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Krss - it is an unusual situation. Presumably if IRC do not pay pog they will have breached the debt terms, and by demanding repayment pog can take them into administration. At this point, pog then act as guarantor of the debt, and assuming they can get financing, take control of the assets. I still have little conviction about whether this is a positive or negative - irc may be on the cusp of generating profit and the assets are being bought at a fraction of booked value, or irc is just a lame duck.

Yes, it’s looks like the IRC shareholders have had it and pog will pick up what’s left. Can pog afford it? I think so. Should they want it? I really don’t know. Operationally IRC has certainly not delivered yet but pog will be picking up the assets at a fraction of their booked value.

I don’t think they own it

“I'm bot sure how much the Amur bridge is going to help..” from memory, they are estimating $5 per tonne on 3m tonnes delivered, so $15m ie significant in the context of a circa $200m valued asset

Some interesting points RB. Many thanks. 1) enterprise value uses the market value of the equity, not the equity figure stated in the balance sheet. As an enterprise figure, you also need to include all the assets of the company = $546m. Given I am assuming the shares are worthless, the EV is effectively the debt. So with net debt of $230m and reported assets of $536m, if pog assume the assets as guarantor of the debt they will be buying them at sub 50cents to the dollar. So operations wise - it doesn’t set the world on fire - but given the heavy discount already built into the EV (assuming the shares go to zero) - the question is a little tougher than that. 2) I agree as stated in my previous message, booking the reversal as profit is a nonsense. I have no view on the revaluation of the assets - but that would have the effect of deflating income due to higher depreciation. Looking at the cash flow numbers, they generated $21m and spent $7m on capex ie the operations generated $14m of positive free cash flow IF one believes the numbers 3) they were not at full capacity in 2017, and with projected transport savings of $5 per t delivered on 3m tonnes of fe - there are reasons to believe things may get better, though as you suggest - probably not this year. So IRC isn’t worth the enterprise value you describe - and in the event the shares get to zero, the market is not assuming it is. The profit numbers clearly overstate the operating value of the business, but the underlying cash flow numbers suggest the assets DO have a positive value, and capacity increases and transport savings suggest that eventually a valuable entity may emerge. Most of this digresses from the ultimate point of my messages though - that with a working pox hub potentially moving pog EBITDA up to the $300m+ region, they can likely absorb an $800m net debt load. Uncertain times for shareholders, am sure some scary RNS’s will follow, but ultimately they likely have the capacity to pay down debt to a comfortable level leaving a highly cash generative and resource backed business for many years to come. IMO

Many thanks kenj - those estimates look about right. The existing operations just about cover operating expenses, capex and interest payments. A few points 1) I suspect management have “kitchen sinked” the forecasts - they will be very happy to set the bar low, blame the problems on prior management, and hopefully positively surprise. They are also setting the bar low for sequential growth into 2019e 2) we can anticipate that with the pox hub nearing completion, capex should dramatically fall into 2019 - freeing up additional cash flow 3) with the entire fixed costs of the business covered even in a year of depressed cash flow - looking ahead, nigh on the entire gross margin generated from the pox hub will likely fall to the bottom line. Around half of pogs reserves are refractory, more than half of Russia’s prospective gold assets are refractory ie the incremental sales made here are likely to be highly significant both in terms of scale and cash generation. Of course, large amounts of uncertainty - but it doesn’t take a great deal of imagination to see a scenario where both free cash flow and debt repayment are realised at a decent clip. IMO - if this is achieved, within the space of 2-3 years the investment case will look very different, 10x on the current price is not out of the question. If you are interested in a similar story that worked out - check out AAZ over the last 3 years. Sweating assets + debt repayment = 10x recovery. GLA

In the event the company goes into administration, the shareholders will likely be wiped out and the assets used to pay off the debt holders. As the guarantor of the debt, the debt will ultimately sit with pog - hence, the assets are LIKELY to belong to pog. They pay the $200m debt and take full ownership of an asset likely to be worth around $200m. IMO

Kite’s initial collaboration was with the NCI back in 2013. We all know what happened 5 years later..

