Alright folks, by popular demand, here is a new thread for discussing what fair valuation for ARL may be at any given point in time.
Some regular posters have already shared some great resources to help build a sense of what fair value for ARL may be under different metal price assumptions, but these can be easily lost in the parry and thrust day to day.
The idea is that this thread will help readers better understand the value of ARL under different metal price, throughput, exchange rate, financing rate, and other assumptions...any posts with throwaway lines like "this will never get funded", "it isn't viable at cobalt price of $x", can be directed back to this thread for an open/transparent assessment.
I am going to open the bidding and say ARL should be trading in a $2-$3 range right now (MC $200-$300m), and go past $5 by end of the year if a low cost/risk finance/EPC partner gets secured over next 3-6months.
Rationale is as follows:
- size and quality of main deposit: the closest peer is CLQ on quality and has MC > $500m, has been as high as >$800m. CLQ has Sunrise further advanced, but ARL is not far behind. If/when ARL gets serious finance / JV partner, the valuation gap should start to close. If ARL, by virtue of going with conventional HPAL, delivers better economics in DFS, than we may well go past CLQ on MC. For now, we should have a decent discount to CLQ, but not a massive one unless you believe ARL has low chance of securing finance. The other peer that gets discussed is AUZ, with ARL having twice the size and twice the grade of AUZ Sconi in our high grade zone alone. However AUZ have an arrangement with SKI - looking at ASX news release, it is unclear to me if this is a binding off take agreement, or a "binding off take term sheet", the latter being language the ASX seemed more keen on. ARL has more cash in the bank than AUZ, has a tighter capital structure and (IMHO) seems to be a better run ship. while AUZ has some complementary assets it is developing, so does ARL, with ARL's more diversified beyond nickel/cobalt. Ergo...I personally don't believe we should be trading at much of an MC discount to AUZ - ergo my belief that $200m MC for ARL is about right as a minimum for now.
- future earnings potential: Given size and grade here, I find it hard to see us doing less than the 2.25Mt throughput, albeit maybe they will start small and with modular design, ramp up over a few years. However based on such strong, surging battery demand, I think we can be confident that A) we will get funded B) whoever funds it will want as much out of ground as quickly as possible. For 2.25Mt, before optimisation and scandium credit, and using $30/lb Co $5/lb Nickel, I get EBITDA potential at $280m. Given we have a resource that would justify going to 4Mt+ (IMHO), I believe the earnings upside here is enormous. A company with the quality of the ARL resource, that only needs one deal with a finance/EPC partner, and one decent off take at a discount to current metal prices, to all but lock in future earnings of $280m+, is worth taking some risk on. This could even just be one deal with someone like Sumitomo.
- risk: Of course, there is risk... for me, the proxy of risk is our valuation next to peers. If CLQ got finance, AUZ at least got strong interest from SKI, then I personally believe we can be safe to assume, that as per ARL announcements, there is strong interest from finance / EPC / off takers. Given the process of finding finance and off take partners is well underway through one of Australia's best in this space (KPMG) I think we can justifiably be confident of a good outcome. A completely de-risked project for ARL would be valued on future earnings - forward earnings could be north of $280m by say 2022 giving a $2.5b+ valuation by then. Placing a 10% probability on that including dilution factor, and considering the time delay to full production, gives us $250m MC. At $250m today, we could still double every year for 3 years before hitting $2b....ergo, $300m MC today would be the market perhaps justifiably getting excited by future earnings potential and giving this a relatively high probability, anything more would look a bit frothy before finance / off take deal(s) are done.
Few resources for folks:
- my own workings on future earnings under different scenarios (
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- 3rd party research -
https://ardearesources.com.au/research (which BTW backs a $2+ valuation)
- A review of HPAL/laterites from around the world -
https://www.gigametals.com/site/assets/files/4861/2018-03-19-hpal.pdf
- A hypothetical chart (where I override the PFS sell down, on an assumption it was an overreaction / the market got this wrong)
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