It sure looks like boys from SFX have turned up fly the flag,...

It sure looks like boys from SFX have turned up fly the flag, where were you when the punters were crying out for an explanation? I’m only helping to shine a light on the TA and FA for the shareholders wondering why the share price is sinking. To be fair, the company has been pretty quiet while the share price walked back down from $1.20s the mid 50s, is it any wonder there is a wiff of fear and questions being asked.

 

I apologise for some minor math errors and lack of proofing, not egregious, but by the time that post was done, I was done. No excuse for misleading work but forgivable for slightly sloppy work. Still, I will try harder, by the time I finish up with SFX I’ll be full bottle on DFS reports and do better next time. Live and learn is my motto.

 

That said, I did review after posting and realised the $100M NPV deduction for capital instead of $80M was wrong. I had $95M rounded to $100M but then went back and updated to more realistic figures for accuracy… without following the working through doh. On another reading I’ agree how convoluted the post is regards the figures and calcs. Below is more simplified update to the BFS numbers based on public announcements.

 

BFS NPV8% post tax = $620M

Add Opex Savings NAIF infrastructure =$65M (my guess opex savings from $65M capex investment after int, 8% disc etc)

Stage 1 Capex Addback = $350M 

Stage 2 Capex Addback = $150M (ie $190M disc for 3 years 8%)

Total 8% discountedpost tax free cash flow = $1,185M

 

This is the total discounted post-tax free cash flow within the original BFS after capex is removed, NAIF opex NPV savings added in, simple and clean.  Then we need to reduce the positive free cash flow back down with the new Capex and Start-up cost estimates:

 

Stage 1 Capex Addback = -$-398M

NAIF Capex Infrastructure = -$65M

Stage 2 Capex Addback = -$190M  ($240 disc for 3 years 8%)

Total Investment/Start-upCosts = -$653M

 

Adjusted NPV post tax = $1,185 – 653 = $532M  (like for like with the BFS)

 

Less start-up Working Cap, Corp Cost, Int, Fees etc = -$139M (30% of capex as per ASX release)

 

Final Adjusted NPVpost tax & start-up costs = $532 –$139M = $393M

 

 

This is only slightly different than my rushed first effort because I chose to reduce the “30% of capex” corporate start-up costs to $115M to be generous. I also didn’t include an opex savings on the NAIF infrastructure, and I made some minor arithmetic errors. As things worked out it pretty much cancelled out my error (funny that haha but still very real).

 

The difference between $393M, 405M or $440M is immaterial to the discussion IMO. The NPV figure is what the project is worth in post-tax, 8% discounted figures back to the start date for the owner or any purchaser and yes, strategic considerations are worth more than the difference between them. The project is more expensive, less profitable as per the NPV (analysis designed specifically measure and compare competing projects) but still strategic which is also part of my point. Only a strategic buyer pays overs for an expensive, low return project. Strategic value is only meaningful to a few.

 

I need to address some of the points raised by the recently arrived posters. Balilow suggests that I should have used Bride St updated NPV of $614M which are unexplained and unsupported. How did Bridge come up with $614, diff disc rate, spot prices? what changes to opex? Accounting for the capex as shown above is straightforward enough but to simply reduce $620M to $614M after a $160M capex increase before accounting for start-up corp costs is not just unexplained but unreasonable. My entire analysis was based on the BFS, which had the following NPV figures reported.

 

 

My new simplified NPV adjustment has only made the assumption of $65M opex savings after 3.5% int per annum and then discounted back 8%. The other capex changes are large and factual and certainly set the new NPV much lower than $614M. Whatever changes Bridge made to the NPV, they clearly used inputs radically different from the BFS. Over a 42 year project I would caution using spot prices and FX rates because long term predictions are more relevant, for what they are worth. Nice piece of selective cherry picking btw, here’s another one. In October Blue Ocean reduced their NPV by estimation by $139M post the capex increase (excluding the $139M start-up corporatecost), while I only reduced the NPV by $85M. Too soft, I know.