“So the higher you are in debt the more valuable your company is by this measurement.”... this is not right. The higher the debt then the smaller the value of the equity. Simple example to show why this happens. A company generates free cash flow from operations, from which they have to pay capex. The remaining number is free cash flow - cash flow available to hand out to the debt holders in the first instance as interest or principal payments, and whatever is left can be handed to shareholders - either reinvested in equity/assets or distributed as dividends. What happens if debt is added as you describe? Then the interest payments go up, the debt repayments go up, and the amount of free cash flow left for shareholders gets smaller. Result - the value of the shareholders equity shrinks AND the enterprise value shrinks commensurately. Yes - you can add debt, but unless a corresponding asset is created then the market will react to the reduction in net profits by forcing the market value of the equity down. Interested in people’s thoughts on IRC - is this a valuable operating business or not? Is it an asset? It seems to be generating decent free cash. I do find managements assertions of $100m+ profit due to the reversal a bit off putting - highly misleading in the context of the underlying cash performance.

A commercial deal with Biontech on TCR could come at any time, as could partnerships for immunobody or moditope. Grand challenge result expected November. Medium term - both moditope and immunobody are now funded into the next phase into the clinic. Risks - still waiting on the ind, but again that could come any time.

Enterprise value is simply the market value of the financial instruments fed by the free cash flow of the company. It is neither something to like or not like. If a company’s debt level is perceived as inappropriately high, then the equity value shrinks toward zero. As the debt is repaid and the risk removed, equity holders assume all the free cash flow and the equity valuation rises. That’s the hope here! I don’t quite understand the depth of pessimism around IRC. Using the 2017 numbers, it generated around $15m in operating cash flow post capex, and this figure could multiply as they move to full capacity and the transportation efficiencies come through. I am sure the market will ascribe a positive value to it at some point. The point is not whether IRC is a valuable operating asset - but how it is funded. So yes - there is a debt here which I think is well understood, but what is less well understood is - there is also an asset. I can imagine that if they can get to $30m+ fcf here then the asset could be worth north of $200m ie covers the debt but equity holders wiped. Risks are - fe prices which could go either way, and I’m not convinced by things mgmt come out with - eg swung to $100m+ net profit when they know this f

The current enterprise value of IRC is around $300m, made up of circa $200m net debt and a $100m market cap. So pogs c30% stake is currently valued at around $30m. But what happens if pog take on the $200m debt? 1) the equity value of irc moves from $100m to $300m, and the value of pogs stake rises from $30m to $100m, offsetting part of the $200m additional debt 2) I have not read the details of the covenants, but it MAY be that the guarantees are only invoked in the event IRC goes into administration, and it MAY be that if pog honours the guarantee they have first right to assume the assets off the administrator. In that event, they take on $200m additional debt, but take full ownership of an asset currently worth $300m. It would be very interesting to see the detail of the covenants on this. In the event the debt is placed with pog and the unrest payments stop, IRC may become cash generative in its own right particularly post cost reductions expected post bridge completion in 2019 and its standing as a low cost producer. Perhaps during 2019 therefore we can look forward to having two substantial assets - pog and irc - moving into recovery/growth mode. That’s the optimistic pov!:)

