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Interesting, but unfortunately, the issuance of the Series B...

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robynjackson

219 Posts.

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24/06/18

18:18

Post #: 33913626
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Originally posted by ExpatSingapore ↑

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.

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Interesting, but unfortunately, the issuance of the Series B Preferred stocks makes any ongoing revenue and profit to Elk irrelevant as long as they are outstanding and even has an impact after they are paid off.

This was not addressed by your post at all.

ELK Price at posting: 7.7¢ Sentiment: Sell Disclosure: Not Held
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