Value Discussion, page-3

At the risk of being overly simplistic, I think this can be best described as a two-scenario (binary) situation:

Scenario A) If the water issue does get fixed, then from FY18 onwards KRM ought to be able to produce 40koz pa at a US$800/oz AISC. At the current POG and SP, that gives a static IRR in the region of 40% pa.

Scenario B) If the water issue does not get fixed, this going to be worth zero (probably a bit harsh, but conservative).

The main question for me then is, what static IRR do I want from a one-mine gold producer operating in Indonesia? Factoring in country risk and looking at the IRRs of comparables operating in Australia, I’d say something like 15% pa (that is obviously a subjective assessment).

So, what probability of success (let’s call it P) is such that P * 40% + (1-P) * 0% >= 15%? The answer is P >= 37.5%.

What do I know about what P really is? Nothing, but I do know that Chairman John Morris recently added 380k$ worth of stock to his own account (where he already held 7.6m shares), and I also know that existing substantial shareholders recently took part in the cap raising for a total of 8.5m$.

Would all these guys want to increase their already significant exposure to this Company if they didn’t see a probability of success of at least 37.5%? People do make mistakes but, as I said, the situation is binary here and I believe the Chairman of the Company and its substantial shareholders have enough technical knowledge to decide whether this water issue is fixable (at a cost that makes economic sense) or not.

From all of the above, I conclude that the probability-weighted static IRR of KRM is currently higher (perhaps substantially higher) than 15%, on which basis I have bought in and am planning to keep averaging in at the current prices until further news.

All IMHO and GLTAH.