I love that HC is a true meritocracy. We all exist behind nom de plumes, alter egos defined by what we offer in quality of content and substance of character. I think of HC as a village. A group of people bound together by a common interest and internet residence, struggling to get ahead against the larger and powerful players that dominate the ASX. The best of HC is informative research and analysis by those who can to help those who can't stay ahead of the insiders, the brokers, the manipulators and the price movements on which we all live or die. The worst is HC as a vehicle for ramping or scaremongering to obvious agendas, or simply schadenfreude seeking posts fanning the flames of fear and uncertainty. Only through challenging our bias and debating facts can reality rise above the noise, strategy be refined, and tactics implemented successfully against a market designed to transfer money from the ignorant to the informed. I thank all those who make me dig deeper and learn a little more every day.
The new BFSU has been sold down rather savagely, holders are rightly asking questions and wondering why. From inside the HC SFX cheer squad all looks great, but are we perhaps looking through rose coloured glasses? A couple of posters have shared their thoughts on the BFSU and share price sell down, the most serious and damning accusation being that product pricing (the most critical and uncertain variable in the document) was way too optimistic. Captain Barnacles says
" So if we knock the commodity prices down to realistic levels, is the NPV still positive? Does anybody have an estimate as to what a realistic NPV is? I note the sensitivity analysis on page 34 - but it only covers a 10% lower commodity price. (And they are using prices based on a structural supply deficit - lol - what ever happened to being conservative?)"
Cabe says "Doing a deal is not impossible, but will still be tough - especially if potential investors look at less 'starry' pricing forecasts."
Both sound authoritative but neither provided any justification despite calls to put up. Some solace to those without the time or experience to judge product pricing assumptions for themselves, in context of the fundamentals and possible future pricing decks. One could simply assume neither have any idea what their talking about, and would be correct, but better would be a deep dive review of pricing assumptions against the facts and peer comparisons to see how realistic new BFSU pricing actually is. This is another one of my long posts, but if you want to understand more of the TB BFSU products and pricing I think it will be worth your time.
Zircon is pretty straight forward being a fairly homogeneous market, so long a critical parameters such as size and contamination are met. History gives context but only future price forecasts are truly relevant, and for this the BFSU pricing simply reflects TZMI FOB forecasts ranging from US$1588 in FY22 (against $1695) down to US$1469 in FY26 and beyond (note, zircon concentrate is priced at a specified discount to the premium Zr price). The reason the BFSU has lower prices than the chart is because prices are discounted back to 2019 real values. TZMI is the world's preeminent independent consulting company for the mineral sands market, providing pricing and insights for companies across the mineral sands sector. Clearly TZMI are experts who consider a multitude of factors, including future mine development scenarios, in producing their forecasts.
1. Forecasts based on the June 2019 TZMI Market Study Report
To do anything but input TZMI pricing, adjusting for any company specific off-take factors, would seem imprudent and certainly leave SFX open to accusations tricking up the BFSU. Interestingly, that is just what some of SFX most relevant peers are doing, most significantly Base Resources in their recent world class scale Toliara project PFS. Base chose an " internal price forecast for each product is used until 2030", resulting in the first 10 years (most critical to NPV valuation calculations) using Zr at US$1822 against a TZMI average price in the high US$1500's as per SFX BFSU. Not that an argument cannot be made for zircon prices 15% higher than TZMI forecasts, the market looks to be facing a steep supply deficit from early-2020's, but the opposite to conservative has to be called optimistic.
I won't waste time on the various supply deficit charts and discussion available in the BFSU or other publications. If you haven't seen them they make for a strong investment case in mineral sand companies, but sticking with the experts price forecasts as SFX did seems appropriate. However, I do think the BFSU AUD:USD rate of 75c used to translate USD prices is too high, which effectively lowers the zircon BFSU prices into the conservative category. I'm happy to invest based on conservative pricing assumptions with multiple upside opportunities.
Zircon represents 70% of the BFSU revenue, the remaining 30% is a Primary Ilmenite (P-ilm) product. Interesting to note is that the Hi-Ti88 leucoxene has been removed from the old BFS in the new BFSU. This product was valued in the 2017 BFS at US$500/t or approximately 275% higher than the upgraded LTR ilmenite price. Higher again today, HiTi88 spot would be well over 500% higher than the P-ilm pricing in the BFSU yet SFX has chosen to just mix it in with the P-Ilm and sell it for ~US$100/t? An interesting move, certainly simplifies processing, transport and sales, yet on the surface appears to reduce maximum revenue opportunity. We have to assume that the extra HiTi88 revenue forgone in mixing back into the P-Ilm product has been picked up in the P-Ilm pricing contract signed with Chinese P-Ilm off-take partner Bengbu. This segues into the topic of most import and interest to SFX in the new BFSU, removal of LTR ilmentie processing and the transformational shift to direct sales of primary ilmentie.
