I agree with you, that this is probably close to best case scenario, if MGU can execute on their plans.
I also agree that Iron Ore companies generally do not trade at close to NPV levels until well into production. The upside I provided will not be realised tomorrow, or the next year, but the 20x upside can more realistically be realised in 3-5 years time, once MGU have shown that they can deliver on plans, whether it be 68% concentrate or HISMELT.
I went back to see if some of my assumptions were correct.
Shipping costs - Assumption of $27.20/tonneThis assumption was based off the cost of ship iron ore from Brazil (Ponta De Maria) to China (Qingdao) with Capesize vessels (150,000 tonnes). This is a journey of 11,092 nautical miles according to www.sea-distances.org.
MGU will be using smaller Panamax vessels (60,00-75,000 tonnes), and for the same distance, these have higher shipping costs per tonne than the larger Capesize vessels.
One advantage that MGU has is that it is shipping straight across the Pacific ocean from Stockton to Qingdao, a distance of 5,495 miles, which is about half of what a ship from Brazil has to do, saving a significant number of days as well as distance.
There wasn't much online regarding shipping costs per tonne online for Panamax, but I found a S&P report which quoted the Panamax shipping cost from Hays Point (Australia) to Paradip (India) to be $25.40/tonne), a 10 year record high. This journey is around 5,000 nautical miles.
https://www.spglobal.com/platts/en/market-insights/latest-news/coal/021921-drybulk-panamax-rates-in-the-pacific-hit-multi-year-highs-as-atlantic-demand-surgesOur iron ore has to go around 10% more than the example that S&P gave (Hays Point to Paradip), and if we add 10% to the $25.40 cost, we get around $28, which isn't too far off the assumption used of $27.20.
Anglo American Margin - Assumption of $10/tonneThere is no real basis for this assumption. However it seemed reasonable, since Anglo is not actually doing much or taking on much risk. They are essentially loading a ship at Stockton Port, and then delivering it to a purchaser in China, and making a $10 margin for this.
Most of the pricing risks still lies with MGU, as they are the ones exposed to decreasing iron ore spot prices.
Cost of Production - Assumption of 62% DSO FOB equivalent cost of $46/tonneThis is the one assumption that has the most impact, and is taken from the 2013 PFS into the Buena Vista operation done by Nevada Iron, which had the following cost breakdown for the 68% concentrate product:
Mining - $17.20
General and administration - $2.19
Offsite freight to port and loading -$26.81
Processing - $17.55
Total 68% FOB - $63.75I was comparing MGT's Razorback 2013 PFS (completed under Royal Resources) to the 2021 PFS.
The 2013 PFS which was based on bulk mining (8.2mt/pa) had a 62% DSO equivalent opex of $48/tonne. The 2021 PFS which is on the basis of selective mining (2.7mt/pa) has a 62% DSO equivalent opex of $54/tonne. The increase is only around 12%, which is not that much, especially because some of the opex benefit of larger scale mining is lost when doing a project with smaller tonnage.
MGU will also benefit from there being lower demand on the rail line as coal tonnages have come off, and this should decrease the bulk of the process cost, which is freight to port.
There is some scope to increase this cost, but it shouldn't be materially higher.
Iron Ore prices - Assumption of 62% DSO price of $150 for 2021-22, $110 in 2022-23 and $90 in 2023-24 onwardsThese assumptions are mostly an average of what Goldman Sachs, the Australian Government and Ausbil Investment Management have forecast going forward. The long-term price is also $20 lower than what MGT have used in their recent PFS.
I have also maintained the premium margin of $10/percentage grade above 62%, meaning the 65% fines product will get a $30 premium and 68% concentrate get a $60 premium on the 62% DSO price.
Although this premium is high compared to historical levels, there is a push to reduce carbon emissions, and using higher grade iron ore does support that. This means even if demand for higher grade iron ore should hold steadier than lower grade ore.
SummaryIn summary, the biggest advantage that MGU has is the imminent start in December 2021 as well as the low capex. This is what is supporting its high NPV and also allows it to have cashflows much sooner.
As a rough sense check, I compared the numbers for MGU Stage 3 (960kt @ 65% & 1,440kt @68%) to the MGT PFS (2,700kt @ 68%)
| | MGU Stage 3 | MGT | Difference |
|---|
| 1 | Production | 960kt @65%,
1,440kt @ 68% | 2,700kt @ 68% | -300kt |
|---|
| 2 | Commencement | Dec-21 | Q4, 2024 | 3 years |
|---|
| 3 | Capex | $180m | $675m | -$495m |
|---|
| 4 | Calculated NPV | $1,016m | $669m | +$347m |
|---|
| 5 | Breakeven 62% price | $46/tonne | $54/tonne | -$8/tonne |
|---|
| 6 | Payback | 2 years | 5 years | -3 years |
|---|
| 7 | Current Market Cap | $52.1m | $90.8m | -$38.7m |
|---|
| 8 | Market Cap as a % of NPV | 5.1% | 13.6% | 8.5% |
|---|
The higher calculated NPV of MGU Stage 3 of $347m makes sense due to:
- capex is $495m lower
- commencing operations 3 years earlier as well as having
- lower operating costs
MGU is currently trading at 5% of its potential NPV (based on Stage 3) and at 3% of the full project NPV including HISMELT. MGU is more than 60% undervalued compared to MGT based on current market cap.
MGU doesn't have the future potential upside of a large scale project, given MGT has around 5 billion tonnes at Razorback and Muster Dam, but MGU has a more credible path to market then MGT.
