Ann: Managing Director Video Interview with Boardroom Media, page-5

Achieving investment-payback and actually paying off the financing used to purchase an investment are separate events. Useful to be clear on the difference between 3 things:

1 - Madden purchase-price - which was US$17.5 million paid to the former owner

2 - How the purchase of Madden was financed - US$14.4 million of 3-year-duration convertible notes. The notes pay an 11 % annual coupon and are convertible to common equity at a conversion price of A$0.103 cents per share. Additionally, Elk secured a US$6 million line of credit at Prime-plus-2% by hedging 80 % of Maddens first 12 months production at $2.93 and 40 % of Maddens second 12 months of production at $2.82. That $6 million facility must be fully paid-down over 3 years.

3 - What revenue the Madden asset generates - which was US$4.95 million from acquisition date in mid-March-2017 through FY17 year-end on 30-June-2017. Additionally, Madden sold $10.1 million worth of fossil fuels ($8.9m gas + $1.2m sulfer) in the first 6 months of FY18 - ending 31-December-2017. That's roughly US$15 million of revenue from Madden over the first 9 months, following purchase.

Revenue from Madden . . . beyond what is needed to amortize the $6 million line-of-credit and to pay the 11 % coupon on the $14.4 million of convertible notes . . . is presumably being re-invested to grow Elk's business . . . or to pay-down other debt such as for Grieve completion or Aneth purchase.


Without diving down into full/detailed accounting treatment of the various interest amounts on the notes and the line-of-credit . . . plus the bankers fees for arranging the convertible notes . . . plus odds-and-ends like payments to the (minority-owners) Crow Indian nation, my own simplified math is like this:

- Madden is generating roughly $1.5 million per month in revenue for Elk.

- During the 15 months since the transaction closed in mid-March-2017, that revenue run-rate exceeds $20 million dollars.

- Conclusion: investment payback has been achieved already in cash-equivalent terms

Sure, the convertible-note holders probably won't exit until March-2020, because they receive an 11% annual coupon and also have the right to convert their principle-plus-interest into Elk-shares at 10.3 cents per share. I'm pretty sure the note-holders will pocket substantial capital-gains by doing so, assuming that the market will value Elk shares well above 10.3 cents each, 21 months from now (in March 2020).

A pessimist may grumble about the resulting dilution to other Elk share-holders from conversion of the $14.4 million worth of notes. Not me! I say thank you to those note-holders. I also say that they are very welcome to their (probable) capital gains upon conversion of their notes to equity, because their loan of $14.4 million to Elk in March 2017 made the purchase of Madden possible.

Let's remember that in March-2017, Elk had no revenue; was still a double-digit number of months away from expectation of first-oil from Grieve; and the Elk share-price was below 8 cents throughout the month of March 2017.

The expected life-span of the Madden asset is at least 16 years and the projected revenue from Madden over that life-span is a range of $165-195 million dollars.


All the above interpretations . . . any errors are solely my own . . . are taken from just 2 collaterals. First is the (audited) FY-2017 annual report for Elk. Second is the 36-slide investor-update from April 2018.

I welcome being educated if anyone understands the Madden transaction considerations differently. Absent being educated otherwise, it seems to me that purchase of Madden was another terrifically value-accretive purchase.

"Well done, Elk management!" is my overall summary on Madden.