So what are we waiting for? and what should the share price be when we get it?
Well it seems like the market is waiting for something more than it currently has.
Let's take a look at where SFX/KMS currently stand and see if what we can expect beyond this point warrants a +50% discount in the SP.
A summary of the October 31st presentation by Bruce Griffin:
1) Plant construction has been completed several weeks ahead of schedule.
2) The construction has come in at $311mil compared to the $336mil budget ($25mil under budget)
3) There is $60mil available for drawdown for working capital and any cost over-runs.
4) No production was forecast in the cash flow projections for CY 2023. Given the production has commenced fairly early in Q4CY23 we will now have production in Q4 CY23.
5) First shipments are expected early in Q1CY24 (January) and first cash receipts 60 days following.
6) At the time of the DFS and final financing (at the request of the bankers) KMS's operating cost forecasts (OPEX) were inflated by 10% to provide a buffer for any inflation in these costs. As a result the OPEX forecasts can more reliable be considered to be within range.
7) Ore production has commenced and Heavy Mineral Concentrate (HMC) is being stockpiled (see picture in earlier post). Bruce states "....certainly the HMC so far is looking very good and we are very happy with what is happening there"
8) Concentrate Upgrade Plant (CUP) - this is the final stage of the production process and will be activated shortly once sufficient HMC has been stockpiled to provide sufficient feed stock for the CUP.
9) The CUP when it commences is unlikely to pose a production issue. Bruce states "the next step is about making the concentrates (from HMC), it's a relatively simple magnetic separation process, I would not expect us having any great difficulties making the products..." "...certainly what see at the moment is that we are having no difficulties removing the slimes, the HMC is slime free, the slimes are going to the tailings dam." "Given the magnetic separation we are doing is a wet magnetic separation and we don't have any clay slimes I don't anticipate any slimes issue in separating the concentrates out"
10) There will be a period of optimisation (over several quarters) for the CUP process as operators optimise for throughput vs yield, and also to bring the plant to full production. Bruce states "very happy with what has happened so far, but also very realistic that we are in week two of operations and there are a lot of things which need to happen before we can say we are fully ramped up, and steady state operator". Production of final products will happen concurrently to this optimisation process.
11)The company will not provide production guidance during the ramp up period however the forecasts in the DFS can be used as a guide.
12) Slimes (typically anything under 38 microns) - in the case of TB the slimes are not typical slimes which are usually clay. Clay slimes tend to be more of an issue to manage than sand slimes as they have colloidal properties which react with water and can cause issues such as coating of minerals. In the case of TB the sand slimes are successfully being removed as part of the wet concentrate plant and sent to the tailings dam. HMC is slime free.
13) Ore induration - "Old deposit with induration, over burden quite rocky - mining process designed for this, that's why we did the large mining trial which helped us learn a lot" .... "we can rip indurated layers with the D11, the DMU is designed to remove that oversize, it's working well, the oversize is screened out with grizzles and screens on the DMU to take the blocky material out...it's what was expected, we have some induration, we're able to handle that as we're mining".
14) Front end performance - "certainly from a mining perspective it's within the range expected....at the moment that's looking pretty good, we're definitely getting the oversized out in the pit and we're get the undersize out in the wet concentrator, but early days, we have not optimised our circuits yet.
15) Tailings management have been decoupled from the rest of the mining operations through the use of a tailings dam. This de-risks the ramp up. Sand tailings are successfully being deposited to the tailings dam and water is being recovered for reuse in the wet concentrator plant.
16) According to Bruce "a start-up is not an event it's a process, you're sequentially starting up a lot of equipment, there's no such thing as a start-up where you turn on every piece of equipment and it runs as you expect, you will always have minor equipment failures and needs to adjust things like shoot position etc, to date the startup is going very well and we certainly haven't seen anything that I would say is out of the ordinary..... I'm obviously sensitive to the fact that there have been some difficult start-ups in Australia, wider than just mineral sands...."
17) Once the various concentrates are produced via the CUP the concentrates will be trucked to port and then loaded onto ships expected to be January ( another presentation hints at late Q42023 as a possibility).
18) When asked about look-through product pricing relative to the BFS, Bruce's main point is that given that zircon prices have come off circa 10% from their highs the short term shape of the curve may be a little different to forecast, however the net effect of improving exchange rates vs changes in product prices is still net positive for KMS.
19) Interest rate increase: NAIF component (50% of debt including cost overrun) not affected by changes in interest rates. Orion rates have increased proportional to increases in the SOFR rates but nothing that can't be serviced even at the lowest forecast prices.
20) SFX fully funded up until CY26 when first cashflows from KMS are forecast.
Interestingly Bruce, in his closing comments stated '...the next significant milestone will be first shipment in early Q1. We don't intend to provide a blow by blow description of everything which happens between now and then (making any announcements that would be necessary under ASX requirements), so if you don't hear anything then you can assume things are progressing and on track.
If you look at the above summary of where we stand currently I am left concluding that the plant/mine (ie, road infrastructure, accomodation, LNG storage, power generation station, tailings facilities, bore management, waste mining, dry mining unit installation, mining operations upto the stage of HMC stockpiling) is almost fully operational with only the Concentrate Upgrade Plant (relatively simple magnetic separation process) left to be activated.
Management is happy with front end mining levels to date, tailings operations are working as planned and management are pleased with the HMC product being produced which is slime free. There is plenty of working capital and cost over-runs budget available and SFX is fully funded until late 2025.
The production of specific concentrates (using the HMC) through the seven stage wet magnetic separator is what we currently don't have evidence of, oh and of course of the ability of the truck drivers to deliver the loads of product to port and whether those products will be able to be loaded onto the ships - do you see my point?
Anyone with access to site will be able to see the concentrates loaded in 2 tonne bags (zircon con) and rotainers (ilmenite) and will be able to calculate the quantities being produced by the plant between now and January. Even without access to site an interested enough party would be able to see the loads leaving the mine and heading to port.
So, in my mind, given the big gap between the SP and theoretical valuation then first products out of the CUP is a significant milestone, as is ongoing building o concentrate stockpiles and interim product grades and recoveries.
The next progress announcement anticipated by the company is the first shipment in Q1 - a lot of share price relavent information would be available before then.
Any serious party interested in TB would have a window of opportunity to make a bear hug bid (with a good degree of certainty that the plant is operational and development risk largely behind uthem) long before we get a first shipment announcement.
Putting aside a bid scenario, my question is: should the share price be subject to a vertical gap up from $0.60 to +$1.35 - $1.50 on the back of confirmation that first products have been shipped? given the degree of certainty that investors currently have about the operation, and growing certainty that can be gained as each week goes by, I believe the discount we are seeing is unjustifed and is in large part because of the communication approach adopted by management. It's one thing to take an approach of under promise and over deliver, however when this approach leaves shareholders vulnerable then that is questionable. Management may argue that the market has all the information - yes it does that is how I came up with the above summary, but it is the responsiblity of management to also onsider shareholder value and that is directly linked to the share price.
The next post I hope to upload will talk about how some of the items mentioned in the October 31 presentation effect Stage 1 NPV and how from that we as market players should be able to determine what a fair market price is given the various financial metrics we have available to us and an assessment of the various risk to those metric eventuating.
SFX Price at posting:
60.0¢ Sentiment: Buy Disclosure: Held
(20min delay)
