Comments on the Circular's valuation. I have been going through the circular for the most of the day. A bit fatigued.
I focused on the valuations for now, and they really are pretty incomplete(RBC)/error filled(Paradigm's) RBC doesn't do much except cover themselves. They don't actually give a NAV number I can see, and say they randomly picked cost numbers based on their judgment, but don't say anything specific except that it resulted in a value around the offers.
RBC also estimates the value of the deals based on Gold reserves in the ground, however conveniently decides to exclude the 21 million oz inferred in the ground at Ez.
Regarding the Paradigm report.
These are the assumptions Paradigm based everything on. p347
MWS Financial Forecasts
Fiscal Year 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Gold Price US$/oz Au 1,661 1,750 1,725 1,700 1,700 1,700 1,700 1,700 1,700 1,700 1,700 1,700 1,700 1,700
Uranium Price US$/lb U3O8 56 58 66 55 55 55 55 55 55 55 55 55 55 55
ZAR per USD ZAR/USD 7.83 7.73 7.29 8.30 8.30 8.30 8.30 8.30 8.30 8.30 8.30 8.30 8.30 8.30
Revenue US$ million 34 164 178 176 165 193 205 194 195 199 178 183 171 224
Operating Expenditures US$ million (18) (77) (139) (125) (125) (116) (116) (116) (116) (116) (116) (116) (116) (116)
EBITDA US$ million 15 84 37 48 38 74 86 74 76 79 59 64 52 104
Taxes US$ million - - - - - - (5) (8) (12) (16) (13) (15) (13) (29)
Change in Working Capital US$ million - (15) (15) 3 (0) 2 - - - - - - - -
Capital Expenditures US$ million (2) (6) (17) (5) (51) (1) (1) (1) (1) (1) (1) (1) (1) (1)
FCFF US$ million 13 63 4 47 (14) 75 79 65 62 62 45 47 38 74
Notice the operating expenses. Somehow they jump from 77m in 2013 to 139m in 2014, then head back down again. However, this number seems pulled out of the blue compared to their estimates above of 63m free cash flow forecast (fcff), and severely impact a number of ratios they used to value the company. They only used an average of 2 years in most multiples. How are costs going to balloon 80% at MWS between 2013-2014... And that isn't including capital expenditures which is dealt with separately. But then go slowly down when they aren't included. However using proper estimates would give a massively different calculation supporting MWS being grossly undervalued as we all know it is.. vs these self serving estimates that skew the analysis due to the cost increases of 80% extrapolated out after FY 2013. And hence CY 2013 used in many of their numbers.
Regarding Cash flow:
The consensus estimate, and what we has seen puts MWS 2012 CY cash flow of between 65-70m. Valuing it at between 422 - 454m
However despite what you see above they use 33-47m as low and high numbers in their estimate in 2013. Valuing MWS at 168-239m based on the 2013 multiple they come up with.
Then when they average them with a 60% and 40% weighting they get a value of 321-368m using that metric. This makes no sense, except if you were writing the report to fit the bid. Especially when right in the forecast above they come up with 63m in free cash flow, vs the 33-47m low and high that they somehow pulled out of the air and put in their numbers to calculate the fair value metric... Somehow there is an 80 % jump in costs to justify this.
So correcting their number and using the 63m free cash flow total Paradigm themselves calculated above for 2013 yields a valuation of 5.1x 63 -321m vs the 168-239m range they give.
So using the existing 2012 numbers and correcting for the error in the 2013 calculation, and using it as an average we get:
FUSA Implied Value (Calendar 2012 CF) (60% Weight) US$ million 422 - 454
FUSA Implied Value (Calendar 2013 CF) (40% Weight) US$ million 321 - 321
Weighted Average FUSA Implied Value US$ million 381.6 - 400.8m
NAV
With NAV they state the low and high consensus analyst values are 443m and 598m for mws. Then calculate a value of between 253 and 298m with no supporting calculations in their own estimate. Then create an average weighting with both using a 75% weighting for their own low ball number. Funny that 443m sounds pretty familiar. No wonder they got Paradigm to do it as RBC couldn't very well do it after just reporting that as their opinion. There are also clearly errors with only a partial number for 2012 listed along with a ridiculous estimate of an 80 % increase in costs from 2013-2014 and continuing in this ballpark forward.
Also take a look at the price deck estimate for the low and high estimates provide. The high estimate somehow uses lower gold prices yet comes up with a higher NAV. P350 So really, how can we trust any number with a report this riddled with errors. This report has so many holes in it you could sink a battleship, and this is just at first glance.
