Hey Franpower, I really appreciate thetime you are putting to...

Hey Franpower, I really appreciate thetime you are putting to work though this analysis.

The NPV debate is partly factual andpartly subjective, both regards our points of view and to what my original assessment was asked to consider. To some extent we are at cross purposes on the NPV. I only consideredthe demonstrable capex changes post bank DFS review, largely because I waslooking to rationalise why the share price was getting sold down and why thesale process might not have been going so well. You are looking at rationalisingwhy the project still has great value and a high NPV despite the capex increaseshoisted onto the project. From that perspective both our approaches are correctin context with their aims. Things are distilling out though, and the importantvariables coming to the fore.

Re-pricing the NPV is clearly our biggest discrepancy and one that should rightfully be considered in an SFXvaluation as it will be by all potential buyers who will have their own pricedeck to put in the model. I aim to address this in another detailed post, worthy of deeper consideration imo, especially in light of other min sands miners putting out some outrageous price decks..

Competitive tension is key to the bestoutcome, UBS should know how to play it, but Iluka is key to competitivetension. I agree they are such a good strategic fit for TB they are the naturalbuyers. If I was ILU I would buy TB, get it up and running, thenidle back Ambrosia and Eneabba as future swing production sources while TB andCataby do the heavy lifting. Iluka would love a long term Zr project noquestion, but what price are they prepared to pay is the question?

OK, so given there is enormous strategic value of TB to Iluka, SFX management justneed to shake out an offer instead of going for a huge CR or selling to thirdparties as you say. Ideally that offer comes because good JV buy-in deals are on the tableto push Iluka along. Management cannot roll over for a tummy tickle by ILUbefore at least trying on the third-party sale 'price discovery'. Certainly not if ILU hasonly offered a measly premium to market price in any potential early, conditional offer discussions (which from my understanding don’t have to be reported to themarket). If I were ILU I would only make an insultingly low, highly conditionaloffer then stand back and see if anyone else is seriously interested. If itends up in a bidding war then it was always going to end up in a bidding war. However,I don’t think ILU are interested in a bidding war.

Management try to push ILU for a higherprice through the structured sale process. If this fails, at worst they go cap in hand and asking for a decent offer before “locking up” the project with a number of prickly JVpartners or controlling cornerstone investors in the heads. Cornerstone investorswill likely pay a premium for a large placement to get set, but unfortunately thosetypes can block future corporate action (as with CMM if you followed thatsorry saga). Neither SFX or ILU want that outcome but it is a valid threat tohold over ILU for a decent TO offer. ILU remains a genuine chance of making aplay for SFX and all investors should apportion a risked valuation to such.

I have been giving some thought recentlyto why I am not more bullish or topping up at these price levels. You havechallenged the zeitgeist and I am always happy to change my mind when the factschange. It all comes down to the probability of a significant CR at prices below60c in conjunction with whatever project level sell-down they achieve. Absent aTO offer, I just don’t think they will sell down enough of the project to coverSFX’s share of capex and working capital etc, without also having to hit themarket with big CR.

For example, based on your re-priced ‘bestcase’ NPV of $579M, selling 33% of the project at 50% discount to NPV willprovide SFX with $96.5M. Subtracting $340M Taurus and NAIF debt from $604M equityrequired for the financiers green light leaves $264M equity required. Subtract $14M spentsince the Dec 65c CR for a round $250M equity funding required for JVco. SFX 66%share of that $250M is $166.5M, less the $96.5M selling down 33% of JVco, stillleaves a $70M CR for SFX on market. That is a large amount that will probably includea SPP and enough liquidity post raise to buy more around the issue price if desired.

Simply put, there does not seem to be arush to buy more SFX unless there is a TO offer, or the next large CR is surprisinglyabove 65c. Not going hard or topping up now risks either missing out on a TOoffer one morning out of the blue, or being breakeven or up a few cents buying into someform of CR circa 60c, or being up quite a few cents if avery large discounted CR comes to market. Not dissimilar to previous options Ihave outlined for HC readers and they themselves have no doubt considered.

I don’t think we can take a large CR offthe table completely as you suggest, and I think some reasonable size CR below65c is almost a given if no TO offer eventuates. I am certainly on board with the structuredsale process being on track with good odds of some form of sell down, but I’mbecoming a lot more interested in ILU quietly stalking in the background. Alarge part of this is due to better weighting to the long term, heavilydiscounted earnings of a 42 year project that are not flattering to NPV calculations as you say,some part is the value of product re-pricing which is fair enough in the current environment,all of which casts a spotlight on the strategic value of the asset to ILU.

Cheers for now.