The purpose of this post is to continue providing explanations which may help us more easily understand that SFX's current share price really isn't representative of the underlying value proposition (assuming that ramp-up continues to progress well and nameplate production is achieved over the next 6 months), and maybe also understand why.
In mid 2020 when SFX was in urgent need of equity funding to get the project into development (following the failed equity partner search spearheaded by Macquarie), Yansteel came onto the scene and offered, and eventually acquired, 50% of Thunderbird (TB) for A$130mil.
For the purpose of this post it's appropriate to frame the 50% sale of TB for $130mil as a sale of 'equity funded TB'.
Framed differently, Yansteel bought 50% of 'pre-equity funded TB' for $58.5mil and then contributed an additional $71.5mil as their 50% of the outstanding $143mil equity component.
As it stands currently in 2024, TB is fully funded (both equity and debt) and so for comparative purposes I suggest we look at the purchase back in 2020 as if Yansteel was buying 50% of 'equity funded TB' for $130mil (SFX then put the $130mil plus $13mil into KMS which meant the TB which Yansteel bought was equity gap funded).
What SFX look through value per share (in mid 2020) can be extrapolated based on the $130mil sale price?
The calculation is really quite simple:
SFX post the sale owned 50% of equity gap funded TB (conservatively worth $130mil - remember SFX were not exactly dealing in an environment full of competitive tension when selling 50% to Yansteel)
SFX had $16mil in the bank (of which $13 mil was needed to fulfil SFX's further TB equity commitment, so $3mil net)
SFX had ~346,000,000 shares on issue.
$133mil divided by 346mil shares on issue gives us 38.4c per SFX share back in mid 2020 (based on 'fire sale value' of 50% of SFX's main asset).
Since then the number of shares on issue has risen by ~55mil (due to $0.50 capital raise) however SFX has equivalent cash in the bank and other asset options to account for that increase in shares, so we can ignore the effect of the additional shares.
SFX's (and Yansteels) equity contribution requirement to build TB each increased by ~$21mil in the interim and for SFX their portion was funded by the sale of non-core assets. We can largely ignore thees factors and just treat TB as funded.
Between 2020 and now the 'unfunded NPV' of the project rose from $980mil to $1.4bil. The funded NPV of TB currently stands at about $1.85bil.
Even given the massive increase in value that has happened as a result of several factors (including the fact that TB is now a producing asset sitting on a 37 year, world class Resource) during the last 3.5 years the market attributed enterprise value of SFX's 50% share of TB has risen from ~$130mil to ~$180mil.
The theoretical EV value of TB (Stage 1 and stage 2) is $1.6bil, and Stage 1 only EV is around $1.1bil (100% basis). In other words SFX shares of TB EV is $800mil (stage 1 and 2) or $550mil for stag 1 only.
In short the market price of SFX simply isn't appreciating the value add that has taken place over the last 3.5 years ($130mil EV to $180mil EV currently, vs $550mil (Stage 1 only) - $800mil (Stage 1 an 2) theoretical EV).
In my opinion this is not because a value-add hasn't happened, or because there are unusually high enterprise risks associated with TB, but rather due to the simple fact that given the current liquidity in the SFX market, institutional money is not willing to buy stock in a market that they cant exit out if they need or want to.
What this means is that sellers are forced to sell into those few buyers that are there willing to soak up stock at very cheap levels, all the while, buyers are not forced into a competitive situation where they need to pay up or miss out.
At some point this unusual phenomenon will change, and will change quickly, because once it becomes evident to enough institutions that, regardless of a lack of liquidity, the shares are a buy simply because of the amount of free cashflow one will be entitled to, then demand will outstrip supply quickly and the price will rise.
Most sellers at the moment are selling due to either necessity, ignorance, boredom or perceived opportunity cost, and not because the stock looks expensive. So as soon as the stock starts moving (as real investment money enters) this will encourage all those on the sidelines to rushto try and enter the stock, and will turn those who were sellers due to stagnation into holders. This means a chronic shortage of selling when the tide turns, so obtaining large positions at that poit is unlikely to be a realistic expectation.
It will be those institutions that step into the market at times like this and start accumulating slowly but surely that will be able to secure meaningful positions at low prices. Even if their buying moves the stock from 55c to 85c over several months they will still have an average of 70c per share in a stock that should arguably be trading at $1.40 plus once production consistency is reached in line with the DFS.
Until sufficient buy orders eventuate the current lag between share price and fundamental value is bound to persist. Having said this I don't mean to say the price won't go up but it will lag behind what is normal.
In mid 2020 when the value of 50% of TB was set at $130mil (38.5c per share) there were plenty of outstanding milestones (risks) that needed to be met before cashflow would become a reality.
Below is an off the top of my head list of de-risking milestone that took place between mid 2020 and now which seem not to have been valud into the current share price.
- Proposal becomes binding (subject to FIRB)
- FIRB approval
- JV formed
- Yansteel contributes $130mil to KMS
- Off take agreements signed
- Engineering contract granted
- updated DFS with increase of NPV of $1.2bil (simplification of process)
- Construction commences
- Debt financing process commences
- NAIF pre approval
- ORION financing approved
- Overall debt funding package approved
- Port approvals
- Final Investment Decision
- Construction 50% - on time, on budget, first product shipment expected in Q1 2024
- Construction 65% - on time, on budget, first product shipment expected in Q1 2024
- Construction 75% - on time, on budget, first product shipment expected in Q1 2024
- updated DFS with increase of NPV of $1.4bil (simplification of process)
- Sale of non core assets for great prices beyond expectation
- South Atlantic Project Option
- SFX well funded after capital raising
- Construction 90% - on time, on budget, first product shipment expected in Q1 2024
- Construction 95% - on time, on budget, first product shipment expected in Q1 2024
- Waste mining commences
- Commissioning activities commence
- Pre-operation commissioning complete
- DMU onsite and installed
- Construction 100% complete ahead of time and budget
- production starts 2 months ahead of schedule
- First ore Production - HMC stockpiles building
- Concentrate Upgrade Plant starts
- first product stockpiles build
- Working capital of $35mil available in KMS
- $40mil cost overrun drawdown still available
- Plant construction $311mil actual vs $336 forecast ($25mil saving)
- Current product pricing/exchange rates Vs DFS forecast remain current
- Production costs in DFS included a 10% buffer and are more or less inline with current cost estimates
- Maiden small sample product shipments sent to off-take customers
- First two months of ramp up show no surprises, production rates hampered mainly by minor equipment breakdowns which can be rectified and improved delivering full availability.
- current stockpiles in excess of 35,000 of product.
- First bulk shipment scheduled for Q1 2024
All the best
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