Pin A Tail On It and Call It A Weasel

Yep Blackadder quotes again, but I wouldn't bestow this prestige on just any old plan. SFX have, I think, come up with one of those rare and cunning plans, and just in the nick of time. For reference, I name the new Thunderbird FS; the Cunning Feasibility Study (CFS), to separate it from the first poor efforts.

Before I go to the bottom line, I'll bring you up to speed first, otherwise this post will get reported and moderated for outrageous ramping. Either management have concocted this story to paper over a failing reality, or the Gods have swung circumstances into serendipitous alignment. The seemingly unsolvable problems of capex blowouts and huge equity hurdle, unloved by potential partners, is suddenly and abruptly resolved by an unexpected and unlikely change of events. Truly Deus Ex Machina !

I was trying to solve a puzzle with seemingly too many missing pieces, when the news hit that SFX signed "an annual supply contract of 650,000 tonnes of primary ilmenite. This represents all of the estimated volume of primary ilmenite to be produced during Thunderbird Stage 1". But how can this be with a Stage 1 Plant? The BFS had Stage 1 LTR Ilm + TiMag at 421,000tpa combined total. Even the best last two years of Stage 1 only had 457,000tpa LTR product at peak throughput, some 45% increase in ilmenite production. Then I see properly the line in the June 19th presentation, TB's primary ilmenite (P-Ilm) starts at 38% TiO2, fed to the Ilm Dry Plant and upgraded to 48% TiO2 then LTR feed.



Well, if SFX want to save approx $35M on the Ilm Processing Plant they are stuck with the 38% TiO2 P-Ilm. If I take year FY23-24 Stage 1 company max production levels of 287ktpa LTR Ilm and 170ktpa Ti-Mag we would start with a feed of 457ktpa of 48% Ilm from the Ilm Dry Plant. Back calculate to tonnes of 38% TiO2 P-Ilm dry plant feed, equals 577ktpa at 38% TiO2 (though is actually less because rejects contains TiO2). Obviously there's a reject stream loss from the dry plant upgrade, add 75kt from the reject stream and, viola, there is the 650ktpa of Primary Ilmenite in yesterday's announcement. 650,000t looks about right for a conservative Stage 1 annual P-Ilm off-take (more probably, if the mine is run at 10-15% higher rate than planned to get extra Zr as outlined).

Now I can hear Peppie groaning "yeah but 38% TiO2 is sheet, never sell it". But this 38% TiO2 Primary Ilmenite is basically a mixture of magnetic iron minerals and ilmenite, no trash; low chromium and alkalis. The capex and opex of the ilmenite dry plant is all designed to remove iron oxides before running it through the LTR. Whoever buys the 650,000t of 38% TiO2 primary ilmenite simply ends up with more iron ore to process and sell. Iron ore as a free by-product in China... I know right, money for jam. Bengbu Zhongheng (" a globally significant mineral sands research, development and production company and world’s largest producer of fused zirconia") takes the primary Ilmenite without any expense to SFX, then feeds it into an LTR and then their slag furnace that built for " targeted chloride pigment production as part of its future growth plans." Roasters and kilns are both plentiful and cheap in China, why should SFX do it here at all?

Bengbu gets the premium 56% TiO2 LTR upgraded Chloride slag feed they wanted originally, plus valuable high grade and low contaminant iron ore and TiMag to sell locally into the huge Chinese steel production sector. Benefits to SFX are obvious, but what about the extra costs to Bengbu? SFX had some $20Mpa of nat gas, electricity and labour minimum to run the LTR, but that gas was bought as LNG after trucking 900km...wft, surely the opex is much cheaper in China. In fact, everything is so much cheaper in China than Derby, it's almost embarrassing comparing capex and opex between the two. With iron ore fines currently well over US$100/t I don't think the TiMag at US$48/t is a stretch. Not unreasonable to say that Bengbu will not spend more than A$20M to process the 650,000t of 38% Ilm that it would have cost SFX to produce the same LTR products.

