This will be relatively quick, but lets start with the PFS (Dec 2019). Using there assumptions, I get pretty close to their NPV and IRR, so feel have a good starting basis - Post #: 41740042
1. Dec PFS In duplicating the PFS, I got A$503 million NPV (reported in PFS A$507 million) and a IRR 28% (reported 25%), which suggests the issue for me is how they ramp to production. Anyway since I got close I can work with this. Key assumptions in the DFS are in yellow below in the Table, noting the price used is US$710 DMT6.1% grade.
Just to make the table easy to read year 8 - 28 (26 years mine life is not shown but the numbers identical in nominal terms to year 7).
If this gets to production at the 2mtpa configuration, and the variables come in as per PFS, well in terms of earnings per share and assuming 2 billion shares on issue it is 4c per share, which translates to a SP of 40c per share at P/E 10. This shows the importance of getting to production and working in nominal $ instead of discounted dollars btw, and why IMO your own MD is saying hold long term.
But what happens if there is a takeover today on that configuration, noting the person doing the TO would be looking at a IRR of 10% - 15% btw - so lets set it at a required 11.5% IRR - can't set it at 10% because TO person wants to share in the economic rent is the point. Takeover price, under PFS assumptions would only be A$307 million, i.e basically treat it as a capex charge and gets you 11.5% IRR, hence the point about moving this to 5mtpa configuration.
5 mtpa configuration For a hypothetical, I have doubled capex costs to A$480 million, the economies of scale concept in capex, and given the underground section, bumped up A$ costs from PFS A$564 per tonne to A$600 per tonne for a 5mtpa configuration (i.e. underground section cost increase but that is a guess). Model will be sensitive to these assumptions, in any event. I have left the price assumption as per PFSs, and increased production from 295,000 tonnes to 740,000 tonnes to reflect increased configuration.
First thing you will notice from table below is the significant rise in NPV - from US$500 million to $1.2 billion, post tax, with IRR increasing slightly. Then you should also notice if this got to mining, EPS jumps up to 9c, making SP 90c at P/E 10.
Now what would the takeover price today be for that configuration, assuming the PFS assumptions come into play - answer A$750 million to get to 11.5% IRR.
Now, all the above is based on spodumene prices of US$701 per tonne for 6.1% grade spodumene, as per the PFS assumption. Now what would the TO price be if spodumene prices were US$550 per tonne instead (i.e. A$764 per tonne), which is still higher than current spodumene prices. Not a lot because at US$550 per tonne (A$764) post tax IRR falls to about 12.5%. EPS falls to 4c, making SP about 40c on these assumptions. Hence the importance of higher spodumene prices for LTR, unless of course it finds ways to reduce opex costs, but like I said I am leveraging of the PFS in the cost estimate btw.
And just to show TO price today on these assumptions - a spodumene price of US$550 per tonne leveraging of PFS modelling if the market believed that was the long term price indeed, would be low, it would be below A$100 million, to get to 11.5% since the TO entity still has to put in capex to build the project as well, hence why need to take this to mining IMO, given where spodumene prices are at now. If the 'suitor' doesn't perceive spodumene prices improving to Dec PFS prices were it to bid, well from an NPV point of view (to define IRR) they will low bid is the point. Because they still require to make a profit and still pay for upfront capex in an opportunity cost framework (i.e. it is why a NPV is discounted to start with - opportunity of capital concept) despite in nominal $ it actually has reasonable EPS is my point.
So why production and what TO price then in production at US$550 per tonne in this hypothetical - well in production you don't have the upfront capex anymore and that means upfront revenue as well, which reduces discounting impacts on revenue at that time. So, the only thing to model is the takeover price and obviously in production assuming TO entity agrees and production shows that opex costs are coming in as planned in DFS - which becomes A$800 million at this assumed US$550 per tonne revised price, more if price is higher is my point, but need to be in production to extract this type of value, demonstrating profitability, if spodumene prices do not return to say the US$650 per tonne to US$700 per tonne range etcetc. Obviously in production the risk is that costs are shown not to be coming in at DFS levels and that teh recovery rate is not near a DFS estimate (i.e. PLS's issues for example).
