Dear me, the DRE intelligencia have dropped in to hitch their wagon to a fallen star
This offtake term sheet starts to bed down one reality I've been talking about for some time... which is China dominates down stream processing, China is ridiculously cheaper than Oz downstream processing (much lower costs and 10 years process efficiency lead on the west) and in an over-supplied competitive market the best chance for Yangi to get developed is to drive down capex, opex and maximise revenue through doing a deal with the Devil.
Strategically this is the sort of deal I expect China do to. Although the actual tolling costs and payability at various basket prices is not referenced in the term sheet, some quick maths and I have payability lifting from ~44% mon-con basket in the May2023 Stage 1 DFS revision, to ~58% in the term sheet. No way in the world could ILU or LYC afford to pay equivalent of 58% of basket value for mon-con, there simply wouldn't be any profit left after processing through MREC to REO. If HAS ever gets funded and developed, this Baotou off-take cements China's dominance and ample RE feed supply, perpetuating low prices that ultimately prevents most RE deposits being developed or actually making material profits if they are.
Stage 1 May2023 to Feb2024 Assumption Changes as per my table (if my LOM NdPr price calc is out, then the Payability variable must go up or down proportionally, excluding any material changes in opex/capex assumpions)
Stage 1 May2023 DFS assumed 'average' NdPr US$129/kg first 10 years (ie escalating from below $129/kg to above over time), then the price lifting to an average US$235/kg over the last 7 years. Today's updated financials assume the first 10 years avg NdPr price drops to US$121/kg but in the absence of any other reference one assumes the last 7 years NdPr price is assumed to stay at US$235 avg as May2023. Net effect is a LOM average NdPr-Ox US$175/kg in MAy23 update dropping to $168/kg today's update. These prices reflect a parallel universe from the one I live in, though never say never I suppose.
The reason a "fixed tolling" offtake can lift free cashflow so much over LOM vs a "profit-sharing" model is because of the huge leverage to REO prices. For arguments sake, assume 'fixed tolling' charges are US$70/kg NdPr equiv in mon-con... then at NdPr price of US$70/kg HAS will receive $0 payment for their con. At $121/kg, HAS will receive US$51/kg contained NdPr equiv for their con. At a price of $235/kg NdPr, HAS will receive US$165/kg contained NdPr equiv for their con and so forth.
Under a profit share model, a floor tolling price of say US$50/kg NdPr (eg to cover downstream costs at a minimum) would rise by less at higher NdPr rpice assumptions because the downstream processor takes a slice of the increasing margin as a profit share. At very low prices, the profit share model may be better than fixed tolling cost, but at very low NdPr prices (eg $70/kg) then Yangi is a dead duck so it doesn't matter anyway. At higher, especially very high NdPr prices, a fixed cost model leaves a much greater amount of margin with HAS... but will those very high NdPr prices ever eventuate? Maybe there is good reason Baotou is happy to lock in US$70/kg NdPr equiv fixed tolling price (other than strategic national interest) and forego the profit sharing upside (ie they don;t believe prices will get that high).
The May23 NPV and IRR values exclude the $100M capex already sunk, which is typical games I've come to expect from HAS, so I wonder if today's NPV exscludes just $100M or the new $142M capex spent to date? Ultimately it all comes down to one's judgement of future NdPr prices. The other thing doing a deal with the Chinese must bring into question is any sweetheart finance package form the western alliance, including Australia's critical mineral finance programmes. Thyssenkrupp Materials Trading is a trading house middleman, and the 2/3 mon-con offtake will almost certainly also be sold to China for min treatment costs and maximum revenue also. It makes no strategic sense to subsidise new mines supply China with feed for their ongoing RE-magnet production and price control dominance...
GLTAH
(20min delay)
