ABSOLUTELY COMPELLING ECONOMICS, page-789

This post is in response to @h1tch0 and the post on the news thread asking about how a JV would impact the share price and a JV v's dilution with extra shares. I thought I would post here given the response is more about the economics of the project.

Here are some options to consider. By way of background, I have made the following assumptions.

Long term 62% Fe price of US$100, US$25 premium for Hawsons Supergrade, US$60/t all in costs for a margin of US$60/t and a margin of US$65/t. At US$/AU$ 0.75 that is AU$86.67/t profit and at 20Mtpa that is an annual profit of AU$1,733M. Assuming a two year construction period and twenty year mine life, the NPV of the future profit is $12,195M, say $12B - but note that is before construction costs. Assuming AU$4B construction cost, the project has a value of AU$8B. Some will argue higher or lower profit, but I suspect most will accept it is in the range of reasonable possibilities.

I'm assuming that Hawsons would have around 850M shares on issue once all options are exercised.

Alternative 1

JV partner says they will pay for construction for a 50% interest. Hawsons is left with 10Mtpa, but no construction risk as JV partner is paying. Therefore, NPV of Hawsons 50% share of $12B is $6B. Therefore, future share price could be $7.06 ($6B divided by 850M shares) when in production and say half that after JV announcement.

Alternative 2
JV partner says they will pay $2B for a 50% interest and share 50% of the construction cost.

Hawsons can use the $2B from the sale of 50% for its share of the construction cost. Therefore, the outcome will be similar to Alternative 1 above, being Hawsons will have 50% of a $12B project that is fully funded for construction costs with approx 850M shares on issue, being 50% of 12B = $6B divided by 850M shares = $7.06 per share once in production and say half that after JV announcement. However, this scenario could be a bit lower as Hawsons would still have some construction risk.

Alternative 3

Hawsons then needs to raise $4B for its 100% share of construction costs. Lets say it can raise debt for 60% and has to find 40% for its share, being $1.6B. The question then comes back to what price will it raise capital to work out how many shares on issue. This becomes harder to predict because there may be offtake agreements which provide some funding, but at a cost of reduced selling prices. For simplicity, I am assuming all of the $1.6B would be raised via additional shares, but this could be less with offtakes but profits could be lower with offtakes that provide funding.

The value of the project would be $12B when in production, less debt of $2.4B, being $9.6B.

If Hawsons was to raise $1.6B at $1 per share, there would be 2.45B shares on issue (1.6B plus current 850M). Project value of $9.6B divided by 2.45B shares on issue equals $3.92 per share when in production and say half that before construction.

If Hawsons was to raise $1.6B at $2 per share, there would be 1.65B shares on issue (800M plus current 850M). Project value of $9.6B divided by 1.65B shares on issue equals $5.82 per share when in production and say half that before construction.

Conclusion

Therefore, I would consider a JV to sell down 50% of Hawsons where the JV partner funds the construction to be my preferred option, selling 50% where the JV partner pays an amount that approximates half the construction cost my second option and straight capital raise my third option.

I note that there could be an unlimited amount of combinations of JV, offtake, debt and share issue. Management will work with Citi to consider the options and work out which is the best combination.

Regardless of which option is selected, it is fairly easy to see that the share price could easily be north of $2 shortly after BFS completed.