Hi Bacci,You put a very persuasive case so persuasive in fact...

Hi Bacci,

You put a very persuasive case so persuasive in fact that I do wonder how many potential investors in Penrice you have talked out of buying them and if that is the case then perhaps there is an argument for saying that they may now be oversold.

Just to go through some of your recent points.

The BiCarb plant is dependent on the Solvay plant. This can just as easily be seen as a positive. The complexity and replacement cost of this system means that the barriers to entry are enormous Penrice is unlikely to have a competitor come into Australia to set up stumps against them. Penrice seems to be beautifully placed with its own limestone quarry, a dedicated railway line to deliver it to the plant, nearby salt production, close to its customers and sitting on a very expensive looking piece of land near the coast. Anyone wanting to set up a new manufacturing business would die for these conditions.

Soda Ash is a commodity and Penrice are price takers big deal, how many companies get to control the price of their commodity.

The Solvay plant replacement cost of $2b and the end is inevitable. Even though nobody appears to be building Solvay plants any more, Wikepedia quotes that three quarters of soda ash production currently comes from Solvay Plants with the remainder coming from scarce natural deposits.

The Solvay process is energy intensive. So what. There appears to be no other viable method of production so every producer has to face these same high energy costs and they have to be reflected in the final cost of the product. In fact better than that, you tell us that Penrice has a deal to buy cheap energy from the adjacent Co Gen plant.

Capital Run Down it would cost around $2m to replace. There is no thought of ever replacing this plant and the fact that the costs are prohibitive means that Penrice has the game to itself in Australia. Shareholders can buy this whole company for $27.4 million at a share price of 30c and for that you get this massive manufacturing company that cost billions to create. I think it is a very fair risk at these prices.

Plant Hazard. Solvay plants have been producing soda ash for more than 100 years. The technology is very well tried. This method of production would not have lasted for so long and continue to produce three quarters of the soda ash production if there were unsurmountable problems with the process.

Corporate Orphan. Just about every listed corporation is an orphan that cant depend on parents to survive. As I said above, Solvay plants have been around for generations. They are big enough and old enough to look after themselves.

Lack of Diversification. Many investors see this as a positive. This company is focussed on a well designed system of a quarry, a soda ash plant and a sodium bicarbonate plant and a dedicated railway line connecting them all. It melds in extremely well.

Profit and Cash flow. Yes, the company is not making millions but if it was the share price would not have fallen from $2.30 to 30c over the last five years. But equally it is not losing heaps of money. It has come through the global financial crisis basically all square and there must now be an argument for saying it is underpriced.

No blue sky. I disagree wholeheartedly here. Yes, there is risk but there is also enormous blue sky. If they get this right with sales of $160m a year with potential to grow and equipment worth billions then there is massive upside here. Many of the sectors in which there customers operate have been in the doldrums in recent years e.g. wine sales, new car sales, house building. But they wont stay down forever. Even if the share price were to get back to its early listing price of $2.30, that is a seven to eight fold increase and it is not impossible for such a massive operation which has no competition within Australia.

Defined benefit Superannuation. If the company has a liability here, then I presume that the auditors would insist that it be registered in the balance sheet as a liability. Defined benefits work both ways if there is a liability the company pays it but if there is a surplus then the company gets it.

Environmental problems of CaCl. There are none as far as I am aware. Sure they cant dump it in the river any more but I see it can be used in roadwork filling and I also see where environmental companies are actually promoting the production of CaCl as a way of using up carbon dioxide emissions. It sounds a lot better to me that trying to stick CO2 back in the ground.

If ACI leave them they would be stuffed. Why would the leave them. ACI are as dependent on Penrice as Penrice is on them. The two plants are within about 10kms of each other. Why would ACI risk sending its local provider broke so that it would have to depend on imports of soda ash.

Interested in how you think its gearing is reducing. Compare its debt to its current market cap. As I am sure you know, gearing is not measured in terms of market cap. The formula is net debt/net debt + equity. The company itself recently told us that its gearing had dropped from 59 percent in June 2009 to 41 percent in December 2009. The net assets have increased from $61.5m to $91.1m. The net tangible asset backing is 79.7c a share. The company raised $28.1m just in October of 2009. At a current market cap of $27.4m it is starting to look extraordinarily cheap particularly when it is still announcing profits.

Finally the comments from another poster on the problem with maintaining the railroad. Over here in the West where I live, the miners are fighting for access to railroads to get their product to the coast. Penrice has its own dedicated line. They would die for such an asset over here.

I have copped a huge hiding on Penrice Soda and I wish I had read your postings when the shares were in the seventies and perhaps I would have got out. But I think it is fair to ask the question: Has the fall in price now been overdone? It was a minor downgrade that the company announced in April and they are still predicting a profit. The company forecast free cash flow of negative $7m to 10m but the operating cash flow (which most investors refer to) is around break even coming out of a vicious global economic crisis. That is not a company about to go under in my view. Yet the share price has fallen from 75c to 30c in three months and was falling steeply prior to that. I just wonder what part your negative view might have played in destroying the confidence of those considering an investment here.

I spent a few hours in recent days using goggle earth to look at the companys quarry in Angaston and their plant in Osborne. This is an amazing business for such a tiny market cap. It is an interesting punt in my view.

GPASAS