Let's go through the figures provided in the PFS and analysize them to work out the AFTER-TAX NPV8% of Hawsons project.
In the above table, we see NPV10% = USD $867mil with assumptions of:
- Discount rate = 10% (no mining projects nowadays use 10% discount rate. They all apply 8% discount rate).
- Annual production = 10mil tons
- LOM = 20 years
- Total LOM production = 201mil tons (look up the table at the lower left-hand corner
- Final product = Fe70%
- Fe62% = USD $63/ton, Fe65% = $75/ton and Fe70% = $88/ton.
- All-in-cost CFR = USD $48.03/ton.
- Annual margin = USD $401mil.
Now, look up the table again and you see when Fe65% increased to $85/ton (from $75/ton):
- Fe70% price = annual revenue ÷ 10mil tons = $983mil ÷ 10mil tons = USD $98.3 (from USD $88/ton)
- After-tax NPV 10% increased to USD $1.432bil. That is an increase of $1.432bil - $867mil = USD $565mil.
- All-in-cost = increase marginally due to increase to royalties (3%-3.5%, based on selling price/revenue).
- Annual margin (EBITDA) = increased from USD $401mil to USD $497mil = an increase of $96mil.
The key figures we should be focused on are: how much EDITDA increase and how much NPV of the project increases correspondingly.
What we see above is: when EBITDA (Earnings before interest, tax, depreciation, and amortisation) increases by USD $96mil, NPV10% increases by USD $565mil over the entire life-of-mine of 20 years.
That was NPV10% 4 years ago.
Today at Hawsons project has 400mil tons resource of final concentrate in Indicated and Inferred categories. Plus 150mil-250mil tons of identified extra potential which need to be proven with current drilling round for 576mil tons identified in the KPS report. The last time they drilled to upgrade resource from Inferred to Indicated in 2016 they were able to convert massive 96% of Inferred to Indicated category at 9.5% DTR cut-off grade and eventually 100% fully converted to Indicated category after finding out the ultimate optimal cut-off grade of 6% DTR. In other words, everywhere they drilled the last time, they were able to convert every single hole and every part of the Inferred category to Indicated. I am absolutely confident we will see most of Inferred resource again converted to Indicated category with the current drilling round of up to 160 holes. This is the biggest drilling programe compared to 72 drill holes in total in the last 3 drilling rounds of the history of Hawsons project discovery. Also, keep in mind the PEA (Preliminary Environmental Assessment submitted to the NSW mining authority in 2017 did mentioned that the company has an Exploration Resource target of 1.4bil tons of concentrate in all 3 tenements. The Hawsons project current resource is in only 1 of those 3 tenements).
Summary of resource and potential:
- Proven resource = 400mil tons of final concentrate
- Identified = 550mil - 650mil (KPS report)
- Exploration Resource Target = 1.4bil tons of final concentrate.
With resource upgrade coming soon = March-April 2022.
So, I see 3 different scenarios of resource figures to be applied to NPV calculation:
- Low case = 300mil tons
- Mid-case = 350mil tons
- Upper-case = 400mil tons.
Let's start with lower-case scenario of 300mil tons.
- Annual production = 15mil tons and LOM = 20 years for total LOM production of 300mil tons. The company may still go with 10mil tons annual production for the first 5 years and then ramp up to 15mil tons for LOM for another 17 years for total LOM production of 305mil tons.
- All-in-cost = USD $61/ton (instead of USD $48.03/Tom from original PFS. This All-in-cost figure is suggested in the PFS report 2 months ago).
- Long-term Fe62% = USD $100/ton
- Estimated corresponding Fe65% = USD $118/ton, and Fe70% = USD $135mil (some will find this USD $135/ton conservative. It is my intention to keep it at the most conservative level).
- Annual margin (EBITDA) = ($135 selling price - $61 All-in-cost) × 15mil tons annual production = USD $1.110bil.
- Every USD $96mil increase in EBITDA above $401mil will generate extra NPV10% by USD $565mil on top of USD $867mil as I mentioned above. So, the new NPV10% = (($1110mil - $401mil) ÷ $96mil × $565mil) + $867mil = USD $5.04bil = AUD $6.72bil.
