To some extent not much has changed... RE price forecast have fallen slightly, capex and opex estimations have risen slightly, but payability for mon-con has risen by more on a cheap Chinese fixed price toll for an overall lift in Stage 1 free cash flow and NPV. Still, the NdPr price assumptions required to attract private equity funding (now ~$250M by my calc) look unrealistically high. US$100/kg NdPr-Ox would make the better deposits profitable, ILU used $106/kg in there Eneabba refinery study, but the prices HAS are quoting include 13% VAT (value added tax) in China...
Either you sell into China and lose the 13% VAT (like our GST), or you sell outside China and hope for a 13% 'ex-China' premium, but you can't have both. If HAS toll treat in China, that LOM $58.5/kg TREO that delivers A$9,696M Net Revenue will actually be US$51.8/kg and only deliver A$8,390M LOM net revenue. However, when top-line revenue drops but costs stay the same, all-important margin falls exponentially, in this case $3,345 LOM free cash flow falls by ~40% to A$2,072M. Highly leveraged to REO prices to say the least.
The update is all about the Chinese fixed toll price deal though, and not just because $1M of Nov'23 performance rights were linked to signing a new Term Sheet (the other hurdles are unachievable or aspirational). The May'23 Update had Stage 1 Opex at $190Mpa (US$15.43/kg TREO). This update has lower AUD, higher opex with more drying and escalation etc, so I thought A$22Mpa was a reasonable figure with which to deduce the fixed tolling cost of A$100Mpa or A$13.5/kg TREO (guided Feb'24 Opex + MREC, REO Sep'n = US$22.50/kg TREO)...
To see just how cheap that was, I looked at ILU 2021 Feasibility Study for an example of western MREC-to-REO Sep'n costs. Eneabba was estimated to cost A$160M in opex alone processing 24ktpa mon-con in table below (vs Yangi 34.5ktpa) at A$13/kg TREO. At a similar size 36ktpa mon-con Eneabba-Wimmera feed like Yangi, unit opex drops to $11.50 for ~A$212M opex. More REO in Eneabba mon-con (60% TREO) than Yangi (27% TREO), so perhaps it's a bit cheaper on the REO-Separation so lets round down to A$200M opex annually.
ILU announced a capex increase from $1.3B to $1.5-1.8B recently... anybody believe it will not end up closer to $1.8B? What is the opex escalation with inflation and reality between 2021 and 2024 Real prices? If capex has risen by ~35%, it's likely opex has gone up by at least 25%, so it would cost ILU ~$250M in 2024 prices to toll treat 34.5kt of Yangi mon-con... vs $100M in the new Term Sheet.
Toll treaters don;t just want to cover costs, they need to cover depreciation and sustaining capex, plus make a profit on the effort and risk. What do you think ILU's depreciation and sustaining capex is on a $1.8B plant? I'll assume 15 year depreciation as a business case (because Niron might perfect iron-nitride perm magnets one day, then it's all mothballed) or $120M per year. I'll assume between sustaining maintenance, TSF lifts and rehab etc there's another $30Mpa, so ILU need another $150M in addition to the $250M opex to cover the investment. That $400M still doesn;t make ILUJ a return on the $1.8B investment and effort/risk of proving the west with ex-China RE-Oxides though. What is a fair post Depreciation rate of return on $1.8B plant... say 10% or another $180M (you can get 6% in a big 4 Oz bank bond FFS, no effort, no risk).
So, ILU would want to charge A$580M annually to toll treat Yangi mon-con, which is a ridiculous amount of money. Even at the US$144/kg NdPr price Yangi would be cash flow negative, it's a non-starter. Fortunately ILU have near free mon-con feed, preferred annual royalty payments before distribution and interest for the government etc. ILU will try and capitalise any gains in the REO price and socialise the losses if prices don;t rise... but at least they have cheap monazite to have a crack.
Maybe ILU opex, depreciation and profit margins are overs? Maybe Shenghe's offtake deal with PEK's Ngualla mine late last year (one of China's largest RE feed processors). Shenghe are huge, 20% owners of PEK, and desperate to replace Mountain Pass bastaesite feed that is soon to processed in the US in there otherwise shut down plant. Talk about a motivated Chinese off-take partner... you'd think they would offer the best tolling deal possible to get Ngualla up and running.
Despite Ngualla's bastnaesite feed being sweet and much cheaper than monazite to crack to MREC, best Shnghe can do is ~44% payability at today's Spot NdPr price, up to ~53% payability at US$150/kg NdPr (similar to Yangi's Update assumption). OK, so a REAL Chinese feed processor can only offer say 55% payability for bastnaesite con if pushed, yet Baotou Sky Rock who has NO processing plants of their own can offer HAS ~50% payability at spot, but quickly escalating up to high 60's payability at LOM assumption prices
I smell more than a turd, I smell a rat...
Not saying a Chinese middleman couldn;t find enough spare capacity to process 10ktp mon-con for peanuts, or maybe that the Chinese government wouldn't encourage it to undermine western downstream developments, but it just feels like too big a drop in toll charges, by too small a bit-player, against the evidence the biggest feed importer running around doing deals with the west. I mean, Sky Rock is pulling the rug out from under Shenghe and completely up-ending China's new consolidated price control approach. It feels like the Term Sheet has plenty of out clauses, if this is China actually starting a new phase of undermining western downstream processors with aggressive new off-take discounts?
Just thinking about some players I follow... BSE just came out with a bi-product monazite study for their Toliara min sand deposit and they assumed a traditional 35% payability for monazite...
VHM Goschen DFS March'23 assumed ~37.5% payability for mon-con, and they have some very serious xenotime DyTb credits (and just signed an offtake with Shenghe Jan'24 as coincidence has it).
But middlemen like Sky Rock and other unknown processors will toll Yangi monazite for a 68% payability... I want to call BS! For another thing, Yangi loses 13.7% of the mon-con TREO to MREC, and another ~5% to RE-Oxide separation, while the min sand mon-con is super clean (90% monazite), >60% TREO grade, only loses 10% to MREC-RE-Ox Sep'n, and all the cracking plants are set-up for min sand monazite because that's the only mon-con on the market... I need to call BS.
Makes me wonder if besides triggering $1M PR's to management, perhaps this super-cheap fixed price tolling term sheet is really about rattling a sabre to the Australian government to cough up big grants to HAS or lose Yangi to China and undermine the whole process? Makes me wonder if Alpha Investment Partners are not quietly selling down the 6.5M shares they got to raise funds under the new 'at-the-market equity finance facility' in lieu of the traditional brokered CR's that HAS arranged last November. Makes me wonder if Twig the master subsidy seeker is right now twisting some minister's ear about how much and when Yangi government assistance would suit him...
Whatever the plan or it's bona fides, the clock is ticking and having dropped one in the pot, the market will only sit on it so long before completely moving on imo.
GLTAH
(20min delay)
