Is Karara now profitable ??, page-53

The Baker,

I have posted a number of comments on KML's debt. I have rechecked my calcs.

As at 24 May 2017 KML had a debt of $US2,564.32m including 3 loans valued at $US900m which Ansteel rolls over when they mature.

When the company refinanced the $2.564b ($US1.481b on 24-05-15 plus $US900 + $AUD244 loans) GBG shareholders voted not to guarantee all loans including the $1.481b loan which is due to be repaid in 2030 (12 years away).

Also as the $US900 (400+300+200m) loans matured GBG did not guarantee these loans. These loans have all been rolled over and GBG has no liability.

So GBG has no liability for any KML loans EXCEPT some guarantees with suppliers of services such as the train contract and other similar types of guarantees.

I would respectfully comment that Maradyne is a bit bullish on his prices. It must be remembered that the price we are advised quarterly about KML sale price excludes a whole lot of deductions which reduce our actual sale price and also our margin.

There is a $AUD244m loan that Ansteel has given KML which Ansteel have the option to convert to KML shares and this would reduce GBG's holding to approx 38%.

Ansteel has not done this YET.

Problem for Ansteel is that it owns 36% of GBG and it wants to maximise its value of GBG as well as KML. Reducing GBG % to 38% of KML would reduce share price of GBG. I haven't done the figures but it may be that it is better to not convert $244m loan.

But if KML goes bust - GBG looses all its shares in KML.

With respect to whether KML is making money, it all depends upon the interest rate KML is paying for the loans. Fortescue (FMG) had/has loans and is paying around 7% (from memory), but these were a lot less secure than KML's.

At 3% interest on loans KML should be making cash money on about $AUD100-110 per tonne BUT from an accounting point of view there is a lot of depreciation and maintenance costs which would eat an accounting cost out of any surplus.

My view is that KML needs $AUD120 per tonne for a prolonged period (say 2 to 4 years) to see GBG give a value to KML. I do not have a crystal ball on the price of 66% grade iron ore and I don't know KML's interest rate on its loans.

GBG's cobalt and copper move may bring value, but there are a lot who bought in when GBG was $1.92 - $1.20 range so unless that averaged down they would be well and truly underwater and never to surface.