Primary ilmentite sales are absolute key to the BFSU and SFX's future ASX acceptance. It is P-ilm that I wanted fully understand because of it's critical revenue and strategic importance to Thunderbird, seemingly turning it into the world's premiere new mineral sands deposit.
The above chart (ELECTRO SMELTING OF ILMENITE FOR PRODUCTION OF TiO2 SLAG– POTENTIAL OF INDIA AS A GLOBAL PLAYERCVGK Murty, R. Upadhyay and S. AsokanTata Steel, 2007) shows the generalised feedstock flow of titanium minerals through the processing pathway to pigment plants, which represent the vast majority of all titanium production. The pigment market today is moving strongly towards Chloride pigment plants for environmental and costs advantages. The preferred feed for Chloride pigment plants is Rutile, or an upgraded ilmenite to rutile like TiO2 concentrations, also for similar environmental and processing cost advantages. There are three suitable high TiO2 feeds; natural rutile, synthetic rutile or titanium slag.
Rutile supply is declining at over 10% pa since 2017 out to 2022 and then declines even faster based on current mine forecasts. Rutile is a minor by-product of nearly all mineral sand deposits and there are few known rutile dominant deposits left to mine. Increasing demand for rutile like feed means that only upgraded ilmentite can fill the supply deficit moving forward. Synthetic Rutile is pretty much an Iluka only specialty, due to the fact it is a complicated and costly process, prone to operational issues, with no by product credits, and a rapidly falling supply of the necessary high TiO2 altered ilmenite feed. In 10 years time when Cataby closes it is possible that Iluka will close it's WA synthetic rutile kilns and consign synthetic rutile to history.
Titanium slag looks to be the future, a process that is very simple, clean, and produces only valuable pig-iron and high titanium slag products from the process. No fluxes are added to the smelting, it simply relies on the quality of low contaminant feed, and the only waste productis dust collected from the furnace off-gas.
"Ilmenite used for smelting typically contains 36% to 50% TiO2. These lower TiO2 ilmenites are the preferred feedstock for smelting, as the high iron content provides suitable thermodynamic conditions for smelting to take place and high grade pig iron is produced as a valuable by-product." and "It is the level of impurities in the ilmenite, rather than its TiO2 content that is the most important criterionfor slag production. For the production of chloridegrade slag, the most important criteria are low levels of alkalis, low U and Th and low SiO2 and Al2O3. Inaddition, the quality of the pig iron by-product can be influenced by impurities such as manganese and phosphorus." (Murty et al, 2007)
What I want to emphasise here is that, especially since the substantial increase in iron ore and steel prices since the mid 2000's, Titanium Slag looks the winning product to fill an inevitable natural rutile deficit for chloride route pigment production. Therefore, any large, long life supply of low impurity ilmenite suitable for titanium chloride slag is a very desirable project, hello Thunderbird. However, in it's natural state TB P-ilm is not suitable for direct chloride slagging feed, it needs to be roasted and the Fe2O3 'reduced' to suitable levels of FeO for smelting (thus the LTR requirement).
It appears that most current titanium slagging plants actually have a pre-roasting or pre-heating kiln through which the ilmenite is pre-reduced or modified before entering the smelting furnace. The Namakwa sands example below had such a design built in to take advantage of the free off-gas heating available, others like Rio pre-roast to remove chromium, QIT pre-roasts to remove sulphur. Bengbu will pre-roast TB P-ilm at low temperatures to reduce the Fe2O3 to suitable levels of FeO before smelting. The process is both simple and relatively cheap built into the slag smelting operation, using free residual heat from smelters to assist in reaching the required 500 degree C temp. Certainly it has to be much easier and cheaper next to the smelter in China than a purpose built LTR plant from scratch in the remote plains of the Kimberley using LNG trucked in 900km in small bullets. Bengbu has gladly agreed to take the P-ilm and simply pre-roast treat it like many other titanium slag producers around the world currently have to do. SFX are not breaking into new frontiers here. Whether or not Bengbu needs to actually separate the titano-magentite from the LTR ilmenite I don't know. Given the P-ilm has already been pre-heated, and that the titano-magnetite by-product is being fed into a pig iron smelter anyway, it may well suit Bengbu to just run the entire 40% TiO2 product entirely into the smelter for higher pig iron production?
