Advanced Explorations Inc. ADEXF

My $0.02 worth

[B-Diddy]

Taking a strictly non-bias (I hope) and non-emotive (hoping again) view of this, here are my thoughts on what we have seen of recent:

• Without splitting hairs on some numbers, the FS seems to have delivered its target in my opinion.  The only reason the NPV falls short of 1 billion (which is what scared away the day traders on Friday) is because it is using a low spot price for iron ore.  Initial estimates are always made based on more hopeful, or often even present day, spot prices, whereas an FS has to be ultra-conservative (mostly to protect its authors) and therefore must use the shabbiest spot price projection, which happens to be about $104/tonne.  If they didn't do this, they really wouldn't be assessing feasibility in the truest sense. Regarding spot price forecasts looking to 2012 and beyond (ie. when AXI could begin selling product), they are about as reliable as your crazy aunt Mary who thinks she too can predict the future.  So yes, if spot prices are that low, or more accurately average out that low, for the full duration of the life of mine (LOM), then we don't make 1 billion (although we do still okay).  You may now be seeing that a feasibility study is geared to consider the worst case scenario (for all numbers) and seeing if the project can still make money.  This FS says it can.  What's more if the global recession improves or better yet ends, this FS shows that the NPV could flex to represent a very profitable mine, potential much much more than 1 billion. MORAL: Because the NPV can flex based on the spot price, which no one can predict very well over the LOM, the NPV is the least reliable number that we should be using to assess if the FS (and this company) have delivered.
• So what is a more reliable indicator?  I believe it may come down to the low OPEX numbers.  If you look at the cost curves for iron ore, AXI sitting at about $50/tonne is quite impressive for many reasons.  First, it is very competitive with the "big 4" who only hover just below this value because of their sheer size and scale.  AXI sits right beside this with no size and scale considered, just the "C' zone on its own.  But what's critical is that those mines which sit to the right on the curve (ie. have much higher costs/tonne), many if not most of which are China's domestic iron ore producers, risk losing money and inevitably shutting down if the spot price drops below their position on that curve.  If I were XingXing, Shandong Fulun, or any other prospective investor for that matter, the one thing I would want to know is that the mine will guarantee iron ore (to myself and the market) continuously, without ever losing money or risking shut down if the spot price moves too low.  Meaning, I'd want to invest in a mine that will produce my iron ore and still make a bit of money even if the bottom falls out of the spot price.  AXI, now confirmed by the FS, is actually one of very few individual mines that can actually guarantee this.  It doesn't have to have the have the highest potentil NPV of its peers, because most of its peers can necessairy provide the same safety net of a low OPEX.  And if AXI does succeed in leveraging Roche Bay to produce more ore through Tuktu or any of the other zones, guess what, the cost/tonne will go down even further. -Gravy.  And if they do eventually manage to use LNG (although this is not so reliable so don't bank on it), then the cost/tonne goes down further. -more gravy.  (And spot price goes high - lots of gravy.)   In other words, looks like a safe investment (good to know if the economy isn't great) that will stand on its own as is, with a number of very promising upside plays and the potential to profit far more than a rather conservative FS will ever be willing to show.
• If the spot price does go down to $104/tonne, or worse let's say below $100/tonne, the majority of China's domestic iron ore producers may no longer produce (ie. they shut down) because of their position on the cost curve (meaning their OPEX is too high).  This will leave XingXing and Chinese steelmakers with the need to rely on the big 4, something we know they are not keen on long-term.  Again, for reasons stated above, RB provides a safe mine play regardless of the world economy, with favourable economics, and the ability for the Chinese to rely less on the big 4, especially when the economy is poor and domestic iron ore supply in China recedes.  I can see motivation here on the part of the Chinese.
• Regarding the stock price, and the drop seen on Friday after details of the FS were released.  This drop most likely represents day traders (maybe a few newbee retail traders too), or those who gambled on the immediate market reaction to the FS alone, a few of whom panicked when they didn't see the number 1 billion or higher, thereby setting off a panic sell amongst their day trader compatriots.  I'd suspect all the longees held tight and tried to make broader sense of the FS, so there was no time for the buying side of the market to balance out the panic selling side, hence the large drop.  If this was the case, then it would be a huge mistake to think that the "market" has spoken regarding this FS, as a few on this board have suggested.  Given that the volume was only 1.6 million shares traded, I'd say we were looking at less than 2% of non-insider shareholders who actually fled AXI after the FS results were published.  The rest of us are trying to digest the material and decide if the "long" is still the promising play.  And as most of us who are playing AXI long will probably admit, I think we always knew that the big play was always going to be the Chinese committing to RB (and of course, it still is).  I believe (in this market) only a rather spectacular FS, which managed to somehow outshine its original guesstimates would have been suffiicient to bounce the SP considerably higher, and even that would've been mostly the same people who recently panic sold - but simply the opposite phenomenon.  AXI share price, still being a penny stock, is of course at the mercy of such phenemena by its very nature - it only takes small amount of panic from a few day traders and/or retail traders to landslide the SP, but we would be in error to think that this is the "market" speaking as it represents only a very few who probably have the least knowledge (DD) regarding AXI.
• If XingXing and the Chinese follow through, I'm quite sure this will get the attention of larger institutional investors, in which case the SP will increase by factors (not points) and the long play for those of us small fries will be realized.
• We also can't ignore the possiblity that the low OPEX figures of RB (now verified by the FS), and all its various upsides and opportunities, may also now appeal to other suitors... If this were the case, the game could get really interesting...

All comments and insights welcome...  just remember to contribute not simply contradict  ;>)

B