HIO (ASX) ABSOLUTELY COMPELLING ECONOMICS

THE IIR REPORT:

Key numbers and inputs:

- Initial CAPEX = AUD $2.1bil
- Working capital = AUD $250mil
- Total capital needed = $2350mil.
- Debt:equity ratio = 70%:30%
- Cash needed = 30% × $2350mil = $705mil.
- Exchange rate AUD:USD = 0.72

This table from the IIR research report sets out a range of different short term (construction ready stage, around mid-2023) sp targets at 30% MC/NPV ratio and long term (a few years after first production commences) share price targets based on 10mtpa production, LOM = 20 years, product selling price = AUD $238/ton = USD $171 (using AUD/USD Fx = 0.72).

From the table above we can see the report estimates that:

- If the $705mil equity component is raised through a CR at 50c, therefore 1410mil shares to be issued, total shares = current fully diluted shares (including all options) of 819mil + 1410mil = 2229mil shares.

Short term sp target = 83c
Long term sp target = $2.78

Project's value (NPV8%) = $6200mil using selling price CFR Fe65% = USD $130/ton, which corresponds with Fe62% ~ USD $100/ton (too conservative IMO).

Project's value (NPV8%) = ~AUD $9bil using product selling price of AUD $238/ton = USD $171.30/ton (corresponding Fe62% = ~USD $120/ton).

- If the $705mil equity component is raised at $1 per share, therefore 705mil shares will be issued, and the total shares = 819mil + 705mil = 1524mil shares.

Short term sp target = $1.22
Long term sp target = $4.06

- Now, here the things: I do not see any chance whatsoever that the whole $705mil will need to raised. There are many many ways the company will be able to get some funds through many channels:

1. Off-take pre-payments. The main reasons for off-takes are: the buyers get guarantee of delivery of the goods (supply certainty) and certain percentage discounts and the seller get 30% up to 50% pre-payments to put towards construction.

10mil tons × $238/ton selling price × 90% (after 10% discount) × 30% pre-payment = $642mil. This option alone almost wipe out the need to raise any funds.

2. Off-takers contributing some funding packages towards construction. Mitsui & Co did sign an off-take agreement with us back in 2017 with an extra funding package towards construction of USD $60mil = AUD $80mil. If HIO requests each off-taker to pay AUD $100mil towards construction this time around. 7 customers can contribute up to $700mil. Again this is a very significant sum and basically wipe off the need to raise any other funds. Of course it depends on how the negotiations go and how much we need the fund in exchange for discounts and other favours to the off-takers.

3. Major Project Status can help the company to apply for financing packages from the federal government, the NSW and also the SA gov under many available assistance schemes such as export credit, green steel, ESG credentials...Cobalt Blue Ltd (also in Broken Hill?) has been awarded $200mil financing package from the government 2-3 months ago. I believe HIO will also be awarded similar packages from both the federal government and the NSW gov.

4. Corporate bond at 10% interest(?). Pilbara Lithium (PLS) did use this options twice if I remember correctly. May not involve share issuances at all or if it does, it will come very late into production years down the track and therefore at much higher sp, reducing dilution.

All in all, I do not see any chance that the whole package of $705mil will need to be raised by the company. HIO may need to raise $200mil, $300mil or may not need to raise any money at all for that $705mil.

Hypothetically, presume that that $705mil is still to be raised, i do not see the raise price at less than $2.50. If the resource upgrade confirms 400mil tons, sp will quickly move to $1.50 within a few weeks I strongly believe. From there, there will be many more updates in the months ahead including environmental approval, mining permit, metallurgical and hydrogeology updates, demonstration plant update, optimal port option update, off-take agreements, financing deals, BFS,...There are so many sp catalysts that by the time they want to raise the fund (if at all) during March-April next year, sp would already be in the $3-$4 zone.

So, if the equity price is at $2.50, that $705mil will be raised by issuance of $705mil ÷ $2.50 = 282mil shares. Total shares = 819mil + 282mil = 1101mil shares.

Short term sp target at 40% MC/NPV = ($9000mil ÷ 1101mil shares) × 40% = $3.27

Long term sp target = $9000mil ÷ 1101mil shares = $8.17

The IIR clearly say MC/NPV ratio

That is sp targets under 10mtpa and resource utilization = 200mil tons. If the resource upgrade confirms 400mil tons resource utilization, then sp targets under 20mtpa with LOM = 20 years, Fe70% = USD $171.30 are:

Basic rule of thumb is when production double, net profit will triple or increase by at least 2.5.

Short term sp target at 40% MC/NPV ratio = ($9000mil ÷ 1101mil shares) × 40% × 2.5 = $8.17

Long term sp target = ($9000mil ÷ 1101mil shares) × 2.5 = $20.43

I must remind again here: raising the whole package of $705mil is very unlikely. There are so many other options including off-take pre-payments, off-takers's contributions towards construction cost, financing packages from the governments, corporate bonds,..If any of these financing deals happens, obviously SOI will be less and sp targets will increase further.

What happens if resource upgrade is 600mil tons?

Also, the Exploration Resource Target = 1.4bil tons will increase to 1.6bil-1.7bil tons to be drill-tested some time in the future.

Summary:

SHORT TERM TARGET SP = $8.17
LONG TERM TARGET SP = $20.43
ANNUAL PRODUCTION = 20MTPA