For those who may be interested, and for myself to run the numbers on this, rather than just argue the abstract point with carna on the effect of gearing on the NPV.
Here's the tale of an ungeared and geared NPV on Arrowsmith North
Carna's contention that a 'geared result would be crap' is a nonsense.
This is very easy in a spreadsheet. Enter your annual cashflow
point the spreadsheet NPV function at that series of cashflows
point it to a discount rate
and Bobs your uncle, the NPV function calculates the NPV
I've used my standard spreadsheet for constant earnings and just lumped in the capex and other assumed payments as described below
The left hand NPV calculation is an ungeared calculation:
You fork out the $67m capex in year one
that goes down as a negative cash flow in the NPV calculation
let's say for simplicity's sake that you do your build that year
and, after that, you are in operation and collect $28m a year in cashflow
Why $28m?
because that is the cashflow that almost exactly matches the announced updated Arrowsmith BFS NPV10 of $166.7m
i.e., with a somewhat simplistic model, we've derived a future cashflow consistent with the company announced BFS
Now, if you gear this calculation, what happens? That's the right hand NPV calculation:
You don't fork out the $67m, because some-one lends it to you. Year one becomes a zero entry while you again spend that capex to get up and running
For several years your cashflow is reduced versus the ungeared equation, because you are paying interest
At 15% interest p.a. that's $67m*0.15 = $10m p.a. near enough
So, while paying interest the annual cashflow is reduced from $28m to $18m
At year four of operation (year five of the model) the reduced $18m cashflow, after interest payments, has accumulated to $72m and you are able to repay the loan
year six of the model therefore shows $28m cashflow from operations minus the $67m loan repayment, i.e. a net -$39m
and, after that, the loan is repaid and we go back to the $28m a year operational cashflow, the same as the ungeared model
Now,
note the fairly small difference in the model NPV10 outcomes, top right of each model
The ungeared NPV10 provided by the company is not misleading on profitability and value of the project, as some-one keeps insisting. The geared and ungeared NPVs are pretty close.BUT THAT IS ONLY PART OF THE STORY
Why are VRX showing us an ungeared version? Maybe because that is the worst case outcome in reality.
\We should recognise the HUGE advantage the geared situation has.
In the ungeared model you have to find $67m that is
not from debt, i.e. you are ungeared.
Where is this going to come from? It comes from equity. You find someone prepared to stump up $67m, issue them a WHOLE LOT of shares in return, and the existing shareholders then own a much smaller proportion of the company and are diluted.
The ungeared case is going to dilute the heck out of the shareholding.
And that is FAR worse for shareholders than a geared situation.
Now, in reality, there is going to be some debt and some equity. That's the way it works in finance.
A lender won't lend without seeing some equity put up to finance the project as well.
The level of debt might typically be 50/50 debt/equity. But the equity requirement can be minimised by an offtake prepayment arrangement on future sales.
Bankers will be willing to provide debt finance if an offtake provides up front finance for the remainder.
And that would potentially negate any need for dilution, or at least reduce dilution.
In reality an offtake usually involves an equity stake being taken in the company by the offtake pre-payment deal provider
So, some dilution from an offtake agreement can be expected.
This MAY also explain why we do not have any signed, conditional offtakes.
I expect the company will want to negotiate offtake agreements from a position of strength and to extract the best prepayment deal(s), likely with some exchange for equity. But as little as possible.
And I'd expect the best deal for that will come when they have an approved project ready to go.
Carna's much repeated and rebutted contention that the ungeared NPV would be crap is false. It is solid and highly profitable as the updated Arrowsmith North BFS shows.
And, even better, gearing can improve on that.
(20min delay)
