have the power here.
Yet again a set of naive AIM investors are likely to learn a hard lesson.
“However, to say that serentiy is not factored into sp is a red herring. If bad news ocurrs in this regard the sp will get hammered regardless.”
Not convinced- O&G investors are valuing free cash flow and returns at the moment. I think removing the risk of spaffing a whole lot of cash on CAPEX in a high cost, politically contentious basin will be looked on kindly. Not to mention the BoD have hardly covered themselves in glory in the UKCS so far.
What I think could be wise is a spin off of the UKCS assets into a separate entity which I3E maintains a holding in.
"It's a factual statement. If you're going to add liabilities to create a narrative why don't you add assets too."
Most of the other assets relate to a 65% completed mine and they are balance sheet carrying values and not the price anyone would actually pay for them.
Its ludicrous looking at the value of cash in comparison to market cap when overall debt exceeds cash.
"The key takeaway from this quite comprehensive analysis is the actual funding shortfall for HZM is actually circa $50m, not $175m as they already have an existing circa $125m facility in place."
Which misses the additional working cap needed due to the delayed start and doesn't consider any additional contingency that senior funders are likely to require.
"Just get rid of it and focus on our 700 drilling locations in Canada which we are currently drilling far too slowly."
Totally agree, the UKCS is a political minefield and a higher cost end of life basin - the previous licence holders can smell the coffee, I3E should also.
Nothing really wrong with that update - sales and revenue are slightly down, but anyway we knew about that as it was due to the maintenance activity in Q1.
They might miss budget a bit, but I think it was always optimistic that the upgrades would not impact production and they should still produce and sell around 16-18koz in the second half.
Almost 200,000 tonnes were mined in Q2, so mining has increased by around 50%, so they are well placed to process around 800,000 tonnes next year assuming the capacity is in place relatively early in Q1 which would produce 40-50koz depending on what grades they can achieve.
Overall operationally I think this was a positive update - I always had 2023 down as a transitional year and development is clearly on the right track.
As usual releasing news at last minute and skipping updates doesn't say much for shareholder relations which is holding this back as much as anything.
Unfortunately they were forced into hedging 50% of their production at what looks to be the low point.
"I don't think it's irresponsible either to be talking about m&a or buy backs - had i3e hunkered down after the failure of liberator and not taken the decision to make several large acquisitions in Canada (at the bottom of the market"
Agree and I'm not averse to a great deal, but I'm not sure how many are on the market at the moment that will be accretive to existing shareholders. Plus they already have enough opportunity to develop for the last deal they did
"I'm not sure what you are talking about with regards to "substantial negative assets" - just went back to the yearly report and they are reporting 168m pounds in net assets !?"
I missed a rather important word there - negative net CURRENT assets. At the end of 2022 the balance sheet shows net current liabilities of $32million, that is a weak balance sheet.
I agree cash generation was good last year and obviously one of the reasons they didn't generate much net cash was the capex spend, but in my view it was irresponsible to pay out effectively 100% of free cashflow after capex as dividends, when the current position of the balance sheet is as weak as it is and furthermore the increase of the dividend this year was terrible management, when commodity prices were already weakening.
Before anything else, dividends should be reliable and then ideally progressive and for a commodity business where prices are volatile it takes extra care to make sure the are the ongoing financial resources. I3E went at it like a bull in a china shop and have severely damaged investor sentiment and trust and that will take a long time to come back.
Tony, first let me say, sorry to see you getting this grief from other members on this discussion board, I see you as an excellent contributor with complete integrity.
To respond..
"I3e still have CAD35-CAD40m left on the drawn portion of the loan - so I expect them to do something with it shortly."
Frankly, I hope not, unless it is a hugely attractive piece of M&A that adds production and cashflow. I3Es balance sheet is weak - last year they paid out all free cash generation in dividends and ended the year with substantial negative net assets. Their claim that the debt facility strengthened the balance sheet is laughable - debt does not strengthen a balance sheet, but it does provide additional liquidity and flexibility, but there is no way they should be blowing through all that now, there is every change that commodity pricing gets worse in the short term.
They need to focus on hunkering down now and strengthening the balance sheet, throwing around glib statements about buybacks is completely irresponsible.
I'm not sure I can think about anything more damaging to management credibility than slashing a dividend you have only fairly recently substantially raised, slashing the capital expenditure budget and then talking about buybacks.