Ann: Updated Donald Project Economics - Phase 1, page-4

I started out to do a deep dive into a comparison of the DMS Update with the original DMS DFS figures, but after many hours of laborious spreadsheeting I appear to have managed to either delete it entirely or loose it in the interweb...seniors moments ..., so I'll present a truncated version for now.

Obviously the Update revised financial metricise figures are a big drop on the DFS forecasts, with after tax NPV8 dropping from A$852 to A$522m ( -39%) and post tax IRR falling from 25.8% to 17.6%, which is very disappointing to say the least. An IRR of 17.6% is a bit skinny IMO, but as the DFS and Update appear to have been robust in their assumptions, particularly in comparison to some comparative project studies (VHM Goschen I'm looking at you!), I'm reasonably confident the DMS project would land in the ballpark of the forecasts.

All the detailed financial metricises take a hit (apart from CAPEX contingency falling from 12% to 7%, with firm contractor quotes rolling in) , and from my analysis most of it is due to a blowout in Execution CAPEX (A$439m v. A$364m, +20%) and Total Funding Required (A$536 v. A$392, + 37%). OPEX estimates haven't really being impacted, with annual average OPEX (A$173.6 v. A$166.6, +4.2%) being well below inflation over the 2.5 years between reports.

Another metricise that is looking a bit skinny is the headline NPV/CAPEX ratio, which was a comfortable 1.9x but now sits on a skinnier 1.18x, however it's still above the magic 1.0x mark.

Relying on NPV as a valuation metric has it's issues, particularly in very long lived projects such as Donald, as the later cashflows are too heavily discounted by the annually compounding nature of the Discount rate. Here lies another issue for mine...I reckon a Discount rate of 8% is too high for a project such as DMS given the advanced nature of the permitting, offtakes, partnerships, low inflation and interest rates, proven mining and processing methods, stable jurisdiction (Victoria might be considered to be a bit too stable, given the time required to approve the Work Plan...) etc. I note that Illuka adopted a NPV discount rate of 7.3% for their Balranald M.S. project, and this project has the additional risk of the novel remote underground mining method proposed. For Fooks Sake, LIN adopted an 8% Discount rate for their Kangankunde project DFS (If you want to read a piece of corporate fiction that puts The Heart of Darkness to shame, have a go at the Kangankunde DFS...IMMHO!) in the depths of darkest Malawi, one of the poorest and least stable jurisdictions in Africa and therefore the world...remembering this was the project that was earlier 'relieved' from Lynas' grasp by local courts.

I reckon DMS could have easily reduced the NPV Discount rate to 7% given the advanced nature of the project, which would have the magical effect of boosting the after tax NPV7 to A$1,005m according to the sensitivity analysis, getting it over the magical A$1B mark and improving the NPV/CAPEX ratio to a very respectable 2.29x...all by changing a spreadsheet variable by 1%.

So to cut to the chase, how does all this affect the valuation of DMS, and therefore ATR... If we go real simple and simply multiply the NPV (A$552m) by the J.V. share ATR 51% - UUUU 49%, = A$281.5m and divide by the number of ATR shares on issue (209.18m) we get A$1.34/share for DMS...apply a risk weighted discount of say 25% and we get the magic figure of A$1.0/share...Shazzam!

If you apply the same logic to the NPV7 value of $1,005m you get A$1.84/ share...Shaazzzaammoo!!...don't you just love some creative spreadsheeting!

Maybe somebody with some capital financing nouse could provide a estimated valuation WRT 50/50% equity v. debt financing of the project and how the raising the additional ATR equity required to get to FID may impact on us LTH's?

GLTAH & DYOR!!