Points: 1. Modelling above leverages of PFS and makes assumptions. There is no DFS currently here, especially given the likely scope increase in orefeed facility from 2mtpa PFS to probably 5 mtpa.
2. The mine plan is open cut leading to then underground mining. The unknown is underground costs, so IMO without a DFS bidders would ere to the side of caution.
3. Spodumene prices are currently unfavourable and therefore don't expect any bids that are 'worthwhile' until prices turn. It is why I say it is in everyone's interest spodumene prices rise, and if it means some existing producers survive so be it. It is probably why TG has deferred the DFS and stated to SH lock up your shares and treat it as a long term investment. And for others why I don't believe there will be no takeover bid for LTR for at leats the next 12 months. Lets see who is closer to the pin.
4. TO prices in production will be higher, if using same opex and price assumption, than pre-production, and they come in at those levels in production. What configuration the market can accommodate for LTR - either 2mtpa or 5 mtpa - will influence TO value. Noting a DFS itself not due here for 6 months - 1 years based on a previous Ann.
5. In production, SP is a function of EPS and P/E ratios (noiminal values) as against NPV/IRR considerations. But in TO scenarios NPV/IRR is the key consideration. If a resource is considered strategic, it still needs to meet hurdle rates of return for the acquirer is the point. I suspect in your valuation in the other thread it is roughly 1/2 of EPS at a US$550 assumption, but that is a guess - Post #: 44626566
6. For avoidance of doubt, these estimates are hypotheticals to show outcomes at different points in time, and to repeat are based on just back of the envelope calculations. The DFS must confirm the opex and capex assumptions to gauge costs if a TO happens pre mine build. But unless spodumene prices improve, and at that back of this comment is improving spodumene prices because economic activity is picking up and lithium supply is needed, then all of this becomes hypothetical, which I have also said when doing the same exercise in the stock I own.
7 Finally, and in relation to point 6, my intention next week will be to buy into an existing producer but a very small investment only whilst still holding my speck play - why, well if prices improve existing producers will be the first to benefit. I was toying with investing in another exploration play, but obviously a punt, but if prices don't improve all explorers will find it difficult to gain entry to market is my point, because static spodumene prices essentially mean that EV growth is not as strong as predicted, meaning the road to 2000 GWh in year 2030 is too difficult to attain. Discussed further in this post, especially teh forecasts and number of new mines required if 2000 GWh is achieved by 2030, but for others the comments in Section 4 equally apply to LTR to make it stock specific. Post #: 43657165 If 2030 takes longer to achieve the development plans of greefields projects also moves out is my point, with corresponding impact on SP IMO.
9. To repeat it is in sound greenfields deposit's interests that spoumdene prices rise because it means the market needs new projects as well. We can debate which projects are good or bad, but it becomes irrelevant if demand doesn't pick up and follows teh pre-COVID grpowth assumed traectory. Refer point 8 again.
10. That is the way I approached the issue, and I am sure others will be able to do better modelling than me. But I for one do not believe in inground valuations as a basis for valuations - valuations are based on the profit you think you are going to get from selling something (not keeping it in the ground).
11. I am sure holders will say, non-holder who cares. But, my thoughts in thsi post is exactly teh way I tackeled the issues in teh share I own to. Am been very consistent is my point. I guess I have provided a theoretical basis to valuation - others can nowrespond with their own approach to valuations. Am always willing to learn.
12. All valuations above based on assumptions and all IMO IMO IMO IMO.
13. Done by an old codger who drinks VB, inpart to keep themind active.
14. Ohers will call this another essay.
15. Things tolook out for in the DFS, is configuration (i.e. I think 5 mtpa), and the most important variable IMO is opex cost. As I posted in others shares. I doubt long term lithium prices will average above US$700 per tonne long term. I suspect they will average US$600 per tonne - US$700 per tonne, because the industry is maturing and the days of prices above US$700 per tonne as per 2017/18 are over IMO.
16. That is how you do valuations and work out project viability. Then in production ensuring you meet the DFS targets around cost and recovery a key, something some existing new producers have been unable to do (also contained in embedded post at point 7). Because that has not been able to be done since the Wodgina and WES bids, that is also another factor IMO as to teh more conservative approaches people will utilise invaluations, and probably in TO. Note - this comment does not apply to Greenbushes as that has a proven track record btw.
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