state of the ccu nation

Few things ...

1. Magna

Its not clear to me why shareholders are so down on Magna. We are being offered a RENOUNCEABLE Rights Issue for which Magna is acting as a free underwriter. This actually places Magna at a disadvantage to other shareholders and is one of the rare occasions that a Company Board has taken care of retail shareholders. How so?

Shareholders with the funds to do so are able to retain their relative stake by exercising their rights.

Shareholders unable to take up their rights can sell their rights to other shareholders or new shareholders, who presumably believe that exercising the rights is a good idea.

Under either of these scenarios, all non-Magna rights should be exercised and so Magna's relative holding will not change.

But what if the SP trades below 13c? Under this scenario, those that believe in the company will be able to maintain their relative holding by purchasing more shares at a discount to the price Magna is willing to pay. Moreover, they will be invested in a company in which they believe the underlying share value is less than 13c, but will have an investor prepared to pay 13c for additional equity. This has the effect of increasing the value of their sub-13c investment.

My understanding is that Magna is not able to buy additional rights, nor is it able to buy more shares. It is only able to maintain its stake by exercising its rights at 13c, and is only able to increase its stake if other shareholder fail to exercise or sell their rights. All other shareholders are able to increase their stake at below 13c (should the SP trade that low) and / or increase their relative stake by applying for shares additional to their rights - and they get first bite at this cherry (ie, before Magna).

2. CBA

Its a rare occasion indeed that I compliment a bank, but to CBA's credit, they have agreed to delayed loan repayments in order to give CCU a chance to get the ball mill working. Moreover, they only required CCU to close out a portion of its $29 hedges - a huge endorsement. If CBA wanted to play it even safer, they could have required CCU to convert all its $29 hedges to $23 hedges. CBA has demonstrated more confidence in the company's ability to trade out of its cashflow problems than have CCU shareholders. A rare occurrence indeed.

3. Going forward

My spreadsheet (and this is certainly not investment advice) shows that even with a silver price of around $22 and production of around 500,000oz / qtr, CCU is cashflow positive. You can make your own judgements about the POS, but given the stockpile, an operating ball mill and CBAs due diligence, 500,000oz / qtr is a bit of a no-brainer to me. A $3.50/oz margin per oz of production equates to positive cashflow of about 2c/share, which in itself justifies a SP of well over 13c. The upside is huge if either production can get closer to the 600,000oz/qtr originally mooted for the mine, or the POS gets back toward $30.

I'm one of the many shareholders who bought into CCU well above these price levels. But as irritating as that is, it makes no sense to throw the baby out with the bathwater. Much of the criticism of the mine design and the company's management were relevant at 80cps, 50cps even 30cps. However, we're now presented with an opportunity to take on the (relatively low in my mind) risks of getting production to 500,000oz/qtr and maintaining a POS above $22/oz at 13cps. As investors we should let previous losses cloud our judgement on present opportunities.