Petaquilla Minerals Ltd PTQMF

Margin of Safety: The Inmet Put

[DetVicMackey]

We all know about the upside potential and stock price expectation, but how would you quantify the risk?

Using the margin of safety approach, I like to think we have downside protection with "the Inmet put." IMN already bought the Cobre project from PTQ for $410M (capex for project of $4.2B) and would likely be open to consolidating all the properties on the Ley Petaquilla concession. Not only would Inmet gain access to the gold, but would also have the Molejon facility to process them. Having an existing operation means that there would not be much more capex needed to fund it. There are a lot of other good synergies that would exist in such a deal. How much do you think Inmet would offer for PTQ as a low ball bid?

Margin of safety:

Let's assume Inmet requires an IRR of 33% or payback period of 3 years. Using 100koz of annual production, $1300 spot gold, and $600 cash costs, the free cashflow would be $70M per year or $210M for the entire period. On 230M fully diluted shares, the low ball offer would represent
.91 per share. This of course does not include premiums or value from cash reserves, PDI, exploration prospects, tax credits, and other assets. In theory, the downside risk is negligible if we can apply the Inmet put and a margin of safety.

Note: the Inmet put could be substituted for any M&A company. This theory may not hold true in practice, but serves as way to gauge risk.