HIO (ASX) ABSOLUTELY COMPELLING ECONOMICS

Originally posted by Tran: ↑

THE PFS 2017.

Let's go through the figures provided in the PFS and analyse them to work out the AFTER-TAX NPV8% of the Hawsons project.

In the above table, we see NPV10% = USD $867mil with assumptions of:
- Discount rate = 10% (no mining projects nowadays use 10% discount rate. They all apply 8% discount rate).
- Annual production = 10mil tons
- LOM = 20 years
- Total LOM production = 201mil tons (look up the table at the lower left-hand corner)
- Final product = Fe70%
- Fe62% = USD $63/ton, Fe65% = $75/ton and Fe70% = $88/ton.
- All-in-cost CFR = USD $48.03/ton.
- Annual EBITDA = USD $401mil.

Now, look up the table again and you see when Fe65% increased to $85.40/ton (from $75/ton):

- Fe70% price = annual revenue ÷ 10mil tons = $983mil ÷ 10mil tons = USD $98.3 (from USD $88/ton)
- After-tax NPV 10% increased to USD $1.432bil. That is an increase of $1.432bil - $867mil = USD $565mil.
- Annual EBITDA = increased from USD $401mil to USD $497mil = an increase of $96mil.

The key things we should be focused on are: how much EDITDA increases and how much NPV of the project increases correspondingly.

What we see above is:

For every USD $10 increase in the selling price of Fe70% (from USD $88/ton to USD $98/ton), EBITDA increases by USD $96mil, NPV10% increases by USD $565mil over the life-of-mine of the project of 20 years.

Important assumptions:

- Average annual production = 20mil tons
- LOM = 20 years
- Resource utilization = 400mil tons.
- A slurry pipeline to be built directly from processing plant at mine site to the port in SA and save at least 50% of the operating cost with regard to Rail & Port (rail transport will be dropped). If you look up the above table again you will see rail and port cost was USD $11.23/ton. My estimate is direct slurry pipeline will trim $5-$6 off this operating cost item.

- All-in-cost = USD $51/ton

Note: in the PFS 2017, All-in-cost was USD $48/ton. Then the KPS report in Oct 2021 assigned a new USD $61/ton, allowing for 27% increase in cost. However we are now dealing with almost double production quantity which must reduce cost significantly. Plus, a slurry pipeline can save around $5-$6/ton. So, I apply a conservative $10 reduction to all-in-cost and therefore new all-in-cost is now $61-$10 = $51/ton.

Also note: MGT has estimated that its all-in-cost will be USD $40/ton if it goes with option of 7mil tons annual production (versus HIO 20mil tons). This gives me confidence that our all-in-cost of USD $51/ton assumption is quite generous.- Long-term Fe62% = USD $120/ton
- Estimated Fe70% = USD $170/ton
- Annual EBITDA = ($170 selling price - $51 All-in-cost) × 20 mil tons annual production = USD $2380mil.
- Every USD $96mil increase in EBITDA above $401mil will generate extra USD $565mil NPV10% on top of USD $867mil as I mentioned above. So, the new NPV10% = [($2.380bil - $401mil) ÷ $96mil × $565mil] + $867mil = USD $12.514bil = AUD $ 16.685bil.

That is NPV at 10% discount. No mining project nowadays uses 10% discount rate. In fact, the KPS report did clearly say the BFS WILL apply an 8% discount rate. For those who does not understand how to convert 10% discount NPV to an 8% discount rate NPV. I already worked out for you:

NPV8% = around 1.2 × NPV10% = 1.2 × AUD $16.685bil = AUD $20.022bil.REMINDER: If MGT is right with its estimate of its All-in-cost = USD $40/ton with 7mil tons annual production, I would be surprised if we don't achieve similar cost structure with 20mil tons annual production with a direct slurry pipeline from mine to port and save a very big chunk of transport cost.

20% MC/NPV = $4bil (immediately after resource upgrade statement confirms 400mil tons resource)

40% MC/NPV = $8bil (around June-July 2023, before construction begins).

THIS IS BASED ON 400M TONS RESOURCE, 20MTPA, FOR 20 YEARS, AT Fe70% SELLING PRICE = USD $170/TON, AND ALL-IN-COST = USD $51/TON.

IF THE RESOURCE IS 600M TONS? It pretty much increases NPV8% and expected MC by more than 50%.

Expand

Excellent Tran, great analysis as always.

Back to Yr 2011/2012 announcement, it did mention Hawson resource is very large with potential 50year plus mine life based on production 20Mtpa, 400M Ton is conservative.

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Excellent Tran, great analysis as always. Back to Yr 2011/2012...

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