Kenj To repeat my point - I assume that pog take on the irc debt. Therefore, it is not about whether irc can support the debt, but whether pog have the capacity to absorb it. You use the historic 2017 figures as guidance but as we all know, moving toward 2019 the company is likely to see a significant uplift in free cash generation as the pox hub is completed and the capex falls. Anyone considering this as a potential debt investment will be aware of this, and also aware of the 7m+ oz resource they sit on. These are considerable factors in pogs favour. You state that they will not be able to pay the debt back before maturity - well of course they won’t! But that is true of companies the world over - utilities, telecoms, food producers, commodity miners etc - they all REVOLVE their debt. They are not expected to be debt free when the debt matures - just have the capacity to revolve it again. Full debt repayment is not only NOT required, but not even desirable, because it may not represent the appropriate mix of debt:equity for the company in question. Pog are likely to have a cash generative and resource backed business that is better off with some debt load - it is usually cheaper, and is certainly cheaper than equity right now. $800m sounds pretty high at this stage, but zero sounds far too low. If they can get net debt down to circa $400m over a 5 year period - this will be rated as a high quality asset again by both debt and equity markets. I’m sure all this is pretty black and white to the guys who were keen to head this up again, and they know that by doing little other than allowing the assets to sweat for a few years debt will be turned into equity value and they will be branded heroes again. Would still be interested to see your forecasts for fcf going in 2019/20. That’s what the banks will be looking at. imo

Kenj The aim of a bank is to lend money and earn interest on it. They even compete to do this. They are experienced at it. The aim of a bank is NOT to requisition assets and flog them off. They will not want to set up a pox hub department to either run it or flog it. The loan is IRC’s loan, but as guarantor the debt will sit with pog IF the covenants are triggered. I am assuming they will be, and it appears from ICBC’s actions that they are pushing for this. That is to be expected - the debt is a valuable asset for ICBC. Whether ICBC select to keep the debt, or if it is refinanced by another bank, really matters little to pog. What matters is whether the debt is attractive to ANY bank? Will pog be able to pay back the $800m total net debt at an attractive interest rate or not? My conclusion is, very likely. I do not any numbers on this point in your post, so with due respect, it is a little difficult to draw any conclusions from it. Have a stab at examining the EBITDA and free cash expectations and we can chat again. The world has become quite adjusted to high debt loads in recent decades..

EBITDA $200m pa. Interest $80m pa. Maintenance capex $30m pa. Tax at 20%. Would leave $70-80m to repay debt each year. Assuming some ebitda growth, $800m debt would be repaid in 5-10 years. No great shakes for a mid-large scale gold producer. Clearly execution risk remains - but that’s true when lending to any’indebted business. It is the business of banks to lend and earn interest - why turn away a decent prospect? Happy to be shot down on any of that btw :)

Just on your point re cash flow to support the $800m debt, i would be interested in any views on what ebida or fcf is expected post pox completion? I suspect it will be considerable. Anything above E200m ebida with falling capex will support that debt sum IMO.

Thanks kenj, I’m not convinced icbc will want a pox hub! I suspect it will be easier for all concerned if all parties agree to extend the debt profile and pog pay icbc a slightly higher rate of interest going forward. Alternatuvely, a sympathetic Russian bank may agree to refinance the whole debt at an enhanced rate of interest. Of course, the situation would be different if icbc perceived pog to not be a going concern, then they would rightly hit the panic button. But I don’t think we’re quite at that point yet. IMO

It would make great sense for the holders of IRC debt to play by the rules that POG will lay out, for the simple reason that if they don’t, they may end up with nothing. Owe me £250 it’s your problem. Owe me £250m it’s my problem. This is particularly the case when the holders of the debt know that in future years, POG are likely to be in a situation where they can repay the debt in full. The business and growth assets are largely built. It feels like an uncomfortable ride for shareholders - but unlike in other debt situations, at least we can be pretty confident cash generation is in its way. There is a reason why so many insiders played a tough game to get control here. IMHO :)

Thanks Ray- my question really related to, how many results are still to come in? Are we past the peak, or is the number of results expected in 2018-19 even higher than 2017? Clearly, if there are many more trial results to come in, it is too early to conclude that none will work.

The article bs posted (many thanks) states that hundreds of combo trials were taking place in 2017, and that the results were generally poor. Does anyone know how many combo trials are now taking place and how many results we have yet to see? I guess it’s a double edged sword - risk of someone finding a better alternative has fallen as a result of the failures, but on the other hand it highlights how high the hurdle is.