Roundtable Discussion; The Future of Mineral Sands. Watch the video here.
With results for Ridges F and G failing to return Fe grades above 60%, and almost nothing above 50%, the Hancck opportunity may be more limited than had been hoped.
The good drill results are limited to extensions of the existing resource on Ridges C and E.
Sampling on Ridge H suggests there may be potential there.
Thanks Fulmar.
Just to note, if I've calculated correctly, the raw value of the shares at 6.94p, less cost, would have been £2.7m. The option value is another £0.8m, making a total of £3.5m. So the compensation breakeven is 7.95p.
Blueshoes, as I see it there were two aims of the acquisition.
Firstly, to realise Zphr’s tax credits, that is, turn tax credit assets into cash flow. The NPV of the deal without tax credits is $36m at an oil price of around $70, which is indeed what we are paying the seller. Since Zphr can mitigate its tax bill with tax credits, the value to Zphr is $46m. In other words, it’s worth $10m more to Zphr than to the seller. This is before any oil price upside, which could be another $10m at $90 oil, but of course this factor was not known at the time the deal was struck.
Secondly, the deal allows Zphr to front-load cashflow into the next two years to allow the company to maximise investment into Paradox over that same period. They use the cashflow now to invest in Paradox, and pay it off over a longer time frame.
While the execution of the funding left a little to be desired, and the price was no bargain, it’s a pretty smart deal overall which aligns well with Zphr’s strategic objectives.
A few important omissions/clarifications:
I seem to recall that Zphr own only 75% of Paradox. Simplistically reducing the mid case to 75m moves the notional total value from £0.24p/s to £0.19.
Delivering on Paradox potential would depend on being able to fund the development. A large part of this funding will probably be secured through farm-out, further reducing the Zphr share of total.
Also worth noting that using the 16-2LNCC NPV/boe roughly assumes that all the wells are completed today, whereas the further into the future the wells are completed, the lower their NPV, all other things equal. But there are so many assumptions already embedded in the NPV/boe that this is a somewhat academic point.
Just a few thoughts while we await the CPR.
Very rough, basic guess at valuation in anticipation of CPR.
Paradox volume:
Last RNS stated “The Board estimates a potential 1 billion boe of hydrocarbon in place across its acreage position, with recoverable rates of between 5% and 15%“
So between 50 and 150mmboe, say mid case 100m.
Paradox value per boe, using 16-2LNCC as a reference, RNS 8th December:
Potential EUR of 2.65mmboe, NPV of US$12.5 million = $4.7 per boe
Far from an ideal comparison since, to name a few limitations, 16-2LNCC has high gas production share, NPV uses $65 oil, unclear how grant funding is reflected in NPV. On balance, expect NPV per boe will probably be higher.
Nevertheless, using these numbers, Paradox value estimate:
100m mid case * 4.7 = $470m
Non-op
NPV $46m from acquisition. For simplicity assume pre-acquisition wells are also $46m, although this is very generous.
2 * 46 = $92m
Total:
470 + 92 = $562m EV
Less debt of $28m: 562 – 28 = $534m mcap = £400m
New share base: 1,304m + 240 (core £12m) + 24m (broker option) + 66m (warrants 1:4) + 22m (TPI warrants) = 1,657m shares
400 / 1657 = £0.24p/share
Every +$1 on NPV per Paradox boe = +£75m = +£0.05 per share
DRB83, thanks for your comments.
To reiterate: the point is that both the price and the cost have to be the same incoterms, FOB or CFR.
All the main reference prices are CFR. Here's one example:
https://markets.ft.com/data/commodities/tearsheet/summary?c=Iron+ore
Iron Ore 62% Fe, CFR China (TSI) Swa: US$121.94
If people wish to quote these prices, they have to also include Freight on the cost side. I have said US$20, but remember that this cost Fenix $34 in the last quarter.
To take the price above, profit would be
CFR price US$121.94
Less FOB cost US$60.00
Less Freight cost US$20.00
Profit US$41.94
The RNS simply stated the FOB cost, while presenting no accompanying sale price. The problem is that people have lifted the FOB price from the RNS and started comparing to CFR sale prices.
Max, thanks, but I'm not StarBright.
What Bill means by fees is ambiguous - could be port processing fees, could be the whole shipping cost. It's just not clear.
Either way, the point about the incoterms having to be consistent across both price and cost still holds.
Max, please listen again to that section of the presentation (17:13 - 17:25):
https://www.youtube.com/watch?v=Wv2EtlNjglQ&t=1033s
“The client brings in their ship…we pay the fees and off it goes”
There's no mention that the client pays for shipping.
Regardless, whether or not UFO pay for shipping will be determined by the incoterms of the transaction. Either the sales price and cost will both be FOB, or they will both be CFR. At present, people here are quoting CFR sale prices and FOB costs, which is misleading.
The point is, in order to secure the sale price of, say, US$122.36, you have to both
1. mine and transport to Port Hedland, US$60
2. transport from Port Hedland to China, US$20-34
The iron ore price is a CFR price (cost and freight) whereas the operations cost of US$60 is an FOB cost only.
Recommend googling Incoterms.
One point I haven't seen mentioned in other threads: Hancoeck costs also need to take account of Freight from Port Hedland to China.
The Operating cost of US$60 quoted in the RNS is an FOB cost. That is, the cost up to and including the loading the goods onto the vessel at the port of departure.
However, the Iron Ore price of US$123 is a CFR price. That is, the price at the destination port in China.
So there is a missing piece: the cost of freight from origination port to destination port. For Fenix, this was a cost of US$34 in the last quarter. This may be on the high side, so perhaps a cost of US$20 would be a reasonable amount to assume for UFO.
This would increase operating costs by 33% from US$60 to US$80.
It is notable that an assumption for Freight costs was excluded from the RNS, which might have precluded the presentation of an NPV for the project.
Interesting comment on the award video:
“...as you know, we love takeovers, and we feel that Newcrest is going to be the partner that takes-over the company”
https://www.youtube.com/watch?v=6lGaV9vbH5c&t=3160s
Zoros, briefly, I chose Canaccord as it was the most detailed report. I used many of their inputs when preparing a bottom-up NPV model that I now use to view different GGP scenarios.
As has been mentioned on many occasions by other posters, the twitter table misses both tax and the time value of money - if you exclude those two aspects a 25p NPV becomes 65p, so their exclusion has a very significant impact. I haven’t looked closely at the Berenberg report, although their 50% risk factor seems somewhat arbitrary, so have always viewed their ‘unrisked’ number with some caution.
Bamps, sure - the original question was, to paraphrase, 'how much of the anticipated MRE update is included in the SP of 22p'. My answer was 'probably all of it, and possibly more', based in part on comparison to the Canaccord broker note, which had 25p for 11moz mined.
In other words, the GGP SP appears to be higher than one might expect for its current stage of development – the SP is ahead of the development curve. When the PFS is issued, the Hav NPV attributable to GGP will probably be far below the current GGP mcap. I believe that's already acknowledged by some. Referencing the original question, would the SP still be higher than expected if we included the anticipated December MRE? Yes, probably – although the 22p mcap and MRE-updated NPV would of course probably be much closer. However, you would normally expect to be trading at a discount to NPV before development, rather than at >100% of NPV. Also bear in mind that while the headline MRE figure may be 10moz in December, the majority of this will probably still be at Inferred status.
One might conclude that GGP runs with a valuation premium driven by a combination of its advantageous fundamentals and sentiment. As long as these hold and GGP doesn't fall back to a more traditional valuation level, then there's no issue. No doubting the long-term potential of GGP, but the SP could be argued to be aggressively positioned at this point.