Update on Merger with Polymetals - Notice of Meeting

CAPM
WACC = E K e + D K d (1– t)
Where:
K e
K d
T
E
D
E+D
D+E
= expected return or discount rate on equity
= interest rate on debt (pre-tax)
= corporate tax rate
= market value of equity
= market value of debt
(1- t) = tax adjustment
Gearing
Before WACC can be determined, the proportion of funding provided by debt and equity (i.e., gearing
ratio) must be determined. The gearing ratio adopted should represent the level of debt that the asset
can reasonably sustain (i.e., the higher the expected volatility of cash flows, the lower the debt levels
which can be supported). The optimum level of gearing will differentiate between assets and will include:
• the variability in earnings streams;
• working capital requirements;
• the level of investment in tangible assets; and
• the nature and risk profile of the tangible assets.
As described earlier, we understand the capital of structure of SXG to be made up of approximately 73%
debt and 27% equity. We have been informed by the Company that the current anticipated cost of debt is
in the range of 7.5% to 8.0%.
Calculation of WACC
Based on the above inputs we have calculated the real WACC to be between 6.0% and 7.1%.
WACC
Value Adopted
Low
High
Cost of equity, K e 19.6% 23.0%
Cost of debt, K d 7.5% 8.0%
Proportion of equity ((E/(E+D)) 27.3% 27.3%
Proportion of debt ((D/(E+D)) 72.7% 72.7%
Weighted average cost of capital (nominal) 9.2% 10.4%
Weighted average cost of capital (real)* 6.0 7.1
* We have converted the nominal WACC to a real WACC using an inflation rate of 3% as per the following formula:
()
( ) = − 1
Based on the table above our preferred discount rate for the Marda Project is 6.5%.
87