General:
I posted the following comment in September 2021, which was the last time I posted here - Post #:56133133
here:
"I am sure others will disagree and have a viewpoint, but I can't get away from the fact the 2020 PFS had a pre tax IRR of 175%. A PFS is plus or minus 25% - 35% whereas a DFS is plus or minus 10%. You would have had to screw up the PFS enormously for the DFS not to come in with a pre tax IRR of at least 70% - 100%. I think they just need to get this to production and then worry about their expansion scenarios and what other products they intend to produce under Stage 2 and Stage 3, but that is a personal view. Obviously, it is always difficult to be an explorer seeking to transition to been a miner, so always difficult to understand what is happening in the background and who is doing what, but from my viewpoint it would appear too me JM is doing the bulk of the heavy lifting here. Obviously I could be wrong."
In no uncertain terms, the 36% IRR today is not what the market expected and clearly shows that the market thinks that ADN does not have a handle on the project. I personally do not believe such a reaction would have been there if the PFS say had a IRR of 40% and this came in at 36%. This is the headline aspect of the adverse impacts today. Delays to mining and a longer payback period compared to the PFS is also a problem that the market probably doesn't like either, especially if the market feels that those figures might be less better than what was reported in the DFS (especially after been potentially led to believe the IRR would be better through those ADN presentations since concrete for example was going to be a 'money maker' here than what the actual today DFS reported).
Some will say yes but they added more products and mine life extended - yes that is true but the problem is annual EBITDA was basically in line with the PFS, and NPV was lower than the PFS, refer Post #:44958119, and so in summary all that has happened is increased capex and increased opex, despite changes in product mix and increased minelife, which reduced IRR. that market does not like and it showed today, and doesn't help when trust in ADN has also fallen significantly.
For me it will be difficult to believe what management may say going forward given the significant divergence in PFS to this BFS result, noting with better product mixes would have at least expected better EBITDA to the PFS (but with increased capex probably would accept a lower IRR but maybe not of the 36% variety in the DFS).
Production:
This is a key statement on page 22 of the DFS:
A lot has to go right for mining to start this year, noting the delays to mining that have already occurred given mining was meant to start last year, and this DFS itself was delayed. Obviously staged approach given the 4 products to produce here so initially dealing with Stage 1 and construction for the 4 stages, noting the four stages happen over differing timeslots..
Financials:
At face value, the table below translates the NPV and free cash flow to possible SP. Right now, SP here would be a function of NPV and now the longer delay to production might also mean, when combined with trust around management, might also reduce the leverage around market believing with absolute certainty that this would get to production.
If the market is basing SP solely on NPV normally would expect SP to be 40% - 50% of NPV, maybe higher, so the next week or so as the market digests this DFS will determine where SP moves short term. The key though is that the market will need to believe that the DFS is achievable and importantly the stated production date will happen, and if that is the view then SP might (again because SP has done this in the past here before - Post #:49039028) transition to a combination of NPV/EBITDA. If they don't believe ADN can get to production and/or the DFS variables, SP will fall, an obvious point. My conservative view is this still remains a significant risk reward equation. The key to SP prediction is what P/E ratio you use. Most probably use P/E20 I suspect, but some miners for example operate at higher P/E ratios as well, and some might slightly be lower.
SP will look after itself if this gets to production and DFS variables are met is my point but that has risks and obviously one needs to assess the opportunity cost of possibly getting higher returns elsewhere (especially those in CGT discount territory). Long term hold, with IMO likely significant (trust based) short term risks, but this side of the market is always a risk, and free carry strategies are worthwhile this side of the market and obviously this comment was for long term holders who have held since say 2018/19. In production things are different but getting to production and convincing the market this is not a pie in the sky dream is the key, and a good start would be getting your approvals in order and seeking to get offtakes. Risk/reward here definately.
Two VBs downed.
All IMO IMO
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