We know that 650,000t of 38% TiO2 primary Ilmenite equals roughly the 287ktpa of LTR Ilm plus 170kt of Ti-Mag tops. The revenue in the BFS from this average Stage 1 LTR production is about A$75M, the equivalent to A$115/t of primary 38% TiO2 ilmenite on BFS pricing. But LTR ilmenite is now priced 20% higher in AUD than the BFS, revenue today is A$87M, or A$134/t of primary 38% TiO2 ilmenite. For SFX or Bengbu.

Leaving aside the logistic and admin costs SFX is going to have selling either LTR or Primary Ilmentite anyway, SFX is forgoing roughly A$100/t revenue by not selling LTR and Ti-Mag (ie $133/t rev- $30/t cost). So what is it worth to SFX to store primary ilmenite for their own LTR plant later? I guess that on a $100M capex for the Ilm Dry Plant and LTR plant, SFX would a return higher than the discount rate, maybe double at 15% return on investment, certainly anything over 20% is a great return on the capital in the ZIRP. Let's assume SFX only wants to sacrifice 20% of LTR business profits to sell the P-Ilm to Bengbu, or A$30/t (ie 650k*$30=$20M) and keep $70/t for the business. Bengbu then gets the product off-take it wants plus A$20M extra profit from handling the primary ilmentite from scratch (plus any extra above US$48/t for Ti-mag and other iron ore rejects). SFX gets A$70/t sale price, or US$50/t for the primary ilmenite sale, dig and deliver. Gut feeling says this is cheap and sounds about right. Base Tolliara project is claiming US$162/t @ 50.5%TiO2 Slag Ilmentie (US$3.20 per TiO2 percentage unit) against SFX TB US$50/t @ 38% TiO2 (US$1.32 per TiO2 percentage unit)..

The fact is SFX ilmenite cheaply upgrades to a very high quality 56% TiO2 chloride slag feed with Ti-mag and possibly other iron ore credits. It is low grade by 'traditional' direct feed standards but very far from worthless! Especially if Bengbu already has the capital items (or will add extra as required) building up a large chloride titanium business in China. Why would Bengbu not try and screw SFX to the floor on price? Think about it strategically. Rio's RBM could only afford to go hard on slag imlenite kilns and production because they had off-take from large, long life, consistent spec ilmentite production (ie their own mines). Bengbu very much wants a large, consistent quality, chloride slag ilmenite to build their TiO2 operation around. What better than Thunderbird, a 42 year mine life even after accounting for a Stage 2 production double. Here is the making of a long and exceptionally beneficial relationship. Except if Bengbu isn't helpful, then either SFX never gets the mine up and running, or someone else gets the mine running but kills the off-take deal, or down the track SFX snubs Bengbu at the first opportunity for not playing nice. Long term, Bengbu are incentivised to pay good dollar for the primary ilmeneite otherwise SFX will build their own LTR plant and control the sale of high quality chloride slag ilmentie themselves. I would argue that SFX actually has the upper hand in negotiations despite their desperation to re-jig the BFS into a lower capex plan, higher NPV new direction. Thunderbird clearly has strategic value for Ilmenite as well as Zircon, obviously.

This just looks like a match made in heaven, a big win for both parties as they both build towards mutually beneficial futures. SFX not just drops $90m of LTR and Ilm Dry Plant capex stage 1, but so long as the price is right never have build the dam thing ever. Tie up a similar off-take arrangement with another chloride slag producer for the Stage 2 expansion etc, avoid the capex, opex and grief, and that masochistic WA EPA carbon tax that is bound to arrive sometime, all for a much higher annual EBITDA and NPV thrown in for free! Now, lets talk about that set of steak knives.