OK, lets get back to the P-ilm pricing discussion. TB P-ilm has a natural deposit variation between 35% - 45% TiO2 with an average of 38.5% TiO2. The LOM P-Ilm production is 961,000tpa. A 38% increase to the 2017 BFS LOM Hi-Ti88 production is 28.000tpa of HiTi88 which will be added back tot he P-ilm in the BFSU. A weighted average of these two LOM products is 40% TiO2 (ie 933ktpa @ 38.5% and 28ktpa @ 88%), which is low but can be simply pre-treated as discussed. The TiO2 is only low because of high quality haematite (Fe2O3) mixing with the ilmentie. An iron ore rich feed into a pig iron smelting process simply means more valuable pig iron by product credits, does it get any better?
We now need to compare the BFSU P-ilm pricing against the TZMI forecasts and recent peer feasibility study pricing to determine how realistic the BFSU P-ilm pricing is. However, the trouble with ilmentite pricing comparisons is that quality and TiO2 content varies considerably. Variations in quality. contaminants, potential feed types, and the strategic value of off-take contracts all go into determining the final price. In this case TB, pricing looks to be based off a TZMI determined Sulfate Ilmenite price index.
2. historical pricing in this chart is based on an average of several different feed stocks, and has been sourced from TZMI
From the BFSU P-ilm price of US$94 from 2026, which in turn is based off TZMI long term benchmark index price of US$194, we can deduce that the Bengbu off-take price payable is calculated at ~48.5% of the TZMI Sulfate Index for the average TB 40% TiO2 P-ilm product. I guessed from the 2017 BFS that running the LTR upgrade process would cost SFX about A$20M Stage 1 and A$40M Stage 2 (80% of the cost being natural gas and the rest electricity, labor, maintenance etc). It simply cannot cost more to operate in China, and considering the free flu gas heating and lower costs in China across all variables, halving that figure might still be on the high side before even considering the pig-iron by-product credits.
Conservatively then, at A$40M to process approx 1.2Mtpa of P-Ilm, each tonne would cost Bengbu approx A$33 (~US$25) for the pre-roast treatment prior to smelting. I simply can't make much of a case for a higher cost to bengbu, even including D&A of the LTR capex the cost should be less. Bengbu is essentially paying US$94 plus $US25 max for a total of US$119/t for the pre-roasted TB ilmenite 40% TiO2 slag feed. This equates to US$2.97 per % of contained TiO2 units (or US$297 per tonne of contained TiO2).
Base Toliara PFS Price Deck and Specifications (March 2017)
Base's Toliara project would produce a more traditional 50.5% direct slag feed ilmenite, as well as a 48.3% sulphate ilmenite as per above table. The price difference in the table between Sulphate and Slag ilmenite is almost entirely explained by the higher TiO2 content of the Slag vs Sulphate ilmenite. BSE also has long term Slag Ilmenite priced at US$193/t (TZMI long term) which equates to $3.82 per % of contained TiO2 units (or US$382 per tonne of contained TiO2). Therefore Bengbu is buying TB slag feed (including LTR pre-treatment cost) at a large 28% discount to Toliara's estimated US$3.82 per % of TiO2. This is still before accounting for substantial extra pig iron credits
How much is the extra pig iron by-product credit worth to Bengbu? A quick google reveals pig iron prices in China are around 2900 Yuan, or US$420/t at 6.9 Yuan:USD. Compared to BSE Toliara slag ilmenite, TB P-ilm has 20% more iron per tonne (ie 40% vs 50% TiO2), so at US$420/t for the titanium slag smelter pig-iron by-product, every tonne of TB feed provides an extra US$84 of revenue above what a tonne of Toliara ilmenite feed provides. Sure, there are smelting costs to consider and potentially TiO2 feed displacement opportunity costs, but it is quite possible Bengbu is killing the pig with this new TB off-take contract (pardon the pun). 30% cheaper TiO2 units plus 20% extra pig-iron credits.
Does that make the BFSU Primary Ilmentite pricing look conservative, fair or optimistic? Traditionally a lower TiO2 product is less desirable and the LTR processing represents a risk and complication verses the alternative of simply buying a direct feed Slag ilmenite, but the benefits of lower TiO2 unit cost and additional pig iron credits makes the BFSU pricing look low imo. It should also be noted that Base's internal Slag Ilmenite price assumptions are 20% lower for the Toliara's first 10 years. Maybe they are right and TZMI are wrong, but I can't see any justification for aggressively discounting the world expert's forecasts, unless they have project specific concerns about finding buyers at the right price for their product. This is actually the cout de grace for critics of the BFSU ilmentite pricing assumptions, SFX has off-take buyers signed, sealed and delivered so marketing risk or further potential discounts are not a risk for Stage 1. When the Stage 2 off-take is ready for negotiation, and Bengbu is saving >28% net on their chloride slag feed vs direct feed slag ilmenite, SFX may well find themselves marketing P-ilm at a significantly smaller discount than the BFSU.
