Investing

Cape Lambert Resources (CFE.ax) are selling their interests in a Queensland copper mine through an IPO. The prospectus can be found at http://www.qcopper.com.au/ .

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.

posted by Neil  # 7:24 AM