sick old dog, page-16

Joewolf,
Thank you for the thoughtful reply.

I am very pessimistic about the future for Penrice and I will give you a list of ten of the main reasons in this post. I will not buy PSH shares under their current structure as in my view the appropriate EV is less than the debt.

You put your finger on a number of good points we agree on;

a) The BiCarb plant lives off the Solvay plant. If the Solvay plant closes the BiCarb plant is a write off.
b)Soda Ash is a commodity. Its selling price is set by the landed cost of imported Soda Ash. PSH is a price taker.
c)The Solvay plant needs to run at close to full output of around 330,000 TPA to be economic. The loss of a major customer such as ACI would be fatal. I expect the customers know this.

Penrice's Bleak Outlook;

1)Energy prices. The Solvay process is energy intensive. PSH is sensitive to gas, electricity, steam and coke prices. These are only going one way. In the late nineties PSH did a deal to buy energy from an adjacent Co Gen plant. I expect that deal shielded them from energy prices to some extent but at some time will need to be renegotiated.

2)Capital Run Down. The Solvay process is very capital intensive. It is a complex, heavy engineering plant. A very important question to ask is "what would be the replacement cost and how much is being spent per year to maintain its value?". This is different from break down maintenance. I guess it would cost around $2,000m to replace and it has a negligible annual reinvestment in depreciation. This is no different from a small business man buying a depreciated old truck and running it into the ground,the end is inevitable.

3)Plant Hazard. This plant has high temperatures, high pressures and dangerous chemicals. It is a serious bit of kit. I trust the management are looking after its safety correctly but the attitude of BHP to an incident at the HBI plant illustrates the modern and correct approach of zero risk tolerance. A rigourous safety inspection by authorities or insurers of the aged plant might be difficult.

4)Corportae Orphan. PSH was once a subsidary of ICI. ICI provided technical support and deep help. PSH is on its own technically.

5)Lack of diversification. PSH is a one trick pony. If the Solvay plant breaks or is closed down PSH is finished. If it has to survive a rainy day it has no surplus to live on. It has used all its debt capacity and equity has been tapped recently.

6)Profit and Cash flow. I am very suspicious of accounting which results in negative cashflow but a reported profit. As PSH is so close to the wind I think cashflow is more meaningful. I note the large stock of overburden/product.

7)Anaemia. A $5m reported profit is a very small percentage of gross sales or COGS or replacement capital. In such a complex business it could easily be wiped out.

8)No Blue Sky. I can't see the potential windfall or technology breakthrough which balances downside risk. The upside is just muddling through.

9)Defined Benefits. I think PSH inherited the old ICI Defined Benefit super fund. I don't know how many current or ex employees are on this. This seems like a considerable risk in volatile markets for a cash flow negative fully geared company.

10)Environmental. I am not sure how they are disposing of the large amount of CaCl waste. I think it was once dumped in the adjacent river. I am not sure how the neighbours feel about such an old and complex industrial plant in what is now a largely residential area but this issue is only going one way.

Regards
Bacci