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Gold/Mining/Energy : Petrokazakhstan Inc. -- Ignore unavailable to you. Want to Upgrade?

To: forecaster who wrote (986)	4/7/2000 5:02:00 PM
From: Hickory	Read Replies (3) \| Respond to of 2357

Forecaster, Living up to your name! Your Jan 16 forecast of 4th Q, '99 results was mighty close to the actual figures released on 1/24! Congratulations! Hope you're right on the money again this time!! With regard to your request for my estimate of the Net Asset Value of HHLA, I've been wrestling with a number of variables. The McDaniel table that you used in your March 7 calculation of net worth is a good starting point. I believe the Constant Price basis given on page 83 of the "Information Circular" is more realistic than the Escalating Price basis. The reason for using the Constant Price basis is that I believe OPEC wants to discourage the search for alternative energy sources while still getting as much money for themselves as possible. If a viable, cost-effective alternative to gasoline is found for vehicles, OPEC knows that all the oil they have is not going to be enuf to keep their existing economies afloat. The last thing the Saudis want is to encourage the search for alternative energy sources. And research on fuel cells is making real headway. So my guess is that OPEC will try to keep oil at about US$20, maybe even drifting a little lower, for as long as they can. Accordingly, I believe the Constant Price basis better mirrors what will be the reality. Given the big uncertainties about doing business in Kazakhstan (pages 119-133), I believe the 20% discount rate is much more appropriate. Understandably, not mentioned in the long list of risks is the risk posed by militant muslim fundamentalists who are using violent terrorist acts to try to force the K government to expunge the baleful influence of the Great Satan of the West from Kazakhstan. McDaniel's figure on p. 83 for these assumptions is US$ 517 MM. The Profits tax at 30% and repatriation tax at 4.25% which you used in your March 7 calculation are fine. But Excess Profits tax has the potential to be higher than just 15%---as high as 50% on Kumkol North excess profits (p. 92). But I will use your 15% figure. Figuring these in, gives us a net worth of the reserves of US$ 263 MM. I will assume with you that the refinery is worth US$ 300 MM, not the US$ 160 M at which it is carried. Add another, say, US$ 100 MM (probably a generous figure) for Hurricane's other fixed assets--which you did not do . Add these to the discounted present worth of the reserves to get US$ 663 MM. The refinery came with an obligation to shell out US$ 115 MM in cap ex by Dec. 31, 2001 (p. 112). Hurricane likely also will have to spend about US$ 37 MM for gas processing facilities (p. 111). Another US$ 13.6 MM to purchase the 11.64% of Shymkent shares not owned by CAII. Another US$ 90.5 MM in Kumkol South development required by 12/31/02 by the terms of the concession. Also, hopefully, cap ex on the exploration concession on 455 K acres surrounding the Kumkol fields (p. 90-91). Add in the US$130 MM + interest at 16% + restructuring fee to the noteholders. Comes to something over US$ 400 MM. (I'm omitting the US$ 90 MM you figured in for future general overhead expenses.) If we subtract these required cap ex and debt+ payments from the net worth, we get about US$ 263 MM of present net worth. Divide that by 83MM to get the per share value and we come up with close to US$ 3.20. This calculation of present net worth utilizes your basic methodology, but different initial assumptions. I believe that the assumptions I use are truly closer to the real situation. This calculation of present net worth is looking at only a 2-year time frame. It is dangerous to project too far into the future. But, IF things go right---IF, then, after these 2 difficult years, HHLA could start to hit its stride and become very profitable. Not too many investors, however, are willing to pay for WHAT MIGHT BE 2 years out in a little Central Asian country with so many uncertainties. Especially in light of what happened to their investment in HHLA in these past 2 years. I hope I get proved wrong. I would love to see HHLA at US$ 10! Hickory