@GortonGums, indeed, unfortunately, it is a
chicken and egg problem at the moment.
This is an extremely CAPEX-intensive industry (unlike sectors such as lithium) and it is very likely that the CAPEX cost for QPM will come in over $1 billion AUD. That's going to be a high bar, regardless of the NPV and IRR (which will be strong).
To finance that, they will need to use a split of equity and debt (indicated to be 40%/60% respectively). So we are looking at $400m in equity and $600m in debt. By all reasonable metrics and conventions,
the project requires a material chunk of equity as part of the funding mix. Raising that $400m in equity is near impossible with a traditional capital raise on-market when the market cap is only $200-250m. But, given CAPEX funding is the key upcoming risk, investors will wait before investing and thus the market cap stays low. It is, unfortunately, a circular issue.
The debt component should easily be secured from a consortium of banks (and NAIF), but raising $400m on market (or to a strategic partner) with a market cap of $200m is a mammoth task (SOI needs to triple from 1.5b to 4.5b). Even raising $400m with a $400m market cap is a mammoth task (SOI needs to double from 1.5b to 3b).
There is of course though a growing realisation that there needs to be far better integration across the supply chain. My understanding is that for situations like this where the CAPEX ($1b+ AUD) is extraordinary relative to market cap,
new models of financing need to be explored. SRL was/are looking at a model where they effectively establish a
joint venture with a partner, plus establish a new
project-level entity (owned by SRL) and proposed that the investment in the
project level entity would take place
at the NPV level (not the market cap level).
That approach has been unsuccessful so far across the last few years but is one method to raise a significant amount of funding without diluting shareholders to oblivion when at a low market cap to CAPEX ratio. If QPM took that path, it is unclear what level of project ownership QPM would end up with (i.e. joint venture 50/50 v 30/70). Stories like CXO were so amazing because the CAPEX ($90m AUD) to MC ratio was so favourable (low). But the lithium industry is an apples to oranges comparison.
Nickel hydromet is one of the most capital intensive processes in the mining industry. While that makes financing a challenge, it also reflects the supply-side challenges that the auto industry faces in securing new supply of nickel to build their electric vehicles.
In my view, automakers and battery makers will eventually
have to vertically integrate and become JV partners with junior miners to be able to bring new supply to market, unless battery technology can shift away from nickel chemistries. The auto & battery industry can not rely on the financial markets to take this step of bringing juniors to market given the CAPEX intensity of the industry. But so far, none of the automakers are making the first step into unknown territory. It's why SG refers to this industry as a "train wreck".
Across the nickel mining industry, there are very few projects that can be brought onstream within the next 5 to 10 years. Many of them face significant permitting timeframes and study phases before you could even consider having them financed. Conversely, China is building new capacity in Indonesia, but that capacity comes with some serious problems, such as deforestation and their plans to dump their waste directly into the ocean. Thus, QPM is certainly well-positioned with respect to these alternatives and from an ESG lens.
The next milestone is of course the DFS due for release mid-year. It will be interesting to see how the market reacts to that. Following the DFS, if financing is secured (debt &
equity), I will most likely re-enter at that point (if the valuation is favourable on an
EV/EBITDA multiple and
EV/NPV ratio). But the risk of financing is certainly not something to dismiss. There's no
guarantee that this project will become a reality and I learned that the hard way with SRL.
I hope to be able to join you all (as a holder, again), once a financing deal is done and the financing risk is removed. No one has a crystal ball (I certainly don't) as to how this will play out, but that's why we all of us love investing so much, it is ultimately a
game of odds and risk v reward.
Cheers,
(20min delay)
