Ann: Thunderbird BFS, Financing and Project Update, page-12

Thanks for asking @apoel, yes my lack of opinion was conspicuous. A lot to unpack in yet another volte face... lot of info, gaps, assumptions and implications. In short though; I'm very happy with the headline number obviously, bit pissed we ended up where we have so far down the track, confident we're fully funded if suspicious about the final finance terms and mix.

Superficially the new plan appears a dig and deliver retreat, though given our situation it's a triumph in goal seeking problem solving overcoming numerous obstacles. Clearly the best possible plan for shareholders during the best and worst of times to develop a new mine in WA. Hat tip to Bruce Griffin. BFS is always a team effort, but strategy and tactics are the leader's job and, as we know from dad's army days, are what project development lives or dies on. Now the skirt has been lifted to greyhound height it's clear what a brilliant tactical job new Bruce has done.

Hints were dribbled out in hindsight, timing was inevitably delayed, but I wonder just how close to disaster SFX came? The YSJV announcement Aug'20 proclaimed the new BFS would have similar capex, total funding and equity contribution requirements as the 2019BFSU. LTR cost less than zircon processing so maybe even cheaper, though the 2019BFSU was already out of date. Since then severe cost inflation made the chances of hitting capex targets looked less and less likely. By late 2021 capex was obviously well over, which called for solutions including cheap and nasty LTR (my bias lol) and stripping out infrastructure back into Build Own Operate (BOO) as per 2018 BFS (TZMI 10 Nov presso).





I imagine this triggered dominoes falling, starting with NAIF. Remember that ABC article "Government to review support for Thunderbird mineral sands mine" 25 Oct 21. I have no doubt where there was smoke there was fire. Bruce wanted to strip out the infrastructure NAIF originally funded into BOO, while asking for NAIF to upsize the loan and make it "not infrastructure specific"... highly conflicting goals right. Aside from the Chinese ownership angle ABC was pushing, I absolutely agree NAIF would be taken aback asked to upsize support even while the infrastructure it was designed to support was stripped out to private hands. Back to the drawing board and reconsider support indeed.

So Bruce finds himself squeezed between prohibitively rising capex and critical NAIF support linked the the capex he can no longer afford. Bruce no doubt argued that necessity is the mother of all scope changes, if TB doesn't go ahead then no infrastructure, no jobs regardless regardless who owns and operates it. Fast forward to last week and we know somewhere a 'simplified LTR' turned into no LTR at all, stripped down to bare bones 'dig and deliver' typical of many Aussie operations. No wonder NAIF is so late deciding their commitment and due-diligence for an ever shrinking project target while also considering the merits of a project caught up in capex inflation not in their own control. I'm fascinated and a little nervous to see what infra is stripped out and where NAIF falls... lower, same or higher than the 2018 $95M full monthly project? (no hints in the BFS).

How badly was SFX being squeezed on capex... well, hard enough for the pips to squeak. Latest BFS stripped out ~$100M (incl contingency) losing just the Hot Acid Leach and Zircon Processing plant. Shunting the power plant, port and other infra off onto BOO (my guess only) for another ~$30M capex saved should reduce 2019 BFSU to ~$260M on a like-for-like basis. Yet the capex has come in at $360M... $100M over $260M, or 38% inflation on the items actually included in the new BFS Sounds outrageous, though partly reflects reality in WA, partly the risk premium "fixed price EPCM" contracts, and partly higher contingency requirements foisted onto SFX by nervous risk-adverse lenders. Bruce's pips were really squeaking...


The LTR plant was costed at $43.4M in 2017, so my eyes are watering at the cost inflation since but seems fair to say LTR would cost around $75M today incl contingency. In addition, Bruce was facing cost escalation in "Other Funding Requirements" despite (or because of) NAIF's new assistance package. That $484M Total funding requirement (higher than 2019) if escalated $75M for an LTR would lift to $550M, close to where it was in 2018 when the BFS had both LTR and Zircon processing plant

Even with a stripped down 'dig and deliver' project KMS has to stump up $62M in additional to the $130M old Bruce thought would cover things back in 2020. An extra $75m would require further $30m IF lenders were happy to stick with 60% gearing as the capex got higher and higher. SFX's share of additional funding currently stands at $36M, which would been minimum of $51M with LTR included, more if lenders demanded lower gearing to match increased risk.


We can see now Bruce was desperately finding capex savings to minimise capex, opex risk, and extra equity that required which would have crucified SFX's share price. NAIF reconsidering, nervous lenders demanding fixed price EPCM contracts and higher contingencies, engineering companies charging exorbitant 'just in case' fixed price premiums. We now know why share price was wallowing low 30's before the Eneabbba sale... $36M CR to a stock with SFX's poor record would have been damaging, +$50M with LTR still in would have been disastrous. Fortuitously, $36M from Eneabba West and McCall's sale exactly equals the extra equity SFX needs to tip into KMS JV... amazing how often numbers work out in BFS documents. Desperately needed project sell down sealed in the nick of time at a great price.. another hat tip sir!

Of course, in return for the lower capex, lower opex risk we could jump over, SFX have gone all in China off-take, single country risk. Back in 2020 when the YS deal was signed, bringing back the LTR was sold as risk mitigation and off-take optionality despite YS taking 100% of LTR ilm off-take. Today, "the 100% offtake with Yansteel as co-ownerof KMS mitigates the potential market risk associated with producing a magnetic concentrate" lol. Clearly, LTR afforded the flexibility of re-directing ilmenite sales to other companies/countries in a crisis or YS failure. That will be very difficult selling a bespoke mag-con...

That said, in market's eyes SFX was already pregnant with 'China risk' having YS as a JV partner LTR or Mag-con, while also selling the non-mag con to China..., can't be half pregnant, SFX going to birth to a Chinese baby might as well make it the highest margin, lowest technical risk baby possible and get funded without killing the share price imo. SFX isn;t the only ASX commodity stock heavily or entirely reliant on China for off-take obviously. I applaud the pragmatism and margin strength of an all concentrate export model. I thank Yan Steel for agreeing to on-shore to China that process and profit (with much better contract TiO2 pricing than Bengbu) for the JV's benefit not just their own. YS has come out smelling of roses anyway, will do very well out of a vertically integrated Ti-Slag operation and let's not forget they bought into TB bottom of the market for a bargain...

Stick a fork in me, I'm done for tonight (not going to check my post and figures, I stand to be corrected). Still some critical details to follow on final NAIF, commercial finance and equity requirements. Hopefully we're not made to wait many months more to find out.

Good luck