So discounting their error filled NAV calculation, and using valuation multiples on a non paid assessments of NAV multiples based on independent analyst assessments, we get an impartial NAV of.
Consensus NAV(1) C$ 443 598
Comparable P / NAV Multiples x 0.67x 0.67x
Control Premium % 30% 30%
Adjusted Multiple x 0.87x 0.87x
FUSA Implied Value C$ M 386 520
FX FX 1.00 1.00
FUSA Implied Value US$ million 386 520
EBITDA:
P352. They state the consensus estimate for CY 2012 is 76-82 m putting a value of between 398-429 million.
However in (calendar year) CY 2013 they come up with low and high estimates of 48-59m somehow for the valuation, despite however just showing they calculated it as 84 million several pages before. This is in the MWS financial forecasts by Paradigm I copied above. P347. Then weight the numbers 60-40% to come up with a weighted value of 313-349m
Using the 84m number they just calculated above and putting it into their formula however yields. (And assuming there is not a magical 80% jump in cost in the middle of the year.)
CY 2013 EBITDA US$ million 48 59 84
Comparable 2013 EV/EBITDA Multiple x 3.2x 3.2x x 3.2
Control Premium less Risk Profile Discount % 20% 20% 20%
Adjusted Multiple x 3.8x 3.8x
Implied Enterprise Value US$ million 186 228 322.56
+ Attributable Cash US$ million 0 0
- Attributable Debt US$ million 0 0
FUSA Implied Value US$ million 186 228 322.56
and when applied into the total calculation to give a range.
Implied Value (Calendar 2012 EBITDA) (60% Weight) US$ million 398 429
Implied Value (Calendar 2013 EBITDA) (40% Weight) US$ million 186 228
Weighted Average FUSA Implied Value US$ million 313 349
Using Paradigm implied values= 367.8-386.4 significantly higher then the 313-349 in their report.
Now with Earnings on MWS paradigm calculates 2012 earnings as between 33-36m
However doing a little back calculating this seems much too low. In their previous example they used a EBITDA value of 76-84 for their low and high 2012 example. So then deducting the Interest, Taxes and Amortization/Depreciation to figure out 2012 earnings. If MWS is sold, there will be no debt, so there is no Interest. Amortization for MWS in the last report was 2.8m. So annualized around 10m as this number goes down over time as the amortization pool gets smaller. FIU MDA Q3 2012 p9 Corporate costs were 2.5m approx in q3 for all of FIU. They estimated 1.3 in q4 so if it is part of another larger company this multiple assets this can be spread across, I think 1m is a safe estimate for corporate costs/quarter that we can attribute to MWS.
So deducting 14m from the 76-84m EBITA estimate leaves 62-70m annual profit before tax. Now deduct .28% SA corporate tax. That leaves 41.76m-50.4m After tax. And that is not taking into account the massive tax losses available that we have.
However on this basis and using Paradigms adjusted multiple this gives a fair value range of between 508.4 and 574.5m vs 372-407 that paradigm calculated. As they did not include all their calculations, I cannot see what expense numbers they used to figure out what they did. However they are clearly massively underestimating MWS profitability. Again in 2013 they calculate MWS's stand along profit in the range of 10-20m. Yes this is MWS all alone for the entire calendar 2013 year. We are currently earning more in a quarter at MWS then their low estimate at a very stable low risk operation. So I do not know how anyone can take a 10m earning estimate at MWS in 2013 as at all possible even if it is a low estimate when we are earning more then this in a quarter now.
For 2013:
Again from the above example where they calculated a 2013 Ebita of 84m, then deducting similar costs and an additional 6m for capital costs, assuming they are expensesed vs capitalized, to be conservative. That leaves a 64m profit this time. Less tax that is 46m profit for 2013 on MWS. Then applying the 9.1x takeover multiple Paradigm used gives us 418.6m vs the ridiculous 110-182m value they came up with on this metric.
So the P/E calculation is now
2012 (60%) 508.4 - 574.5m
2013 (40%) 418.6 - 416.6m
= 472.5 - 511.3m
So putting this all together in using their valuation method.
Low high
NAV 40% 386 520
P/cash flow 25% 381.6 400.8
EV/EBITA 25% 367.8 386.4
P/E 10% 472.5 511.3
Total 389 455.93
Much below the low ball 335m currently offered.
And none of this is even disputing any of the multiples Paradigm used which there could be an argument for as well.