RE:RE:Nice Little Classic Shakeout This Morning
Yeah that 34% haircut sounds inevitable any way you slice up ETG and its future. When I have done my valuations/projections I apply that reduction whether we are in or whether we are bought out.
The thing is, assuming we have been correct that Lift 2 is much larger (and I can't repeat enough it will be the most profitable ore with the highest NSR's so far revealed at OT - much of the extraction capex will already be spent and still useful after Lift 1 (all the above-ground infrastructure, the Hugo North decline conveyor to surface, the concentrator and dozens of other pieces), assuming those costs make Lift 2 the jewel in the crown, the Mongolians will be pushing for Rio Tinto to begin work on accelerating Lift 2 development and expanding the production capacity. Big money. But of course Rio Tinto doesn't want ETG surging up on that wave. They want to say "optionality for the future" at most.
This is why that depth and strike length beyond HNE 625mN is so important. Rio Tinto got away with a real slick propaganda job over 18 years after the 2006 drilling that the resources stated at that time were really the meat and potatoes of OT. But they sat on the high probability of a much expanded high grade resource for long enough that we didn't hear anything about optionality when TRQ was being valued and bought out.
While its true that long-deferred revenue has little impact on current valuation that is far from the case if Lift 1 is finished up earlier due to higher production c1pacity and Lift 2 development has been advanced. Particularly as in the opinion of many industry observers, economists and pundits, these high production years can occur during an incredible sweet spot when copper is in a major production to demand deficit and prices are extremely strong due to carbon reduction spending - EV's , wind turbines, upgraded power grids and charging for clean urban energy use. Cha-Ching!
My prediction tilts heavily towards Rio Tinto having to step up with a fair offer that takes into account the failure to procure an IA for ETG that left us exposed to this 34% haircut (some compromise there), but especially the huge upside we will be leaving on the table for them. And I agree, before May 2025, likely sooner, hopefully not until 2025 only because I have some Canadian capital gains management issues I'd love to spread into a new tax year.
ETG has a minimum of 20% of the icing on the cake at OT. Let's make a wild generalization and guess that equates to a 10% interest in OT. The TRQ $3.1 billion USD takeout bid implies an enterprise valuation of $9.3 billion USD. I add 20% for increased metals prices. I add 20% for optionality and the value of the prospective JV and ETG's 100% ground, including the ability of Rio Tinto and Mongolia to find another partner to help develop Heruga early. Then shave off 34% in prudence for Mongolia.
You have trouble getting below $6 CDN any way you slice it. Conservatively, delivered a beating by Rio Tinto, and leaving a premium on the table for them because they are accepting the downstream economic risks and we are walking with cash ... I target $4.75 minimum. But you know what? It doesn't matter because the price will be handed to the market as a done deal. This run-up in the past few weeks looks like sub-insider accumulation. It's illegal for insiders to conspire with other shareholders to acquire creeping bid positions, but if you weren't sure of your ability to cement a deal, might you not encourage some reasonable and friendly people to come into the market and sop up some of the float, knowing they are likely to side with any management-recommended buyout deal? Get HCU on side as well, whatever we are handed, the sole remaining option is a dissent and valuation proceeding. And future optionality is a terrible argument in front of Vourtsnthat lean heavily towards "the public market for the shares in question should be taken as a prime indicator of value in the absence of compelling evidence to depart from that value." Judges are not trained or inclined to mess around with public market big dollar valuations.
Its all great. I agree with Rock completely, no fair offer, no deal. But I also believe there is sufficient pressure and the market indicators seem to be table-setting for a healthy premium to market buy-out. The only real question in my mind is more like watching the wheel of fortune spin at a carnival midway - we don't have access to the full geology opinions of ETG and HCU and Rio Tinto and Mongolia through OTLLC. They are going to wrestle this thing to the ground and we have to leave enough on the table to make it attractive to everybody. In every negotiation there is a win-win solution somewhere.
In this case it's no paltry $2.25 or $3.00 ... so be happy, don't worry. Now if the Mongolians went gonzo over some foul-up in negotiations, well, we have seen them fall on their sword and stab themselves badly to prove a point about how tough they are before. Hopefully with such a big nation-building cashflow at stake here calmer opinions prevail on this one.
Ya gotta love this set-up if there were days you were holding a big underwater position and ETG was transing small volumes down under 30 cents! As much as I was accumulating it was stressful to say the least.
cg