RE:RE:RE:RE:RE:RE:RE:RE:RE:warrants - extending the Exercise Period to August 3, 2020Well put BullStockington.
Not much to add, except to say that a buyer will be looking not just at IRR (a basic measure of profitablity of an operation) but at their return on the actual cash invested (their equity) once leverage (debt) is considered. These ROE and ROI figures tend to range between 10 and 20% in real life for a major, and I've heard that majors will try to get projects that can pencil out at between 15% and 30%. A project with an IRR of, say, 18%, can be developed with the use of some debt (say, capital costing 6% per annum) to return 30% on the developer's invested capital (equity).
A corporate finance guy with experience inside a major laid out for me the application of this to Santo Tomas as follows:
A major buys an asset like ST for, say, US$750 million and they do so with a mixture of cash and shares. This is (part of) their equity into the deal. They then add an additional $250 million cash investment to attract a $1 billion loan at 6% per annum to complete a bankable feasibility study and build the mine. A this point they have a billion cash in and a billion of debt associated with the mine.
Amortized over 15 years, that loan requires annual payments of $85 million.
Santo Tomas will produce 125k tonnes of copper a year at a cost of, say, $2,750/tonne ($1.25 a pound), and at $2.75 a pound for copper genrates $413 million in annual earnings. Minus the $85 million in debt service equals $328 million, or a 32.8% return on invested capital.
This more than meets the hurdle rate for majors and would be much more in line with the valuation calculation done by majors than eyeballing a chart (during a bear market, a trade war and a global pandemic, and before any new drill holes). It suggests $750 million isn't an outrageous price for ST.
When it comes time to buy the asset the majors are bidding against each other, not us small speculators, and each of them will be doing a calculation like above. They'll earnestly bid the asset up in a bidding war against each other, and then at the end an Asian company eager to secure long-term feed for their smelters will come in and bid 50% more, as they only need a 10-15% ROE which means they can bid many, many hundreds of millions more than anyone else. China knows of the coming copper demand tsunami, which is why they've been building smelter capacity even as domestic copper mining production falls.
Your next car may be Chinese and electric:
https://www.youtube.com/watch?v=3BZ2225OJDg