pfs or back of envelope

Let me note that I have no interest in MAK. My interest in comment is that I am interested in the sector, am doing my own analysis for my own reason, have some starting knowledge and am merely tempering some of the outlandish statements that I occasionally see on this site. I do not pretend that my comments will have any influence on the price, so do not consider myself a downramper as all who are in love with a stock ever seem to call someone who is providing a counter view.
I actually think that MAK has a chance, but get annoyed when I see statements issued by the company that say it has a potential net pre-tax cashflow of US$1.5Bn/annum based on the literal back of envelope calculation. And am surprised that these statements are not challenged more – and not just by posters.
Perhaps they are unchallengeable, but if something is too good to be true, it probably aint.
If their operating cashflow two years out (yes, we are producing in 2010) was going to be A$1.2BN (3M t x A$400/t operating margin) then surely their company should be trading at, say, twice that cashflow given that it is so close you can touch it? Even with this very ordinary market. That would make it slightly greater than $20 per share would it not?
The figures have been worked through on the back of an envelope. I am not sure whether it is a scoping study or a PFS due to be released in December – I would have thought only a scoping study as they do not possibly have enough information for a prefeasibility study, but others have been adamant on a full PFS.
I have read posters say they will have virtually no capital cost, and the company suggest it is only $30 to $40M. There is always capital costs in projects of this magnitude, and sometimes where you don’t even expect them. Suddenly a beneficiation plant appears when posters originally said they did not need one – based on information from the company and releases which said there was virtually no capital costs. A beneficiation plant for a facility this size, and to be sized correctly to manage ore at eventual grades of 20% to 25%, will be, IMO, at least $100M. Look up the road at Phosphate Hill where they are mining based on iron grade, awaiting a magnetic separation plant – MAK do not seem to have reported the grades of the deleterious elements. Perhaps MAK’s ore is different, but iron will be an issue – of sorts. MAK may also need a beneficiation plant.
And operating costs at $100 to $150/t? I would think the logistical costs to transport 3M tpa close to 1,400 Kms, with load on and load out, transfer between road and rail, with capital associated for new wagons (even if paid for by the rail provider) – storage costs at mine site, rail transfer, port and load out costs, will probably be very close to $100/t on its own. And then think labour, energy, mining costs, reagent costs etc.
And where do we put working capital in the system?
And why would Phosphate Hill be putting in a magnetic separation plant when apparently they could just ship dso at 28% P2O5 for apparently the maximum selling price as posters have tried to indicate? Why is 28% P2O5 considered DSO? Is that because the CEO has told us so? In fact you could ship 20% P2O5 and call it DSO if you wanted – there would be another phosphate producer who would buy it and put it through their own beneficiation plant at some price. But surely when you are nearly 1,500Kms from the coast you are trying to maximise the P2O5 contained in the ore? I note today’s announcement did refer to 35% P2O5 as direct shipping ore for the first time – that is a grade I could accept – though think it should be accompanied with comment about Fe content.
They cannot produce a PFS without sensible metallurgical results, which are going to require separation of iron – and other deleterious elements, mass balances associated with same, consideration of reactivity of the P2O5 as it converts to phosphoric acid for the production of TSP, MAP, DAP – even though I know that is not their production plan. It does however go to the selling price of their product – and is also the reason why 28% P2O5 cannot possibly be being sold for the proposed US$450/t – as it costs a producer somewhere extra to process it.
And then we are also going to make $30 to $40/t on the freight rate differentials – well, don’t look now, but I suspect that freight rate differential has tightened dramatically with the substantial reduction in recent freight rates. If MAK are transporting 28% DSO (which today’s announcement fortunately now seems to counter), they will not be much better off than their opponent who is transporting 35% or 36%. The cost of the P2O5 being transported will be similar.
I was impressed with the increased resource today – though it seems from posters that this is no great surprise as the resource was previously identified, just now being upgraded to JORC. And I did make an error in trying to read a previous presentation as it related to P2O5 grades. Am always happy to say I am wrong, which unfortunately happens too regularly. I suspect what I did read was depth of overburden rather than grade – though it was not easy to read.
Finally, the long term price of P2O5, which has spent much of its life at US$50/t or thereabouts. In the last two to three years there has been no shortage of comments that the world has changed and commodities are going to stay high. Iron ore hasn’t come down because of the manner in which their contracts are priced, but base metals, and many other commodities are a fraction of the price they were 12 months ago. So one can only be careful in looking at long term pricing, and certainly should be wary of saying the highest price a commodity has experienced in years is going to be the long term price.
And with only $10M in the bank, with another $4.5M to come in from options exercised, I would be surprised if they do not need more capital to conclude their Feasibility Study – let alone start production.
I reiterate – I do not mind this story – but lets not make it a story and build it up further than it needs to be at this point.
If they can make $50/t over 3M tpa they will make $150M pa. Now that may be a realistic target, and would justify saying the price is on the low side at this point – and one from which there may well be upside. But please wait until it is sensibly proven by suitable studies – and then promote it comfortably.