Replies to post #39278 on Prom Resources Inc (PRMO)

[vikingzskillz]

Nice post...

[eyewarrior11]

PRMO I would love to see at a penny in months to come :). I like your analysis!! Undervalued here crazily obviously! That's why it's being accumulated like crazy here

[Codesters]

"What does this all mean Basil?"

[MRSMITH1]

man, that is good DD. earned you a PM.

[miltonjayro]

Very well thought out post is it ok to post this on my blog ? miltonjayro.blogspot.com

[JPS02]

PRMO valuation (earnings approach-Q1 update): After reading PROM’s Q1 update as of Sept. 30/10, I think we need to update our previous valuation of PRMO that was based on the annual report in this post (http://investorshub.advfn.com/boards/read_msg.aspx?message_id=57595495).

We previously used the reported annual net income at June 30/10 of $2,309,938 and divided it by 8,418,197,564 shares to get a PPS of $.0003. Since we now have a net income for Q1 of $3.009 million and if conservatively we assume net income generation will continue at a constant pace during the remainder of the year (i.e. holding constant gold prices and volume), we can project an annual net income of $12.036 million for the year ended June 30/11.

Since the o/s has not changed as of Sept. 30/10, we can calculate a forecasted basic EPS of $0.0014. If we multiply this forecasted EPS by a minimum of 10 P/E ratio, the fair value of each common share is approximately $.0143 assuming no dilution (see fair value calculated below assuming full dilution). I am not sure why PRMO is currently trading at .0001/.0002?

Validation
Now let us validate our forecasted value of $0.0143 above. We already know that the accounting standard is to record inventory at lower of cost or market value and the profit to be made on selling the inventory at market value will show in the income statement when the inventory is sold. For Q1, we know that the $4.115 million in revenues had a $1.105 million cost of operations associated with it. Based on the annual report, we previously calculated 52.4% as the gross margin earned on sales.

Since we have no detailed information in the Q1 report to calculate an updated gross margin ratio, we need to use this gross margin ratio and assume that PRMO can sell its entire Sept. 30/10 inventory of $15,315,872 in the next 9 months without any additions. We are also assuming that PRMO continues operations as normal in the next 9 months which they should be able to since the demand for gold is increasing.

Taking the Sept. 30/10 inventory of $15,315,872 and dividing it by a 52.4% gross margin ratio, you can roughly approximate a revenue figure of $29,228,763. Since this is the projected revenue for the next 9 months, we need to add the actual revenue for Q1 of $4,115,124 to arrive at a projected total revenue for the year ended June 30/11 of $33,343,887.

To validate this, we previously projected revenues of $23,503,572 for 2010-11 based on the annual report. A variance of $ 9,840,315 is 41.9% higher than our previously calculated annual revenues. We can accept this since inventory has experienced a net increase of $3 million from year-end after accounting for sales and activity during Q1 and gold prices continue to rise. Therefore we can safely use the new projected annual revenues of $33,343,887.

Based on the annual report at June 30/10, we previously calculated a net income/revenue ratio of 37.42% (2,309,938/6,172,876). Based on the Q1 report, we can calculate an updated ratio of 73.12% (3,009,794/4,115,124). Since this updated ratio is 95.4% higher, we need to normalize it since the results of this quarter might not include expenses incurred during the year and year-end accruals that are not recorded in Q1 that will be recorded in the year-end results. Therefore for this validation, we will be conservative and use a basic average of these two net income/revenue ratios which we calculate to be 55.27% ((37.42% + 73.12%)/2).

Using a net income/revenue ratio of 55.27% and projected annual revenues of $33,343,887, you get a projected net income of $18,429,166 for 2010-11. This projected annual net income is $6,393,166, or 53%, higher than the $12,036,000 annual net income we projected above by annualizing the Q1 net income and it is $9,634,130 higher than the net income of $8,795,036 we previously projected using the June 30/10 annual report. We can justify using this higher projected net annual income due to the following:

1. Consistently increasing inventory levels we have noted from June 30/09, June 30/10 and September 30/10 will help generate increased revenues and therefore increased profits;

2. Decrease in operating expenses for the three months ending Sept. 30/10 as compared to 2009;

3. Projected continued increase in gold prices; and,

4. PROM MGMT’s renewed efforts to operate PROM effectively and become compliant with its OTC reporting requirements indicates that the reported net income will be well managed

No dilution: Using a projected net income for 2010-11 of $18,429,166 divided by 8,418,197,564 o/s shares, you get a projected EPS of $0.00219 and times it by a minimum of 10 P/E ratio, the project undiscounted fair value of each common share is approximately $.0219.

Full dilution: Now say MGMT gets greedy and wants to max out the entire a/s of 20.5 billion shares, $18,429,166 divided by 20.5 billion shares, you get a projected EPS of $0.000899 and times it by a minimum of 10 P/E ratio, the projected undiscounted fair value of each common share is approximately $.00899.

Now let’s go back to our projected net annual income of $12,036,000 which is based on annualizing the Q1 net income. If MGMT fully dilutes, you get a project EPS of $0.0005871 and times it by a minimum of 10 P/E ratio, the projected undiscounted fair value of each common share is approximately $.00587.

Conclusion
PRMO is undervalued at current prices because the basic fair values of $0.0143 assuming no dilution and $0.00587 assuming full dilution are more than validated by the calculated fair values above of $0.0219 assuming no dilution and $0.00899 assuming full dilution. To this end, Dror's e-mail response that "We believe that only then the full potential of the company will be reflected into the PPS" in the following post (http://investorshub.advfn.com/boards/read_msg.aspx?message_id=57722933) might have some validity to it.

This is my second high level attempt at these calculations, let me know if you have any edits or if I have missed anything.