As far as risks go TMT is at the low end of the spectrum. Grade compares favourably with market leaders LGO & BMN but we've shown a significantly better recovery rate than both. If the V market remains intact we stack up too well not to develop and succeed. Execution in most cases only impacts timing which in turn only becomes a risk if the V market fails.
My big risks therefore are the market dynamics if V prices rise much further. On the demand side, Nb rebar substitution will creep in acting as a welcome handbrake and partly meeting higher Chinese rebar input about to kick in but if this doesn't hold price near $20 supply side forces become a threat.
Mark Smith, CEO of Largo gave great insight into it the other day (as referenced by Alecfra). Chinese stone cold production or increases to Russian slag processing capacity could trigger an oversupply as we have seen in the past. Most Chinese steel production now has zero V contained thanks to high grade Aussie & Brazilian iron ore. They've introduced strict environmental standards to be met before they will issue permits to import slag from Russia as they have in the past. Smith mentioned a $15 break even to fund the process so we're currently at a price point where the risk is real. Russian iron ore has very low grade V which they currently only have capacity process approx 3Kt of. Given their slag export to China has ceased a sustained high price would make the investment decision to add capacity an easy one which could bring on an additional 10Ktpa. Either option will require time and capital.
The good thing for TMT is our high grade feed will be targeting the 99.5% purity end of the market for perhaps half (more?) of our 13Kt. This not only gives a $2 - $4 market premium to 98% flake but is also protected because slag producers can't reach without incurring about this same cost. (Smith estimated a doubling of production cost for every 1% uplift in purity.)
It's nice to have 12 months to see the new market dynamics play out before our own investment decision. If the V price sits in the $13 - $23 range for this time we're good. The market wouldn't love a pull-back of course, but it would be in our favour - snuffing out the hopes of the low grade by-product hopefuls and keeping Russia / China at bay.
A-team management and two big slabs of the best deposit in the world can't guarantee success if the market isn't there. It's important to understand what you can't control and we're lucky that we currently have the perfect stable, goldilocks pricing situation.
TMT Price at posting:
56.5¢ Sentiment: Buy Disclosure: Held
