Hello all,I'd like to begin by disclaiming that: 1) The entirety...

Hello all,

I'd like to begin by disclaiming that: 1) The entirety of this post is my own opinion, and from my own research. Please do your own research & form your own opinions, 2) I have created a new thread as we approach submission time of the SS2, which is a long-awaited economic study to assess the revised viability of the Estelle project following extensive drilling and a new MRE, and 3) I have conducted this analysis as a part of my own DD, and hence there may be errors & inaccuracies (though I hope not too many!).

I have wanted to construct a DCF model to formulate my own view of the expected upside here, and with the ability to toggle the inputs to assess the possible upside & downside levers for the project. To begin, I created a DCF template and input the key assumptions from Nova's first scoping study (released 28/2/22), with the goal of mirroring (as close as possible) the key metrics of that study. I got reasonably close, however even though my Production, Revenue, AISC and Capex were basically on-par, I continue to calculate a slightly higher NPV. Not super material, but you'll see it in the table below. It could be that Nova's study presents the 85% ownership NPV (though I couldn't see this stipulated), for ease of reference I have presented 3 NPV's (all pre-tax, being in USD, AUD, and AUD adjusted for 85% ownership).

Once I had established a 'reliable' model, I began to toggle a few things, namely a) LOM between 15 and 30 years, b) Grade, c) Capex and Opex, d) Discount Rate, and e) the Gold Price. I've presented only a few scenarios below, but based on the feedback received from this forum, my intent is to present further scenarios and improve the model, The key aspect of this study which I am not super comfortable on is the Grade & it's relationship to AISC, I have constructed a linear % relationship (to allow me to flex the Grade & hence adjust the AISC on the basis that those ounces are cheaper to extract on an equivalent basis). This isn't perfect arithmetic, however I think it is suitable for the purpose of scenario modelling.

The summary tables are below:


My key takeaways/ findings are as follows:

• Extension of the LOM to 30 years (on the assumption this is possible based on the current MRE) has a significant impact on NPV. In fact, any extension of term (18, 20, 25 years) yielded a significant increase in total Project value even considering the heavily discounted cashflows at the later stage).
• Increases in the Grade were also a significant impact. I used a (pretty rudimentary) estimate of 2.5g/t over the first 3 years, with a decline thereafter to an average of 0.44g/t. On the basis that RPM is the starting mine, and considering the M&I of that portion of the resource, this logic feels correct to me (and the mine will always seek to extract the highest grade upfront, to improve capital payback & IRR). However, I welcome any and all views of the specific grade used, and how this profile should look. As you can see from the table, in the 3rd scenario I have increased the Grade, and also increased both the Capex and Opex by 10%, and I see a huge increase in NPV ($350m, or $297 @85%).
• Increases in the Gold Price were also a significant factor. I have used a ceiling of $1,950USD, which (as you can see in the last two columns) delivered a significant increase in project NPV & IRR.
• In all cases after the base case, I have found a significant improvement in Payback period & IRR is possible with an increase in the Grade. This is also true, but to a lesser extent, considering an increase in the Gold Price.
• Finally, depending on the scenarios chosen by Nova, assuming a) 15 year LOM, b) Gold Price $1,950/t, c) Capex & Opex increase of 10%, d) Increased Grade in the first 3 years, and e) a discount rate of 7.5%, I find that a ~$1bn pre-tax NPV is possible ($974m @ 85% ownership).

Please, share any comments/criticisms/feedback you'd like, I'd like to improve the model and am also keen to test my skills once they release the actual study. Of course, the Scoping Study is much more in depth than this rudimentary analysis, but as a starting point it allows me to test the impact of the key catalysts on where we might land.

The MRE was a lesson for me, and as a result I believe it to be prudent that I test my own understanding, and model my own scenarios, lest they present another surprise (downside) result. Cheers.