HMW Project Valuation

For those that might be new here and wondering what all the fuss is about, here is a quick 30 second summary.

We have gone into a trading halt pending the release of an update to our Mineral Resource Estimate. In this release we are hoping that a good portion of resources move from "Indicated" to "Measured" in order to support the work that is currently being done on the DFS (the DFS is due to be released in early 2023). We are also hoping that the MRE update will help support an increase in production output from 20ktpa as expressed in the HMW PEA, to 25ktpa in the upcoming DFS.

The other aspect we are looking for is for the DFS to utilise higher long term lithium pricing than what was assumed in the PEA. The HMW PEA, which was completed in December 2021, assumed $18,549 US/t whereas a number of feasibility studies released by other companies have utilised much higher long term pricing assumptions (e.g. the LPI DFS uses $23,609 US/t, EUR provided preliminary DFS numbers using $26,800 US/t, and LTR have been using $29,401 US/t - EUR and LTR are both hydroxide which is pretty close to carbonate pricing these days).

So, if we take the numbers from the HMW PEA and recalculate post tax NPV and Free Cash Flow using a $23,609 US/t Lithium Carbonate pricing assumption and an increased production output to 25ktpa while increasing capex to $694m AUD to support the higher production output, we get a post tax NPV of around $3.5 billion and a yearly post tax free cash flow of $434 million.

This would then support the following share price targets (using pretty standard stage to NPV ratios - yours might be different to mine):
1) between $2.55 and $3.34 at the time the DFS is released in early 2023
2) between $3.61 and $4.40 once offtakes are secured (here I'm assuming by Q2 2023 - could happen sooner)
3) between $4.04 and $4.82 once finance is secured (here I'm assuming capex is 50% debt/equity financed at $3 - to be conservative - I'm hoping financing could be done higher)
4) between $5.21 and $6.39 once construction starts (sometime around Mid 2023)
5) between $11.86 and $17.73 once in production sometime in 2025 (it's a big range but just depends on the PE ratio you want to use - below I am using 12, 15 and 18)



Note: The fully funded SOI and SOI increases are shown on the right hand side. This will depend on the actual share price at the point the capex is raised through issuing equity - as shown in the "Post Finance" section of the table.

Now this scenario is showing what happens if we go straight to carbonate production which has the benefit of higher earnings and potential dividends once in production (and therefore a higher share price target) but has the downside of higher capex (and therefore dilution) as well as increasing the timeline to production (i.e. production in 2025 vs 2024).

The ultimate is the hybrid scenario where we start by producing Lithium Chloride which may mean we only get around 75% of the Lithium Carbonate price (75% payability), but on the plus side, also means we don't have to finance anywhere near as much capex (because there is no need for a lithium carbonate plant), which means significantly less finance risk, less technical risk and less dilution. It also means we could be in production in 2024 instead of 2025. We could then transition to carbonate using the profits from chloride production which allows us to increase earnings/profitability without any further dilution.

This is what the Lithium Chloride path could look like in terms of reduced capex (JP has said that the chloride path may only require 60% of the capex which equates to $300m US or $416.7m AUD). Notice in the numbers below that the valuation targets haven't reduced too much (given the 75% payability) whereas the capex requirement has reduced significantly (by 40%) - even after allowing for an increase in capex for the increase to 25ktpa production. This results in an additional 69m SOI to raise the funds for capex (highlighted in green below) compared to 115m in the scenario above. This should therefore give us carbonate production share price targets higher than what is stated above as we will not need to issue 115m shares to get to carbonate production (i.e. it can be financed through a combination of profit and debt).


Ok so maybe that was longer than 30 seconds...

Keep in mind that the above is only for the HMW project. We still have the Candelas project which could provide additional substantial undiluted value (share price growth). Just as a point of interest the Candelas project in its current form (i.e. at PEA stage) adds another 82c to $1.05 to the share price valuation (assuming a $23,609 US/t Lithium price).


And once in production at 14ktpa Candelas could add a further $7 to $10 to the share price (after taking into account the dilution required to bring HMW online - ~70m new shares as mentioned above). Yes... the ugly stepsister of a project, that is Candelas, could be worth $7 to $10.


ALL IMO DYOR