Hi All,
As a investor in several RE explorers/developers and a casual observer of LIN, I find the headline post tax financial metrecies for Kangankunde of 80% IRR and NPV8 (real) of US$555m with CAPEX of US$40m, resulting in a NPV/CAPEX ratio of 13.9:1 to be unbelievably good... it should be an absolute no-brainer, but maybe it's too good to be true? So let's take a critical look at the Feasibility Study financial assumptions ...
I don't pretend know the Kangankunde project in great detail; I know it's a very large, moderate grade monazite deposit with a low strip ratio and unusually low in radionucleotides, located in one of the poorest nations in Africa (Malawi ranks 174 out of 189 in the Human Development Index and 115 out of 180 in the Corruption Perception Index), with current has an inflation rate of approx 32%... which leads me to my first question of how prudent is it to apply a NPV discount rate of 8% in such a jurisdiction? When deriving an NPV discount rate you need to account for many factors: inflation; interest rates; your cost of capital; project development stage; duration, execution and operational risk; financial and political risk etc. At the end of the day weighing all these factors make the task somewhat subjective, but are they really saying that that in Malawi is a comparable jurisdiction to Australia or Canada from a risk weighting perspective? IMO I think a more realistic discount factor for projects in developing nations would be a minimum of 50% higher than developed countries, at least 12%.
Another way to improve your headline financials is to factor in future product pricing assumptions that is higher in comparison to that assumed for comparable projects... I'm not across the latest Nd/Pr pricing assumptions from Adamas Intelligence, Wood McKenzie and other forecasters but they have all proven to over optimistic in the past and have not taken sufficient account of the PRC's willingness to suppress RE pricing to maintain their market share and control. I haven't come across 'Project Blue' in DFS pricing forecast previously, looking at their website the principles appear to be all ex. Roskill, so I would expect their pricing assumptions to reflect general market trends. However I can find no mention of whether the product pricing forecast is inc. or ex. PRC VAT. If it's inclusive VAT and your planning to sell to the PRC you can take 13% of the revenue line from day 1.
What does stand out for me is that the product pricing assumptions given in section 13.5; Product Price Assumptions, below figure 27 it states; "Index and Received Sales Price Charts CIF, US$/t of Product Sold, Real)" (doesn't say CIF to where, PRC assumedly), whereas in section 13.1, table 15 the 'Product Transport' average annual cost of US$2,429m is detailed in section 11.2 under 'Project Logistics' as "Managed by a logistics contractor for transport to Nacala port, Mozambique. Costs include site loading, road freight, container packing, rail transport, and storage" So where the product pricing is quoted CIF, the OPEX costs basically assumes FOB Nacala. Who is going to pay for the shipping, insurance and delivery from destination port to customer?
Another stand out is the payability assumed for the 55% RE monazite concentrate product: 13.5 Product Price Assumptions "Concentrate pricing is based on the NdPr content contained, with adjustments made for various factors. Payability averages 64.8% over the LOM based on Project Blue's long-term forecast pricing and confidential industry offtake pricing models." This would appear to be an extremely high payability ratio in comparison to other RE concentrate suppliers. Both Rainbow RE monazite conc. from their Gakara project and MP's bastenite conc. are widely reported to receive around 30% of RE basket value for their products sold into the PRC markets. Recent payability assumptions from more mature projects such as ATR's Donald mineral sands/RE project factored in 33% payability for their monazite/xenotime 62% RE conc., and NTU has assumed payability of 40% for their Brown's Range 25% xenotime concentrate to be delivered to ILU's Eneabba RE refinery.
While the very low radionuclide content of Kangankunde conc. would justify a premium price, I struggle to believe that it would command a 100%+ premium over regular monazite conc. in the PRC market. PRC's RE processors already have processes in place for dealing with the Th & U content in their regular monazite concs., it's not as if they face the regulatory and political issues in the PRC that LYC has faced in Malaysia.
From my brief perusal of the FS financial assumptions, IMO there are material issues that render the Kangankunde FS as less than robust and it would probibly require a major revision to be taken seriously by prospective financiers. I'm not saying it wouldn't be a goer, but those big headline financial metrecies invite scrutiny which I don't believe it hold up to to well. GLTAH & DYOR!
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