There have been many new holders lately and many of them may not have seen this analysis. So, i think it will help them tremendously to take a look at this and to see why I came up with a NPV8% = AUD $17.22bil in the other post last weekend.
Let's go through the figures provided in the PFS and analyse them to work out the AFTER-TAX NPV8% of the Hawsons project.In the above table, we see NPV10% = USD $867mil with assumptions of:- Discount rate = 10% (no mining projects nowadays use 10% discount rate. They all apply 8% discount rate).- Annual production = 10mil tons- LOM = 20 years- Total LOM production = 201mil tons (look up the table at the lower left-hand corner)- Final product = Fe70%- Fe62% = USD $63/ton, Fe65% = $75/ton and Fe70% = $88/ton.- All-in-cost CFR = USD $48.03/ton.- Annual EBITDA = USD $401mil.Now, look up the table again and you see when Fe65% increased to $85.40/ton (from $75/ton):- Fe70% price = annual revenue ÷ 10mil tons = $983mil ÷ 10mil tons = USD $98.3 (from USD $88/ton)- After-tax NPV 10% increased to USD $1.432bil. That is an increase of $1.432bil - $867mil = USD $565mil.- All-in-cost = increase marginally due to increase to royalties (3%-3.5%, based on selling price/revenue).- Annual EBITDA = increased from USD $401mil to USD $497mil = an increase of $96mil.The key things we should be focused on are: how much EDITDA increases and how much NPV of the project increases correspondingly.What we see above is:
For every USD $10 increase in the selling price of Fe70% (from USD $88/ton to USD $98/ton), EBITDA (Earnings before interest, tax, depreciation, and amortisation) increases by USD $96mil, NPV10% increases by USD $565mil over the entire life-of-mine of 20 years.That was NPV10% 4 years ago.Today Hawsons project has 400mil tons resource of final concentrate in Indicated and Inferred categories. Plus 150mil-250mil tons of identified extra potential which need to be proven with current drilling round for average 576mil tons identified in the KPS report. The last time they drilled to upgrade resource from Inferred to Indicated in 2016 they were able to convert massive 96% of Inferred to Indicated category at 9.5% DTR cut-off grade and eventually 100% fully converted to Indicated category after finding out the ultimate optimal cut-off grade of 6% DTR. In other words, everywhere they drilled the last time, they were able to convert every single hole and every part of the Inferred category to Indicated. I am absolutely confident we will see most of Inferred resource again converted to Indicated category with the current drilling round of up to 160 holes. This is the biggest drilling programe compared to 72 drill holes in total in the previous 3 drilling rounds in the history of Hawsons project discovery. Also, keep in mind the PEA (Preliminary Environmental Assessment submitted to the NSW mining authority in 2017 did mentioned that the company has an Exploration Resource target of 1.4bil tons of concentrate in all 3 tenements. The Hawsons project current resource is in only 1 of those 3 tenements).Summary of resource and potential:- Proven resource = 400mil tons of final concentrate- Identified = 550mil - 650mil (KPS report) with weighted probability of AVERAGE 576mil tons.- Exploration Resource Target = 1.4bil tons of final concentrate.With resource upgrade coming soon = Q2 2022.So, I see 3 different scenarios of resource figures to be applied to NPV calculation:- Low case = 300mil tons- Mid-case = 350mil tons- Upper-case = 400mil tons.Note: I strongly believe the upcoming resource upgrade is more likely to be 450mil-500mil tons of concentrate.
-Let's take a closer look at the mid-case scenario of 350mil tons resource utilization and see where the NPV% of the project stands.
Important assumptions:
- Average annual production = 17.5mil tons
- LOM = 20 years
- Resource utilization = 17.5mil × 20 years = 350mil tons.
- Note: the company is working on 20mil tons annual production option. So, this mid-case of 17.5mil tons annual production is conservative.
- A slurry pipeline to be built directly from processing plant at mine site to the port in SA and save at least 50% of the operating cost with regard to Rail & Port. If you look up the above table again you will see rail and port cost was USD $11.23/ton. My estimate is direct slurry pipeline will trim $6 off this operating cost item.
- All-in-cost = USD $51/ton
Note: in the PFS 2017, All-in-cost was USD $48/ton. Then the KPS report in Oct 2021 assigned a new USD $61/ton, allowing for 27% increase in cost. However we are now dealing with almost double production quantity which must reduce cost significantly. Plus, a slurry pipeline can save around $6/ton. So, I apply a conservative $10 reduction to all-in-cost and therefore new all-in-cost is now $61-$10 = $51/ton.
Also note: MGT has estimated that its all-in-cost will be USD $40/ton if it goes with option of 7mil tons annual production (versus HIO 17.5mil tons). This gives me confidence that our all-in-cost of USD $51/ton assumption is quite generous.
- Long-term Fe62% = USD $120/ton- Estimated Fe70% = USD $170/ton
- Annual EBITDA = ($170 selling price - $51 All-in-cost) × 17.5 mil tons annual production = USD $2.0825bil
- Every USD $96mil increase in EBITDA above $401mil will generate extra USD $565mil NPV10% on top of USD $867mil as I mentioned above. So, the new NPV10% = (($2.0825bil - $401mil) ÷ $96mil × $565mil) + $867mil = USD $10.763bil = AUD $14.351bil.That is NPV at 10% discount. No mining project nowadays uses 10% discount rate. In fact, the KPS report did clearly say the BFS WILL apply an 8% discount rate. For those who does not understand how to convert 10% discount NPV to an 8% discount rate NPV. I already worked out for you:
NPV8% = around 1.2 × NPV10% = 1.2 × AUD $14.351bil = AUD $17.22bil
REMINDER: If MGT is right with its estimate of its All-in-cost = USD $40/ton with 7mil tons annual production, I would be surprised if we don't achieve similar cost structure with 17.5mil tons annual production with a direct slurry pipeline from mine to port and save a very big chunk of transport cost.
I have stated many times before, normally most mining projects at BFS stage should have a MC/NPV = 20%-25% and 30%-40% at construction-ready stage. In fact, the latest IIR report also said so.
IF the upcoming resource upgrade next month confirms at least 350mil tons resource utilization, HIO should approach to $3.4bil MC.
