Have had some time to think today. Have been floored by the absence of competitive tension I expected from other Kolwezi operators and Huayou, head was spinning.
The offer from Chengtun - $114M, exceeds pre tax NPV10% (stage 1) using today’s commodity prices and likely payability (terms are not as good as when cobalt was $40+), but also including the new mining code (ownership reduced + higher royalty). If one uses a higher discount rate, reflecting the high interest rate associated with debt raised for DRC the offer is at a premium to NPV.
For an offer made in TODAY’s circumstances, with no competitive element involved (our only way to access a better premium) it seems to be fair for Nzuri.
The question is whether Nzuri should hold out and keep going, wait for better copper and cobalt prices, for the govt to reverse some of this idiotic mining code and also figuring out how to discount future upside appropriately with foreseen and unforeseen risk.
Not a question I can answer for everyone. From my own perspective I place zero confidence in my future outlook, I missed too much despite the fact that it was staring me in the face. I’m still mentally calibrated to a cobalt bull market even though its all but over for the next few years.
The other question is WTF is Huayou thinking. Earlier I interpreted their board level approval as a sign they are bowing out. On reflection, this is still compatible with a future bid and does not eliminate the possibility, even if they wanted to make an offer the best way is to let this 37c offer sit in the market, increase their 14.9% to 19.9% on market at UNDER the offer price (seems to be plenty of sellers at 31-32c), let Nzuri tackle some of the approvals and then come in with a bid on top.
The volume going through today made me think this way. Just who is buying for a fixed 15% pre-tax return on a Congolese junior before DRC govt. approvals?
I’m not inviting people to speculate on a higher bid, in fact I think that’s not a good idea at all. I’m just trying to reconcile what I know with what’s happening. Perhaps there is nothing more to see, but I’m not eliminating the possibility.So what to do, sell or hang on. I have decided for now to hold, I want to see what happens over next few weeks. On reflection this offer is still compatible with my expectations?
Will I be disappointed with 37c, no, I sat through a few exploration programs with no downside, the DRC govt tried to destroy the mining industry and cobalt price dropped 75-80% and I am looking at close to 100% gain. Any other management team would have pissed this asset away as ASX top gun boards tend to do. We also tend to underestimate the challenge presented by the mining code (specifically technicalities that challenge ability to finance) and I am grateful our two man team seem to be managing to navigate us through the cul de sac.
However once Nzuri and Sunstone wind up I think in future I'll be sticking with gold prospects in Australia, I've had it with moving goal posts, government and commodity price. I've become that boring speculator I used to laugh at.
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