- Integration with the current opencut mining operation delivers excellent projected financial returns and sustains a mine life of 15 years.
Does GRR management genuinely expect underground operations to be cheaper than above ground? This is counterintuitive as there is few if any operations where switching to underground is cheaper than open cut.
- Capital investment estimate in the underground mine is ~A$891 million. This is to be funded from existing cash reserves and forecast future cash flows.
In the most recent 6 monthly report cashflow was $30M post payments for current operational activity, and then $23M of dividends is paid. So, to meet the 5-year target to full underground production, which is to be funded with existing cash and cashflow, will payments for the continuation of current operations stop?
With $100m in cash and an average of $50M of incoming cash flow (this is assuming that no dividends are paid in the next 5 years), meeting those operations only funding seems optimistic. Now of the some $900M cost for this project, $400M is said to be reported as existing infrastructure leaving only $500M to raise as an optimistic target with no expectation of cost blowout. It sure looks like a tight budget to be purely funded by existing cash and cashflow. 50x10=$500M plus the $100M in cash. So, it is possible, however, a capital raising is highly likely in the next 5 years. The question is, will they need to do this when SP is low, or should it be done sooner to avoid raising at a discount. IO price surge might change this.
- The integrated project post-tax NPV is ~A$775 million from the generation of ~A$2,122 million in cash returns over the next 15 years.
This sems to be a meagre return compared to the capital outlay to establish the project. With a 6.4-year payback as the optimistic scenario (as we know all of these early reports are best case scenarios) it seems like a big undertaking for a small return. $53M per year post tax over 15 years or an EPS of 4.6c for a PE of ~5. These results would indicate that historic performance of earnings near 10c per year are long gone. Although, a bull run on IO prices to $200US/t in a year or two would surely change that. Current pricing is at ~$100US/t which is a fair assumption.
On the positive side, the dept of the ore vein is largely unknown so this could be a resource much larger than anticipated.
The expectation that converting to UG will smoothly maintain current OC operations while simultaneously increasing tonnage sold per year is wildly optimistic, especially since they have never done UG here. - Payback period of 6.4 years from the commencement of development in 2025.
Payback duration is almost double the average DFS for ASX listed miners. You could argue that it is lower with $400M of costs already in place for existing operations, but it is still reported as 6.4 years. If there was a discount there for existing infrastructure based on the payback period, why wasn't it mentioned?
Overall, my view is that conversion to UG is spun in a highly idealist manner. Expecting to maintain tonnage throughout while gaining cost savings over a 5-year development period is not likely. It may be the case that GRR could see a year or half-year of losses during the conversion from above to below ground. How will the market reward the SP in this scenario?
GRR Price at posting:
25.0¢ Sentiment: None Disclosure: Not Held
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