 

The point is you cannot mix and match new NPV’s using different variables and best case numbers presented by a SFX engaged analyst (“Bridge Street Capital Partners are Corporate Advisors to SFX and have received fees from SFX for services provided”). Keep it real and simple, I wanted to know how the company BFS changed with increased capital and corporate costs.

 

The facts are pretty clear based on changes to the BFS. Capex has increased by $95M ($85M disc at 8% 3 years on stage 2) with no company reported direct opex savings (“more robust operation” is not a factual cost saving). The NAIF power and infrastructure being brought in house I have assumed an equivalent $65M opex savings.

 

The fact remains that the project now requires $703M capex instead of $540M capex  and NPV has dropped from $620M post tax to $535M.

 

The fact remains that “a provision of approximately 30% of the estimated capital expenditure to cover working capital requirements, corporate overheads and other customer lender requirements during the 2 year construction period (including cost over-run provision, financing fees, interest on drawn debt and debt service reserve account funding)” of $139M is effectively added to the $703M capex, raising the total investment required for TB to $842M. No small investment indeed.

 

The fact remains based on SFX announcements, that the equity required for finance and green light to go now stands at some $257M, no trifling amount. It is self-evident that any ‘buy-in’ price paid to SFX for the right to JV or takeover the project is added to that partners total project costs and equity required for their share of the finance/development. If Iluka made a takeover for example at $1.20/share add $312M to the $842M project and investment and start-up costs… now a $1.15B play!

 

I’m happy to admit the mistakes I made but they honestly don’t change materially my TA, FA or bottom-line conclusions, which I was asked for, and I’ll summarise again.

 

The price action falling to a 12 month low, below half the price in November is a worrying signal, fact. Nobody can spin that the price failing to hold the 65c cap raise price, then failing to hold the 60c price after two months of an epic market bounce is a good sign. Buyers have disappeared and only come back below the ask to provide desperately needed support to hold 57c and prevent a rout.

 

The project has deteriorated financially with capex blowouts and a much larger start-up corporate cost and working capital than even the affiliated analyst considered. The higher capex for smaller NPV leaves less room for a JV partner or takeover suitor to buy-in and still make sense of the investment.

 

There is strategic value in TB, especially for Iluka, and hopefully they can be brought into play during this structured project sell-down. It is worth more to Iluka than anyone else IMO and they will want to deal now or probably never if another blocking stake is taken up. The time is right, it does look a world class project even if expensive.

 

SFX is not necessarily under-valued per se, but the weak share price reflects the fear of a cap raise if significant partner funding cannot be locked down. Franpower (welcome to HC) says the share price is irrelevant unless a cap raise is needed, “but it would mean much higher prices than this would be warranted post raise”. Far from irrelevant, a low share price is the problem because it means an even lower share price for a future discounted placement. A lot hangs on a funding deal being done with a buy-in partner, care to share with us your reason for such optimism? Some comfort from a company insider would be much appreciated.

 

I never said the shares are a sell, it is all a gamble on a good buy-in deal getting done. There is more share price upside if a good partner buy-in funding deal is done than downside if SFX has to go to the market for an all equity raise placement IMO. I honestly don’t know at what price the market will fund $257M if a strategic partner cannot be shaken out. There is a chance one or more cornerstone investors will take up shares higher than market prices for strategic and practical reasons, happened before.

 

Some associated with the company will know if a good deal is happening and I expect will leak good news before the market is informed. This whole thread started because the price action looked so weak and holders were asking wtf is going on if strategic partners are falling over themselves to buy-in. Why is the share price tanking into a bull market?

 

Many posters have an agenda, many posters make valid points, everyone needs to parse their own interpretation. Believe it or not, I simply enjoy the research, buying low and selling high. I used to hold a bit of SFX, now I only hold a few and not enough to matter. Let’s see if Bruce and his team can land a big fish, I really hope he does. I'm a big fan of all WA resource projects, the more the merrier, and I hope everyone makes good money.  As always, place your bets ….

Cheers