That is NPV at 10% discount. No mining project nowadays uses 10% discount rate. In fact, the KPS report did clearly say the BFS will apply an 8% discount rate. For those who does not understand how to convert 10% discount NPV to an 8% discount rate NPV. I already worked out NPV8 = 1.2 × NPV10% = AUD $6.72bil × 1.2 = AUD $8.03bil.
(You can check by using Google NPV calculator. Just enter any number, say $100mil each year, year 1 = $0, year 2= $0, year 3= $100mil, year4=$100mil,...year22= $100mil, set discount rate = 10%, Initial capital = $0, then press button CALCULATE, it will show you NPV value. Then change discount rate to 8%, and press the button CALCULATE, it will show you a new NPV, then compare if NPV has increased almost 20% or not. You can try $200mil, or $256mil, $345mil, or whatever number you want and the result is always an increase of around 20%).
If long term AVERAGE price of Fe62% = USD, my estimated Fe65% = USD $140/ton, and Fe70% = USD $165/ton
- Annual margin (EBITDA) = ($165 - $61)×15mil tons = USD $1.56bil.
- NPV10% =(($1.56bil -$401mil) ÷ $96mil × $565mil) +$867mil = USD $7.688bil = AUD $10.25bil.
- NPV8% (discount rate of 8%) = AUD $10.25bil × 1.2 = AUD $12.3bil.
I strongly believe the average long term Fe62% is USD $120/ton - $130/ton. In fact I think it could be averaging USD $150/ton. The strong demand for high grade iron ore pellet feeds stock and pellets created by the new class of DRI and EAF furnaces over the next few years and replacement of many old blast furnaces will guarantee strong prices for HIO's world highest iron ore grade - Supergrade Fe70% product. It could be much higher than USD$165/ton in my assumption.
Summaries of NPVs and sp based on 20% and 30% MC/NPV ratio targets, at approximately 750mil shares (I do not see the company will need to raise funds at all after the BFS).
1. Lower case (300mil tons LOM production)
A. If Fe62% = USD $100/ton, NPV8% = AUD $8.03bil.
Sp at 20% MC/NPV = 20% × $8.03bil ÷ 750mil shares = $2.10.
Sp at 30% MC/NPV = 30% × $8.03bil ÷ 750mil = $3.15.
B. If Fe62% = USD $120/ton, NPV8% = AUD
$12.3bil.
2. Mid-case (350mil tons LOM production)
C. NPV8% = $8.03bil × (350÷300) = AUD $9.37bil.
D. NPV8% = $12.3bil × (350÷300) = AUD $14.35bil.
3. Upper-case (400mil tons LOM production)
E. NPV8% = $8.03bil × (400÷300) = AUD $10.7bil.
F. NPV8% = $12.3bil × (400÷300) = AUD $16.4bil.
Sp at 20% MC/NPV = 20% × $16.4bil ÷ 750mil shares = $4.37
Sp at 30% MC/NPV = 30% × $16.4bil ÷ 750mil = $ 6.56
I cannot bother to show share price at all 6 different NPVs scenarios. The lowest sp of $2.10 to highest share price of $6.56.
As i have said today, my GLN stock has the latest After-Tax NPV8% figure for the HMW project (the main project) of USD $1.338bil = AUD $1.785bil, just updated 2 days ago. And its MC today is around $540mil and essentially account for 85%-90% of this main project (the other project's value is accounted for around 10%-15% of the current MC).
Hawsons project has NPV between AUD $8bil - $16bil. How much it's MC should be? You do the maths.
KPS report estimated NPV of AVERAGE
AUD $9.3bil, based on Fe62% of USD $100/ton, annual production of 10mil tons, LOM = 20 years, total LOM production of 220mil tons. The report was released on 19th Oct, just 2 months ago. Everyone should read it. It has amazing details. If they applies 300mil tons or 400mil tons LOM production, their NPV figure would be AUD $12.68bil or AUD $16bil respectively. And if they apply Fe62% price of USD $120/ton, it would be mind-blowing.
They dont show how they calculate the NPV and that is the reason why I try to dig deeper into the PFS figures to work it out myself.