In summary, it would seem that the Primary Ilmenite has been sold to Bengbu at too low a price haha, conservative at worse, but one which was necessitated by SFX's need to not build an LTR plant and sell LTR treated ilmenite directly. Whether SFX builds a Stage 2 LTR will ultimately come down to how much of a discount they want to accept for contracting out the LTR processing against how much of that discount they want to keep for themselves. It's fair to say that the shear symbiotic benefits and cost advantage of overseas pigment producers buying P-ilm for LTR pre-roasting themselves means SFX will probably never have to build an LTR. Further, competition for a long term, Tier 1 secure supply of, by then, proven P-ilm product means that discounts will likely reduce.
Other than the ever present risk of forecasting long term markets, the evidence clearly supports that SFX used reasonable TZMI expert pricing forecasts across all products in the BFSU. Upside to the TZMI pricing (which was not incorporated into the BFSU) is clearly visible in the consensus supply deficits looking out into mid 2020's and beyond, as grades in mature mines drop and enough new deposits struggle to come online without higher inducement pricing. A clear and present pricing upside to the BFSU is the AUD:USD $0.75 used in the BFSU, which marked against $0.68 spot rate today equates to 9% higher AUD prices across all products (a lazy $300M NPV increase based on BFSU sensitivity analysis) .
What about that equity funding gap, the bleedingly obvious hurdle SFX needs to jump over down the home straight like every other junior. As Cabe illuminated, " still need a big hat full of money - where is that going to come from?". Anyone not living in a cave knows where management are trying to get it from, but how big a hurdle are we actually looking at, and how attractive is it from a potential JV partner's perspective?
Thunderbird now requires only A$143M total equity (including fees, interest working cap etc) to complete financing. This might sound like a lot of money to someone trading stocks on their credit card, but I say only because we're talking about a 37 year, $1B NPV project. Perspective please, $143M equity contribution is an astoundingly low 15% equity to NPV ratio, or only 77% of one years EBITDA based on BFSU LOM average. A JV partner buying 30% of TB at 50% discount to NPV (ie A$150M) would make an immediate 100% capital gain paper profit, but more importantly, on a geared basis because the equity required is so low, receive a huge LOM average 30% p.a. EBITDA return on their investment.
Peer comparison is important in the commodity game, it is after all a beauty contest, not all deposits are created equal and investors way up competing projects to invest in. Base's Toliara PFS (very similar scale 33 year, A$1B NPV project also shortly looking to for development) has a total equity funding requirement of A$569M (US$387M @ 68c spot AUD, as per Mar 2019 PFS doc, page 47). That sort of eye watering equity requirement represents over 50% equity to NPV ratio, or 240% of one years EBITDA. Keep in mind that the A$569M figure is after a further A$75M in deferred acquisition costs and pre-FID funding to advance the project. That A$569M is also before the usual capex increase projects typically incur moving from PFS, to DFS, to BFS and finally to an EPC contract where reality-rubber hits the road, as SFX found out last year. Any potential JV partner BSE introduces is looking at a 400% higher equity contribution than SFX is asking for, and all that before considering the dreaded 'Africa Discount'.
The last analyst trip BSE organised to Madagascar in March 2019 unfortunately occurred after a cyclone caused wide spread flooding, then culminated with all the entire touring party coming down with bad food poisoning. Any analyst that went on this visit with starry eyed optimism of an African adventure certainly understood the Africa risk by the time the bus eventually made it back to Antananarivo, stopping every kilometre for one or another to fertilise the side of the highway from both ends. As one London based analyst drily put it at the end of their research note, "We recommend extreme caution with food, hygiene and security when visiting this region". That same report from Vox noted that while Kenya is not an easy country to operate, Madagascar presents its own unique set of challenges to overcome. "Security is a major issue in the region with criminal gangs known to have attacked vehicles travelling in convoy on the main road between Antananarivo and Toliara", and "
The IRR at 22.4% feels unrewarding in the current environment but this may improve. While we admire the enthusiasm and reputation of the Base Resources team we are wary that the Toliara project may prove to be more challenging and of lesser value than Kwale in Kenya".
I'm not running down Toliara for the fun of it, BSE holder myself, I'm shining a light on just how good TB is, and just how good the equity investment returns are for a JV partner imo. Not just the financials which are now fantastic on fair pricing assumptions, but the under appreciated quality of it's tier 1 location. It is both the high margin quality of the project and it's low risk jurisdiction that compels Taurus to back and finance TB at such a low level of equity funding (high gearing). I'm biased obviously, but just don't think the market has woken up yet to just how high the geared returns are on this low risk new BFSU. Hopefully potential JV partners are also impressed second time around, but nothing is certain in this game.
Good luck
(20min delay)
