Hey Guys,I have been planning to post something after my chat with Peter but life got on the way so sorry for the delay.
I have had a nice chat with Peter few days ago. I am more confident than ever that we will become producer by 2024. The DFS is well underway and we should expect the announces on each milestones e.g. drilling results, resource upgrades etc. Below is my view on MGT and why I strongly believe in this project.
Indicated and inferred resources - 5.4 bil tons @ around 16% that is 864 mil tons of over 68% fe concentrate.The value on the ground of that based on conservative price of US$110 for benchmark fe 62% and roughly $4 premium per fe% US$134 or A$178.67 per ton is A$1.54 trillion dollars (yes its T, not B). At A$104 EBIDTA per ton gives a total EBIDTA of $898 bil.The data published by the SA government indicates the potential resources is 16 - 32 bil tons. With 16 bil ton resources at 16% recovery, its 2.56 bil ton 68% fe concentrate. That is worth A$4.57 trillion. At A$104 EBIDTA per ton total EBIDTA A$2.66 trillion dollars. These are scary numbers but the proven asset is there and the asset is worth that.
However these numbers mean nothing until you go and start digging. An explorer needs to become producer to start making money. The approach the management has taken is exactly that. The biggest hurdle for any explorer to become a producer is funding for capex. So management has decided a staged development approach, start small with lower capex and expand once the cashflow starts coming in. In my discussion with Peter few days ago, I understood the management's main focus in the PFS was to reduce capex, not exceeding US$500 mil. Not quoting what Peter said, the impression I got is that the capex funding discussion is well underway and they are pretty confident that they will achieve this level of funding as and when required.
So why the over 50% plunge in SP?
The main reason is the NPV number reported in PFS. It is certainly not as rosy as market had expected (including me) specially considering the size of the resources MGT holds. This is reflected in SP post PFS. But the point market has missed is that this PFS is only based on 16% of the resources in Razorback tenement or 8.76% of the total resources including Ironback and Muster Dam.
So why management decided to only include small amount of total available resources?
The main reason is the accessibility of project funding in managements view. Management could have easily gone with 6 mtpa with capex of A$1.2 billion that would give post tax NPV of just over A$4 bil and post tax IRR of 37.8% at US$110/t benchmark 62% fe. Or They could have even gone further to 10mtpa with A$1.8 bil - $2 bil capex price tag that would have given a project post tax project NPV of roughly $8 bil at conservative price of US$110. That would have looked rosy and market would have liked with SP flying over 20c post PFS. However the project could have stalled due to inaccessibility of funds for capex. Quoting management any capex amount with billion dollar tag is difficult to fund and could delay the project significantly or even not find the fund and project never takes off. We have our own PFS experience in 2013 where capex was over a billion dollar. Another example is IRD (please note I am not trying to talk it down. I do not hold this stock but based on my research they have great asset too). IRD PFS in 2014 had roughly $3.98 bil capex price tag so the project never went ahead. They did another PFS in 2019 with over $2 bil price tag. I am not sure when they will find that money and start producing.
So the approach management has taken is not rosy but practical. Once we build mine and related infrastructure, the sky is the limit.
What about the recent crash on iron ore price? How will this impact to MGT?
Media always create hype and highlight when something negative event happens because that is their business. Yes it has gone down from ATH of roughly US$235/t but isn't the price around US$183 still too high compared to 12 months ago? And 66% higher than what MGT has used in PFS. It has got no effect to MGT or any other low cost IO juniors who are currently not producing because the high IO price doesn't reflect in their share price anyway. Listening the Iron Ore experts, the ones that understand the market, supply and demand landscape and the future of IO industry, the IO will stabilize between US$120-$150 per ton for benchmark fe 62%. MGT needs US$54 for fe 62% for break even. As BT mentioned in his previous post, IO price has gone below US$60 for total of 30 days over the last 10 years when the IO majors had substantial investment in expansion and new mines resulting in supply outstripping the demand. This time around the majors have elected to distribute the profit to shareholders rather than investing the substantial amount to increase supply.
Also this reduction in price is not due to market force i.e. because of supply and demand. It is due to government intervention to reduce the carbon emission. The demand is still there and the supply is still not catching up with the demand. In the long term the market force will automatically adjusts when supply and demand balances themselves.
The government intervention also highlights the importance of high grade Ore that reduces energy consumption and increase efficiency of steel mills that will be able to produce green steel resulting in higher demand therefore higher premium for super grade products. This justifies the projects like Razorback which will be able to produce high quality super grade products with similar level of margin to the majors e.g. RIO, BHP, FMG etc.
So all the down rampers talking rubbish about MGT not going to be funded and won't be successful should look at why their claim doesn't have any substantiation.
My opinion and observations only DYOR.
(20min delay)
