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    Sunday, January 03, 2010


    Comparables for q-copper

    As a quick sense check on the valuation of Q Copper (q-copper) I looked at some simple comparable data from other firms.

    Reuters shows the price to book for the specialty mining and metals industry as 1.4. This is the industry within the basic materials sector that Q Copper will belong to.

    Applying these values to the revised pro-forma net assets of 183.1M would yield 256M or $1.32 per share.

    I have a concern that the book value of q-copper as presented in the prospectus does not reflect the basis that an ongoing copper company would show. This is because on acquisition you have the opportunity to adjust values on the balance sheet to reflect the acquisition cost. Therefore, adjusting the Q Copper pro-forma balance sheet to reflect the copper co Property Plant and Equipment along with the CopperCo capitalized exploration and development is more likely to provide an apples to apples comparison:

    Adjusted Balance Sheet




    Q Copper prospectus net assets


    Q Copper prospectus subtract property plant and equipment


    Q Copper prospectus

    minus capitalized exploration


    CopperCo annual report add property plant and equipment


    CopperCo annual report

    add capitalized exploration


    CopperCo annual report

    add capitalized development


      Adjusted Net Assets


    Using the adjusted book value and the 1.4 P/B provides a price per share of $1.48. I had a concern that Q Copper had a lot more cash as a % of assets than an average speciality mining and metals company. However, that extra cash is all allocated to further exploration so it will end up becoming capitalized exploration or development expenditure. I would treat it differently if it were going to be returned to shareholders.

    Finally I took the Reuters data for speciality mining and metals and looked at the median book value and then the median book value for those firms with earnings. There ratios were P/B of 1.47 and 2.125. (The original 1.4 that Reuters provided, and used above, is cap weighted which disadvantages smaller firms and includes firms with no earnings). Using the adjusted balance sheet would indicate a price per share of $1.56. Using the P/B for firms with earnings yields a price per share of $2.27 .

    This is broadly comparable with fundamental valuation of between $1.41 and $2.08. It seems reasonable that Q Copper will trade up to around $1.50 and into the $2’s as the mine life is extended (less distributions).

    Saturday, January 02, 2010


    Felix Resources – no better offers

    I discussed a merger arbitrage opportunity in Felix Resources. There was no counter offer and the deal went ahead for a 27% annualized profit. The interesting question is whether or not I got the probabilities correct.

    James Moniter, previously of Soc Gen fame, wrote an excellent strategy piece on Process not outcomes: gambling, sport and investment! He discuss outcome bias, that is judging a decision differently based on the outcome. He cites multiple examples of where the quality of a decision is judged differently based on the outcome rather than the process used to derive that outcome. This is a serious misjudgement, the best performers in any field focus on the process not the outcome. He cites a great blackjack example. If you think hitting on 17 and get a 4 was a good decision then you are focusing on the outcome and not the process. It clearly is not a good decision.

    I’m going to stick with my original Felix probabilities and conclude that I simply had a bad break. I assigned a 60% chance to a higher offer of some sort, a 10% chance of deal failure and 30% chance of the deal going ahead unmodified. That is in fact what happened. Of course the beauty of the opportunity was the positive expected value and I ended up with a positive outcome, just not as positive as expected.


    q-copper IPO

    Cape Lambert Resources ( are selling their interests in a Queensland copper mine through an IPO. The prospectus can be found at .

    The IPO was supposed to list on the ASX just before Christmas. However, one of the major investors failed to fund their allocation and the original plan fell through. CFE have released a supplemental prospectus and are continuing with the IPO but the listing will now occur in February.

    One of the joys of investing in an IPO is the amount of detail presented in a prospectus. Including a valuation of the copper mine and various sensitivities.

    The project, with the current copper prices and USD exchange rate, is worth a discounted 237M (using an 11% cost of equity which is higher than used in the prospectus). In addition q-copper will have 47M in cash. Adjusting for other assets and liabilities on the balance sheet I would call their net readily realisable asset value as 37M. That is 19M of liabilities offset by 47M of cash and $9M of property plant and equipment (the $9M is based on CFE’s initial carrying value not on q-copper’s initial balance sheet).

    There is also likely near additional resources which would extend the mine life. There are research reports from before the CFE acquisition that identify that the mine likely has a longer life than the proven resources reflect. Furthermore the prospectus outlines these and the likelihood of finding them. The cash kept by q-copper has been allocated to further exploration. Assuming that the likely additional resources are proven then there is a discounted additional value of 175M less the $45M of cash to locate them.

    There were originally going to be 225M shares outstanding. Since the original IPO fell through they have revised the offering to 194M shares.

    Cash + proven copper project = $237M+$37M=$274M or $1.41 per share

    Cash + proven copper project + mine life extension = $237M+$37M+$175M - $45M =$404M or $2.08 per share

    There is execution risk as the copper mine needs to be restarted. The target is mid 2010. The analysis above assumes that the mine is not restarted until 2011. There is a new management team and the chance of delay or some other operational stuff up is high. There is a good chance that a delay or operational problem announcement will cause a share price drop. If you don’t get in at the IPO then waiting for such an announcement may be the second best chance to get in.

    The offering is prices at $1 per share. $2.08 is not a fair price as the additional resources need to be proven, however $1.41 is too low. $1.70 or so would be my sell target as long as the additional resources have not been proven.


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    Disclaimer and Disclosure Analyses are prepared from sources and data believed to be reliable, but no representation is made as to their accuracy or completeness. I am not paid by covered companies. Strategies or ideas are presented for informational purposes and should not be used as a basis for any financial decisions.
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