My take on the latest Crux interviewA very enjoyable interview, as always with Crux as they ask probing questions. OK, so when Paul started talking about what RIO would or wouldn't pay, I got the distinct vibe that the figure being used to gauge the buyout offer was the "headline after-tax NPV" or $2.3 billion. Of course, something ridiculous like $3 billion would be rejected out of hand. $2 billion, while allowing a slight ROI for RIO would also be rejected as the ROI would be 15% and that assumes no margin for any error. The figure of $1 billion is quite feasible according to Paul. So, what does this tell me? That something in the vicinity of 50% of NPV (or 50 cents on the dollar) would be perceived as fair by the BOD and RIO. I have been saying this all along.
Paul also correctly points out that if we use recent/current prices of the metals we double the NPV to $4.5 billion. Mind you, I think this $4.5 billion is using a 8% discount rate, so if we use current metal prices and a 5% discount rate, then we get closer to the $7 billion NPV figures I was calculating about a month ago. So, RIO and the BOD will have to negotiate along these lines: Do you want to use overly conservative metal prices? OK, then we have to use 5% discount rates. You'd rather use a more conservative discount rate? OK, then we are using more realistic (i.e. curren/forecasted) metal prices. Either way, it will probably shake out to the point where the project being sold is going to be valued around $4+ billion.
This is all that matters. Not market share price. If RIO doesn't want to play ball and negotiate based off NPV, the BOD will gladly allow them to go into the market place and attempt to purchase in excess of 50% of the shares outstanding, which by the way we all know is about impossible to do without drastically increasing the share price. Since that likely won't the the way the parties want to progress, we are back to negotiating how much RIO wants to pay for $4+ billion worth of present day dollars. 50% of that would be in the $16 - $17 range. This is a bit less than the $20 I am hoping for, but well within the range of a reasonable offer.
Make no mistake: the prices of gold and copper over the next 12 months will be CRITICAL. If the prices bottom out and average around $1500-1600 gold and $3-3.25 copper we do unfortunately lose a lot of leverage. In this unfortunate scenario we would not get over $10 a share. That being said, we all know that the BOD will not sell for less than $8 a share because that is the value that WRN was at 10 years ago (adjusted for inflation) when the project was well less advanced than it is today. I have a feeling that the $8-$10 would be a rock bottom, "worst case scenario" that is in the back of the BOD's mind. Of course, if metals prices implode, I readily admit that we may only get that $8+ amount some of the poo-pooers are bandying about. However, I am more optimistic about our metal prices.
BTW, what happens if when we get closer to a final bid, we are looking at $2,500 gold and $5+ copper? Again, it all depends on the metal prices. They will be they key to how well we fare.