Lessons from the laterites

Recent feasibility studies released by ARL & CLQ have disappointed the market, as a result their share prices have been hit. What is it that the markets haven’t liked and what’s relevant to COB?

High capex, low IRR - as previously mentioned a minimum IRR is 25%, even if the project is long life. Especially if HPAL or related technology that is unproven at full production volumes. Both ARL & CLQ came up way short here. Considering underlying commodity price assumptions and in CLQ’s case, a 25% corporate tax rate, both companies need to find a way to a 25% IRR. Including contingencies CLQ has a A$2bn capex requirement. That’s before factoring in interest payments due during the 24 month ramp up. In sheer absolute size and relative to market cap that’s huge. Given expected production volumes, what would a potential offtake partner be prepared to contribute in an equity raise / loan relative to future delivery values? A small fraction of total capex using 6 month volumes as an estimate.

Opex - post cobalt credits CLQ has a negative cash cost for Ni production. This bodes well for the company as the likelihood of a long mine life is substantially improved.

COB - high capex isn’t an issue (A$400m) in nominal, but relative to market cap it’s quite high. The company has another year before the DFS is released, until then limited cash is needed. With that said management would do well to raise cash during a share price rally / recovery. Ideally from a long term, stable holder such as LG. My original target was $2 for the equity raise for capex, sitting at a sobering 92c, a higher dilution should be contemplated. Even at $2/share COB needs to issue ~100m shares, a large % of shares in issue today. However, relative to a production volume of 20k-25ktpa of co sulphate, looking to secure prepayment of future delivery or loans against future delivery from LG in the order of A$200m+ is not unreasonable (~6 months value). As a % of capex this is superior to its laterite competitors. Adding senior debt to LG’s contribution would lower the required residual equity raise to a more manageable level.

Even with a reduced mine life at PFS stage the projected IRR at $30/lb cobalt should be 28%+ for COB. For shareholders who listened closely to Trangie’s recent presentation, COB is targeting a final 120kt contained cobalt, twice the existing 60kt. Potentially doubling the PFS mine life and / or increasing production to 5ktpa. Opex, estimated at US$12/lb, whilst low relative to the current price, does put COB at a disadvantage if the cobalt price plummets due to thrifting or a change in battery chemistry.

IMO, we need to see a PFS IRR of 30%+ and an NPV of A$500m+ (assuming $30/lb and 15 year LOM) to ensure a price recovery. We’ll know very soon. GLTA