Eric: Let me assure you that discounted cash flow analysis is as relevant today as it was in the 1970's. Look at the time frames involved here. The Fluor report assumes there are about 8 million carats on the 701 and 702 properties. At the current production of ~40,000 carats per year, it would take 200 years to mine them all.
Assuming a four-fold increase in production, it will still take 50 years to mine them all. At an extremely low discount rate of 5%, a dollar received 50 years from now is worth about 9 cents today.
Yes, inflation and interest rates are lower now than they were in the 70's. The only difference this makes to a discounted cash flow analysis is that you use a lower discount rate.
This is Finance 101. Any company looking at an investment that involves X dollars of costs now, with future cash flows uses discounted cash flow analysis. Fluor appropriately did this. Yes, it would be nice to see their assumptions, such as the discount rate that they used. But to suggest that discounted cash flow analysis is not appropriate is just plain wrong, IMO. If it wasn't appropriate, KRT should have paid more than $500 million for these properties, not ~$20 million.
IMO, KRT is getting a decent deal. The cash flow from the 701 and 702 properties is worth more than the purchase price, according to Fluor's calculations. That means they are getting the speculative value of the 703 property for free. If I were a shareholder and had the opportunity to vote on this acquisition, based upon what we know from the Fluor report, I would vote yes. |
