IER 1&2 comparison

Here is a summary of the differences I have interpreted between IER 1 and 2.

These are based on my understanding of the documents, and there is no guarantee my interpretation of them is correct.

IER 1 was using data as at 28 February 2018 and was prepared by Deloitte in conjunction with SRK Consulting.

IER used data as at 30 September 2018 and was prepared by BDO Corporate (WA) Pty Ltd in conjunction CSA Global Pty Ltd.

These will be referred to as D (Deliotte), SRK Consulting (S), BDO (B) and CSA Global (C), as I think I will be typing them a bit, and this could be a lengthy post.

I read IER 2, before going back to look at IER 1 (these will be referred as 1 and 2 from now on). 1. Being the D report.

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The first thing that struck me about 2 was that it took me about 32 pages to find the date the report was effective from.

The second thing that struck me was that 2 was dated November 27 (or 29, can't remember), but it was a valuation as at 30 September 2018.

This was interesting because Realm really only has 2 main assets. Cash in the bank and the coal assets around
Foxleigh.

They chose to use a figure that was as good as 3 months old, and a figure that was taken a mere 5 days after C completed a mine visit to the Foxleigh tenements.
I suspect it was going to take C a fair bit longer than that to do all of their modelling and report compilation.

We all know it is a very difficult and timely process to get an accurate cash on hand. This matter may have been irrelevant, given the recent history of how the cash in the bank has been tracking (insert sarcasm somewhere).

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1 valuation range $1.62 to $1.92 per share
2 valuation range $1.08 to $1.44 per share.

Net cash had increased by about $30m (after taking in to account tax liabilities) between 1 and 2, that's worth about 12 cents per share.

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There are 4 segments of the reporting of the value individual assets worth discussing.

1. Katingan Ria (Indonesia project) was valued at $9m to $12m in 1, compared to $0 in 2.

I believe this to be fair enough, given Realm have announced they are not continuing with the asset and haven't been able to find a buyer.

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2. Corporate Costs.

In 1 they were (10) - (11). That's a negative figure. 1 states D calculated this by using a Discounted Cash Flow (DCF) methodology. They have seemingly worked this out themselves as far as I can tell.

The lower the negative figure the better it is for us minority shareholders.

In 2 they were (28).

That's a significant figure, which I believe is amplified further because in 1 they were working on a 24 mine life, but in 2 they were working on a 15 year mine life.

2 states words to the effect of C, that the model was prepared in real terms and includes the Company's corporate costs figures, but certain unknown adjustments were made as C considered the companies predictions on corporate costs were a lot higher than they thought they needed to be.

In other words it appears the Realm management have appeared to make these as high as possible to attempt reduce the valuation of the shares. And we all know who is running the show at Realm! Of course they will dispute this. That's my interpretation of it anyway.

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3. Net cash.

We know about that. Based on the figures used in 1 and 2, it's about 12c a share more in 2

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4. Foxleigh mine (and supporting tenements).

This is where the real difference is, as you may have guessed.

1 has Foxleigh valued at $340m - $410m and exploration assets at $1m - $2m
2 has Foxleigh valued at $159m (low), $187m (preferred), $216m (high). Exploration assets $40m, $58m, $75m.

1 and 2 use very similar assumptions around ROM production estimations, FX rate predictions, and coal price (PCI) projections, although 2 uses slightly higher long term prices.

There are some assumptions in 1 that are not in 2.

1 prices in a 50%-75% chance that cost reductions can be found going forward. The figures are provided in a chart and they are not substantial (under $2m per year from memory).

2 believes there is no reasonable basis to conclude this.

I would of thought every business is always looking for ways to cut costs. They have relatively new excavators now as well.

1 states there is a very reasonable chance that material from currently undeveloped pits (where drilling has occured and resources are declared) can be mined (at a lower capacity than current) between 2032 and 2041 (Daggers Tip, Far South, Pipeline, and Roper Creek).

2 states that they are working upon a maximum 15 year mine life (I.e nothing left to mine after 2032) and state there is nothing to support this given there are no current pits, mine plans, and discounts this aspect.

Valuations are based on the current mine plan prepared by Realm management, and only take in to consideration  mining being able to take place from Foxleigh Plains and One Tree pits. 1 gives a lot more value to the Roper a Creek project than 2 does.

1 values Realm using marketable reserves
2 values Realm using ROM reserves.

Reliance is placed on Realm's financial model, which currently only includes mining taking place from Foxleigh Plains and One Tree pits.

2 appears to place a lot more reliance on modelling prepared by the company (which it seems would appear to be to minority shareholders detriment).

2 - we have engaged C to act as independent expert specialist to perform a review of the technical project assumptions contained in the Foxleigh cash flow model PREPARED BY THE COMPANY (probably morse code for higher than expected expenses (see corporate costs) and lower than expected revenues.

2 - a detailed cash flow model for Foxleigh was prepared by the DIRECTORS OF REALM with the assistance of advisors. (I wonder who did all of the talking).



The part that had me shaking my head the most (only just) was 2 said that their valuation of the Foxleigh mine was based on a market value if the mine was to be sold on the open market.

If I went to T2 and offered them between $159m and $216m for it I know how long it would take for them to start laughing and then walk away.

Obviously Realm is now liable for tax, but $159m to $216m on a DCF valuation does not seem adequate to me.

Taurus know that, but I can't expand further on that statement.

I wonder how many IE's may have got knocked out before BDO was available to select.

They certainly took their chance to have what seems a crack at one of the big 4.