Fellow loyal long-time investors and our new friends, Now that we have come to the phase where a resource upgrade is about to be announced - anytime in the next 2 weeks I suspect - the question is what is the fundamental value of this stock? There are of course countless ways to do this but I will attempt a few just to get a ball-park figure.
Method 1: Assume a resource upgrade to 2p of just 1,000PJ (about 1/3 of the 2c resource). The market attributes values that range from $0.10/GJ (Leigh Creek presently) to $1.60 (Beach Energy) for 2c gas. The average is $0.75 and that included LCK, so the average is now a little higher ~ $0.76. If one attributes to LCK's 2p gas a value of just $0.38/GJ (half the market average for 2c gas) the value of LCK is: [1,000PJ = 1.0bn GJ x $0.38 = $380m divided by say 550m shares (includes options and the kitchen sink)] = $0.69/share. It should be noted that 1,000PJ, at a production rate of say 60PJ per annum give a project life of about 16.6 years. That does not reflect the fact that the company can always drill and JORC more coal reserves and so lift its gas reserves and its project life, something that conventional gas fields cannot do.
Method 2: Assume that LCK elects to only produce and sell gas. Someone else has funded and built the fertiliser plant ($500m min) and LCK supplies the plant with 30PG per annum and LCK supplies external parties with another 30PG per annum. Total production is 60PG per annum. The company will have to spend about $150m to put all the production infrastructure in place but this can be financed through off-take agreements and debt. So now, the cost of production of LCK could be as low as $3.00/GJ and the selling price of syngas at $4.50/GJ - remember this is not pipeline gas. Profit is about $1.50/GJ and on 60PJ that a profit of $90m pa or EPS of $0.16/share (using 550m shares). Currently applying a market average P/E multiple of say 10x the share price should be about $1.60/share, although this scenario could be some 2-3 years away. Applying a 15% discount to the projected earning with $1.60 in year 4 gives a PV of $1.00/share. So anywhere from $0.60 to $1.00 is possible....on fundamentals. Good weekend to all.
LCK Price at posting:
21.5¢ Sentiment: Buy Disclosure: Held