What SFX have told us is that they are aiming to meet the original BFS EBITDA and NPV based soley on reduced opex, higher throughput, and higher prices from the non-mags (Zr and HiTi88), Let's assume that with circa $20M NPV from the NAIF infrastructure opex savings (11.5% IRR less 3.5% debt int) netted against increased Zr production opex and transport etc that the CFS manages to meet management's first objective. To keep things simple then, the only items that will impact the A$675M BFS NPV in the new CFS are; Capex and LTR Ilm/ TiMag/ Primary Ilm sales.

Capex Reduction Stage 1 is Net $40M (excluding NAIF infrastructure)
-$30M Ilm Plant
-$43M LTR
-$10M EPC Scope Increase
-$7M Reduced BFS Contingency & G&A etc
+$50M EPC Scope Increase

Capex STAGE 1 Reduction = CFS NPV increase by $40M (ignores reduced equity gap benefit and lower sustaining capital)

CFS assumes Primary Ilmenite sales of A$75/t, while the BFS had LTR Ilmenite sales at equivalent to A$98/t primary ilm (LT pricing). However, given that the BFS $98/t lost LTR revenue is already replaced by higher Zr prices and production, that $75/t represents an effective 76% increase in LTR product sale prices above the BFS for NPV purposes (simply ignoring anyTi-Mag price increases).

Primary Ilm sales equiv to 76% increase in LTR LT price in BFS, = $585M NPV increase based on BFS sensitivity analysis

Obviously the new CFS cannot partially cover the BFS LTR product revenue losses through increased Zr production for ever. A 15% increase in Zr production per year might help the new plan match the old BFS, according to my maths, but the mine cannot over-produce Zr for the LOM and still have a 42 year mine life! To account for losing that early Zr over-production at some time in the future through sorter mine life, I'll reduce the CFS NPV by reducing 10% the LOM Zr production by using 10% lower Zr recoveries on the BFS sensitivity analysis. This is a thumb suck figure I know, can't be bothered working out the shorter mine life impact on NPV of all variables.

Losing the Zr over-production some time into Stage 2 reduces the BFS NPV by $155M using -10% on the Zr Recovery sensitivity analysis. (note, reducing NPV with 10% reduced Zr recovery is trying to balance the effect of increasing early annual production 15%)

The total new CFS pre-tax NPV8% increases to A$1,145M according to my logic and maths, up from the BFS Base Case of $675M (a round 50% increase . Even if you want to argue with US$50/t sale price for the 38% primary Ilmentie, CFS looks a comfortable A$1B pre-tax NPV project, plus I think obvious strategic value! Someone forward this post to Iluka before it's too late lol.

What hasn't been accounted for in this calculation is that the Stage 2 Expansion capex will also be lower if no Ilmentite Dry Plant or LTR plant is required. Against this is the fact that the NPV increase is now so high I just can't bring myself to add any more. The biggest question mark, having thought it through and believing the simple logic, is how long the Zr over-production can make up for no LTR product revenue before that revenue difference becomes a drag later in the project? It's quite possible I have actually over-corrected with the $155M NPV reduction simply because later revenue from a shorter mine life has a much diminished effect on the NPV compared to extra revenue generated in early years. Yes Franpower, we know.

Anyway, based on my math and logic, the new plan looks cunning like a weasel alright. Appreciate any constructive feedback on where the logic or math looks wrong. The West newspaper article Peppie posted today quoted Bruce; "doubling the zircon output in five years was planned.... it would be decided later whether to upgrade the associated ilmenite with LTR". If I am right in guessing where SFX is heading with Bengbu, sales prices and Bengbu's ability to treat the ilmenite from scratch then why would you bother building and running an LTR so long as the price is right? Dig and deliver boys, that's how Aussies have always made the best money lol (apologies to those who like the thought of downstream processing and WA jobs, but didn't vote for 'go it alone carbon pricing').

Most of this is fact, some might be fiction, but it's what distilled out in my head and it just makes so much sense. Yes it reads like ramping but I'm nothing if not flexible, and I've earned the right to ramp after bagging out SFX management recently with losses to justify it. I'm never any company's shill, but if I have to apologise I might as well do it publicly. Hat tip Bruce and team!

Good luck