In response to your question about the IRR.
Miners consider lowering the hurdle on projects (AFR 2/9/19)
…Super low interest rates are tempting Australian miners to break with tradition and invest in projects with rates of return below 15 per cent, with one mining boss warning an inflexible approach to investment hurdles would disadvantage investors.
The 15 per cent rate of return has been the minimum investment requirement for most big miners over the past decade, with BHP chief executive Andrew Mackenzie briefly raising that hurdle to 20 per cent in the early years of his tenure.
…Newcrest Mining chief executive Sandeep Biswas said he would be more willing to accept lower hurdle rates on ''greenfield'' projects than on ''brownfield'' expansions of existing mines, particularly if thosegreenfield investments could be improved over time.
''We may do a transaction that has an IRR (internal rate of return) less than 15 per cent, but we are unlikely to do it unless we have a clear pathway where the application of our skills, our technology and our expertise can't get us to 15 per cent, that is how we think about it," he told The Australian Financial Review.
"You have got to have some headroom, there is always stuff that goes against you, it is a very uncertain world, so the more buffer you have in terms of the quality of your investment, the more resilient it will be.''
BHP chief executive Andrew Mackenzie said low interest rates meant the time value of money was less of a concern these days, and that meant miners should not feel pressure to invest large sums upfront when approving projects.
Mr Mackenzie said Jansen was a good example of how a small initial investment may not look attractive using traditional financial analysis, yet the slower entry provided valuable optionality and information that helped the investor to avoid mistakes when making subsequent, larger investments in the same project.
''Instead of going for these big bang early investments that the net present value calculation would say you should do, because you’re worried about the time value of money – less of a concern, I would say, these days, with such low interest rates – you actually just go in, in a small way, into the elements of the project, into the ore body, understand what’s going on for a small cost which could be added to a bigger project rather than rushing in up front,'' he told analysts on August 20.
''We’ve actually done that, I think, quite successfully in the way that we’ve approached our Jansen development, the careful way in which we’re thinking about Olympic Dam.
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The IRR (pre-tax) for the Jervois Project of 23.1% (i.e. the cashflow return based on a given investment outlay) would appear to have significant upside potential with a bullish outlook for copper prices based on the current price of $4.25/lb up to a recent forecast for the end of the decade by G&R of $15/lb compared to $3.08/lb in the PFS. And we have the potential for significant additional high grade discoveries along strike and at depth which could double or triple production capacity and the potential for high grade silver and gold deposits.
But more importantly for us, how does this translate to a future share price projection?
I find it easy to do a quick and dirty valuation of the future enterprise value by applying an industry trading multiple (or range of multiples) to projected cashflow (EBITDA) under various scenarios and then make an assumption on the amount of net debt (assume zero i.e. debt paid off/invested in exploration/expansion) and number of shares on issue to derive an equity value per share.
It beats trying to do a detailed DCF at this early stage.
It’s good enough to get a sense for the potential size ofthe prize -what’s this worth under certain scenarios and can give you a good idea of the impact of key value drivers.
Although its too early to tell much more than what’s in the PFS, we can still make certain assumptions and compare these to the company’s actual progress along the way and adjust our numbers / expectations accordingly.
Recent analyst commentary:
First Quarter 2021, Goehring & Rozencwajg, Natural Resource Market Commentary: The previous copper bull market took place between 2001 and 2011 and saw prices rise seven-fold: from $0.60 to $4.62 per pound. As shown in the Barron’s quote above, we wholeheartedly embraced that copper bull market and maintained sizable exposure throughout the rally. The fundamentals today are even more bullish. We would not be surprised to see copper prices again advance a minimum of seven-fold before this bull market is over. Using $1.95 as our starting point, we expect copper prices to potentially peak near $15 per pound by the latter part of this decade.
Aussie Broker: One influential analyst commented recently in a private note to clients – Copper still looks like it wants to head a lot higher over the next 3-5 years we continue to think …xx, KGL are going a lot higher…We think KGL can add significantly to their resource inventory over the next few years and we think KGL can do a lot more than 30ktpa of contained copper in concentrate plus silver and gold over time and circa 80% of KGL`s ground is underexplored.
Blue Sky Valuation Framework Considerations:
Size of the prize? At this stage, its too early to know but the location, geological setting and current knowledge of the resource is supportive of a potential world class deposit consisting of high-grade copper, gold and silver. Hopefully the next 6-12 months of geophysics, drilling and downhole EM can add some additional valuable insights.
Key valuation drivers - Tonnage (significant upside-multi-decade mine life?), grade (maintain or improve at depth), pricing (bullish), costs (inflationary pressures), potential for high grade gold or silver deposits, timing and dilution.
G&R above are forecasting copper prices peaking near US$15/lb by the latter part of this decade.
Scenarios: Three pricing scenarios for my base case, high case and crazy high case - $4.50/lb ($10k/t), $6.80 ($15k/t - GS/Glencore/Trafigura), and $15/lb ($33k/t-G&R) EBITDA for 30ktpa based on AISC of $2.25 -A$200M; A$400M, $1.1Bn
Using a potentially conservative 5x EV/EBITDA multiple gives a valuation of A$1.0Bn, A$2Bn, A$5.5Bn
Approx 400m shares outstanding. Assume additional 100m shares issued as part of project financing in Q4 for a nice even number of 500mn shares outstanding.
Huge potential upside in resource with systematic discovery process along strike and at depth. Potential to be a multi-decade mine with a doubling or tripling of production tonnages based on a successful exploration program.
My Crazy High Case assumes double capacity to 60ktpa and G&R pricing for a value of $10Bn or $20/share. This ignores possible sizeable high-grade gold or silver discoveries. When Fortescue was $2.50/share, nobody thought it would go to $25/share. Iron ore prices are up from $38/t to $220/t.
The size of the prize is potentially quite large, subject to ongoing exploration success, strong demand, supply constraints (peak supply forecast for 2024) and strong profitability, etc.
Exploration success has the potential to punt this into the stratosphere, IMHO. Cashflow from operations or exploration success should allow the team to accelerate the timing of additional development options to chase this huge potential.
It’s still early days with exciting near term and long term upside potential. I’d like to think the majority of the shareholder base that have backed Denis over the last 5 years are locked in for the ride.
Hope that’s helpful. It’s all somewhat speculative at this stage and even the best laid plans can come undone.
I’ve left out another scenario above the Crazy High Case for now which I call the Yurchenko Double Pike where we really go for it ala Simone Biles, the GOAT US gymnast (see youtube performance).I will update my numbers for this scenario when the company issues the press release “Bigger than Ben Hur” or alternatively, “The Yurchenko Double Pike”.
DYOR.
