When I read this post yesterday, something jumped out at me, but I thought I'd sleep on it to see if it still had the same impact on me this morning. Well, it does, so I've decided to add my opinion to the discussion.
Whenever we try to enter into calculating valuations, we must inevitably simplify the variables. We round some off. We make ballpark estimates of others. We ignore others yet altogether. It's the only way to make any sense at all out of a complex subject. But in the end, the assumptions we make are still subject to common sense analysis and debate. I'd like to do a little of that right now.
You said:
"First of all, people have pounced on the fact that analysts commented on the FWR purchase adding $5 per share to CLF’s value.I think some people mis-interpreted this as meaning that FWR shares should have been worth $5 each.I believe that the implication was that each CLIFF’s share value would be increased by $5, in a theoretical sense.
So let’s multiply that by the number of Cliffs shares outstanding (135m now, although I think it was slightly less at the time).That gives us a market value of about $675m for the 47% stake of Big Daddy.Now I admit that this is slightly misleading, because that deal also included BT, etc.But let’s keep this simple.We have to be careful to distinguish numbers here.That stake COST them about $240 million if I remember correctly, about a quarter billion shares at just under a dollar.But the analysts indirectly have pegged the value of the stake at that $675m.
So let’s make a small assumption and say that if 47% of BD was “worth” about $675m, then the remaining 53% is worth about $700m."
Because the net value estimate of the FWR takeover appears to be entirely based on the value of the chromite acquired, then it makes sense to isolate that variable in the assets of the juniors being discussed. Freewest held gold in New Brunswick, iron/vanadium in Quebec, Quest, etc., but KWG and SPQ themselves have substantial other claims in the James Bay Lowlands. What you do to one you should do to the other(s), so let's do a zero sum game, and assign them equal and negating value offsets. For the purposes of this argument, I will even negate the value of Black Label and the nickel potential of the AT12 extension zone. But I cannot accept that Black Thor has no value. The critical difference between Marlboro's assumptions and mine, then, is that I am assuming that Thor and Daddy have equal value. And I'm going to round off the 53/47 ownership split of Big Daddy as being 50:50, i.e. half and half.
If the whole value of Thor and Daddy are equal, then the halves must also be of equal value. Cliffs owns 100% of Thor, so their ownership in these chromites is at a 3:1 ratio to the collective share owned by SPQ/KWG (two halves of Thor, plus one half of Daddy, vs. one half of Daddy).
Then, I'll resume using Marlboro's valuations. The 3/4 ownership in the chromites is valued at $675 million. That gives the remaining half of Daddy a value of 1/3 (3:1 ratio) of that amount, which comes out at 0.14/share, more or less.
Of course, there are other assumptions that will adjust this number, and other variables not considered here. If you believe Daddy is worth more than Thor, then the cash value should be fudged upwards. Similarly, if you believe the control of the asset is worthy of a premium, that value should increase also. But I've also ignored the value of Black Label. And I've also ignored the fact that Cliffs can simply ignore Daddy altogether. They could wait 100 years, according to the mine-life estimates of Thor that I've considered.
I think this approach to assigning a value to ownership in Big Daddy is far more appropriate than the more traditional in situ calculations, as this method has already been valued in the marketplace. But please always remember how many assumptions go into even these simplistic analyses.
Regards,
Lar
