Give Reason to hold or invest in CXO, page-208

Dawg,
You have made the statement: "Everyone knows the economics of vertical peg deposits in Australia i.e. they are not economic."

Is this because you are being intentionally misleading, or your don't know about viable Australian mines with vertical peg's? Assuming its the later (I'm feeling generous today), at least one of the big lithium mining companies in Australia has a lithium deposit that turns vertical. I'm not sure of the peg's shape at the top but this deposit is known to almost all lithium investors, its shape isn't. The lithium deposit is Mt Marion that is run by Mineral Resources. Have you heard of that project?

The relevance to Core?

• Core's new CEO was at MinRes for many years running their lithium operation. He knows Mt Marion extremely well. Mr Brown therefore has an excellent background to consider what BP33's potential might look like, and to know all the geological advice that MinRes received about how to best mine Mt Marion deeper portions.
• Unless you are going on record as saying MinRes and Mt Marion is uneconomic, the statement vertical peg's are not economic is plainly wrong. If some are economic, BP33 may also have good economics.

You are however correct around thinking about how you mine vertical peg's like Grants and BP33. In the case of Grants Core decided to do it as open pit. They decided to basically take layers off the top. The initial slices at the top were approaching 400m wide but as the pit gets deeper the slices get smaller. This has a critical cost impact that the wider public doesn't seem to have clued up to and those selling out at today's prices haven't clued onto - Core's costs for Grants go down not up with time as they go deeper. IMO there's a bunch of profitable ore in Grants that is yet to be mined, but i've covered that in other posts. Core needs more than that to be viable.

For BP33 Core initially looked at an open pit option but the strip ratios became too large too quickly so they abandoned that plan and went with an UG mining plan. Initial costs were clearly understated. Core is still to provide an update as to how much the anticipated cost of ROM has shifted from the July 2022 ore reserves update but back in two years ago the cost of ore from BP33 was A$65.18/t.

How profitable could BP33 be?
That depends obviously on prices but also on recovery rates, mining costs and processing costs. Grants and BP33 have similar ore. Core got good test results from the lower capex option of DMS only so they went that direction and information on flotation recovery is limited. Core's big recovery issue is from fines but lithium can be recovered from fines through flotation, except to the extent they are slimes. If you look at the table from 10 March 2017, 100 Units of ROM would start the process. An unknown quantity of fines would be screened out and DMS would be undertaken the rest. Assuming 80% of the material entered the DMS, the DMS outputs were a 2% Mica screen (within the DMS process), 13% Concentrate, 50% tailings and perhaps15% middlings. The 20% fines were combined with the 15% middlings would be combined to create a flotation feed, but 7% was filtered out as slimes. This would meaning 28% would enter flotation with 7% becoming concentrate and 21% being flotation tails. The overall recovery rate was 82% to SC6. If the target grade were lowered to SC5.5 then the flotation and DMS tails could be reduced meaning a recovery rate near 85% may be possible. On this model, around 28-30% of the material would need flotation. A 1Mtpa operation would need a 300ktpa flotation plant.

We know LTR's had huge capex cost blow-outs on their project that includes renewable power, a 3-4Mtpa flotation circuit and all the other support infrastructure like accommodation units. A 300kt flotation plant is 1/10th of what LTR are building and perhaps 1/15th of their overall capex. Someone close to LTR can refine that guess. That makes a ball-park guess of a BP33 flotation plant around A$100m seem in the right ball-park. Atlantic's looking at a US$100m prepayment for a circa 500kt offtake. The BP33 offtake that should be available is larger than what Atlantic has to work with.

The table from 10 March 2017 Met test work:


What does BP33 look like with flotation, 85% recovery rates and a 5.5% grade?

Well only 4.3 units of ore would be needed for 1 unit of SC5.5 [4.3 * (1.5%/5.5%) * 85% = 0.997] noting an assumption that the ROM grade matches the overall resource grade of BP33, it might be lower. Lets assume 20% price inflation from 2022 pricing making the production unit cost now $78.22/t. The ROM for a unit of SC5.5 costs A$336/t. I'm going to assume the new processing cost with efficiencies (but including flotation) matches GL1 scoping study of A$300/t. With a 20% contingency added so processing is A$360/t (GL1's scoping was on DMS+Flotation). It should be better than that as BP33 has a higher grade than GL1 and this assumed recovery rate is higher so less throughput is needed for each unit of output but I'm being cautious. Transport logistics including port costs, shipping to China and G&A should be under $100/t but I'll assume A$100/t. On these estimates BP33 could be producing A$796/t ore (or possibly less if the production cost estimate is overstated).

So what would that look like if Spod was only US$1,000/t for SC6? This might be US$870-917/t for SC5.5 depending on the extent of additional price discounts for below SC6 grade. I'm assuming Grants delivery has basically met past offtakes so pricing is back to spot. The NT royalty system is complex but there might be 20% royalties on US$300/t or US$60/t. There's also a legacy ~2% royalty or ~US$20/t. At 0.70 exchange rates A$796/t is US$557/t and increases to US$637/t with US$80 of royalties. There's perhaps ~US$250/t margin at US$1,000/t. If Core mined 1Mt/yr they would produce 232ktpa of SC5.5 so the margin is about A$83m/yr (before tax) and non-production costs. That isn't huge, but it is using only US$1,000/t for SC6. Most studies producing higher figures are using higher Spod price estimates. It might be surprising result as the general consensus is that Core is completely unviable at that price but it would require building and commissioning successfully a flotation plant.

What if prices spent some time at US$2,500/t?
The NT royalty would go up by US$300/t and the legacy royalty would add another US$30/t. The margin would go from US$250/t to US$1,420/t or about A$471m/yr. Taking off 30% for tax to $329m profit for the year. The MC's under that so if this was implemented and there was a future period of US$2,500/t per ton prices core has a PE of under 1.0x.

So Dawg, what's your evidence for the statement vertical peg's are uneconomic?