ADN 2.56% 3.8¢ andromeda metals limited

Project CAPEX and Working Capital Comparisons

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    DYOR. Not advice. Analysis below is for illustrative purposes only.
    It's ADN's unique opportunity to build a simple low-risk, low-CAPEX, high relative-return project that makes it fairly unique. The project will generate a total cashflow of $798M (total for 15 years) from an initial capital investment of $9M and working capital $16M (figures are 100% basis).

    The project has a pre-tax Internal Rate of Return of 174%! To put this in context many large miners aim for a rate of return on large projects of 15% to 20%. The higher the IRR the better.

    https://www.copyright link/companie...wering-the-hurdle-on-projects-20190827-p52l5o

    Screen Shot 2019-11-08 at 10.52.26 pm.png

    High IRR projects with a reasonable mine life are relatively rare, particularly projects with an IRR of 174%. In most instances higher-IRRs are involved with expansion projects ( where an old project has some capital investment to extend, rejuvenate or enhance the project ). So to have a new project with an IRR above 100% is quite rare.

    To put IRR in context, let's look at IRR for the new projects I have compared below (data from relevant studies, some are pre-tax and some are post-tax and I have not tried to normalise):
    • ADN 174%
    • AJM 58%
    • FYI 46%
    • LTR 38%
    • PLL 34%
    • ATC 22%
    The numbers here are actually annualised ... ADN is certainly an outlier in terms of the investment return on capital!

    The following post by @ozemania looks at it from a different angle with analysis of the ratio of CAPEX to NPV.

    https://hotcopper.com.au/threads/adn-capex-to-npv-comparison.4995920/#.XcVAyjIzb-Y

    Extract from a recent presentation summarises the scoping study figures (100% basis, ADN's share is 75%)

    Screen Shot 2019-11-08 at 11.36.15 pm.png

    Working Capital of Technically Complex Projects

    I thought it helpful to focus in on CAPEX and working capital comparisons of a number of projects, noting that the CAPEX burden is often funded by a combination of debt plus equity and the working capital is typically funded from shareholder equity.

    Building on my earlier post ( see https://hotcopper.com.au/posts/41315968/single ):
    • PLS (lithium) spent $53.84M over 24 months to end June 19
    • AJM (lithium) spent $19.12 over 24 months to end June 19
    • KDR (lithium) spent $25.36M over 24 months to end June 19
    • ATC (HPA) spent $19.8M over 24 months to end June 19 ( or alternatively $39.8M over 5 years ending June 19, this covers the key part of the period ATC have been developing their project ... and they still have a long way to go )
    The above data has been calculated by analysis of quarterly cashflow reports ( tallying the Net Operating Cashflows Sections of each quarterly ) just to get an understanding of project actuals for technically complex projects

    Intent here has been to provide a perspective of typical working capital requirements in the DFS / construction phases of projects ( where there is often both exploration drilling plus multiple rounds of test work underway ).

    AJM

    It is worth looking in detail at AJM's Lithium Project noting that they have drawn AUD $192M debt against a project that had original declared CAPEX burden of AUD $139.7M. As noted above they spent just over $19M in the 24 months covering the last 2 financial years.

    Also note they raised $40M in a placement at the end of 2016 and another $26M at the end of 2017. Due to cost overruns they had to raise another $28M via a financing package in February of this year, which was later expanded by another $9M. Total of all this equity from 2016 to 2019 is $103M over 3 years (some of this to cover interest bill) .... so working and additional capital is around 53% as a proportion to the original AUD $192M CAPEX bill.

    The point of this ... to show a typical working capital requirement for a technically complex project.

    Capital Intensity

    Lithium and HPA projects are very capital intensive and working capital costs tend to scale proportionally with the technical complexity (and hence technical risk) of the process flowsheet. It's the risk that drives the capital cost because each of the many key process stages need test work. The test work is essential for determining the design specifications for the process equipment. To aid the development pilot plant equipment (at a small scale) will generally be created this can be costly.

    Lithium and HPA projects are complex and they cost big $$$. The complexity is emphasised by the flowsheets below.

    Lithium (hardrock spodumene) - AJM's flowsheet (from DFS):

    Screen Shot 2019-11-08 at 9.50.23 pm.png

    HPA - ATC's flowsheet (from FIDS):

    Screen Shot 2019-11-08 at 9.47.30 pm.png

    Now let's look at ADN's proposed flowsheet for their Halloysite-Kaolin project. Much much simpler! There are fewer components in the flowsheet to get wrong so problems are statistically less likely to occur (simplicity reduces the risk of cost blowouts).

    Screen Shot 2019-11-08 at 9.55.31 pm.png

    Note - Further refining (based on the current scoping study) will occur via toll processing in China, however for the Optimised Scoping Study ADN are going to consider and option to effectively create a wet processing capability at the mine site (replication of existing wet-process equipment).

    Capital and Working Capital Graphical Comparison

    For the Poochera Scoping Study the economic analysis was presented on a 100% basis. ADN's share of the project is 75% and MEP has a 25% share. This means that ADN's CAPEX burden is $6.75M of the $9M project CAPEX and working capital is similarly $12M of the $16M project estimate.

    I have compared this in the chart below with the following projects, noting:
    • FYI (HPA project) an overall Capital figure is given in their PFS and helpfully they seemed to identify a USD $15.1M working capital component of the overall USD $179M spend (CAPEX & working capital combined)
    • ATC (HPA project) the FIDS identifies USD $298M CAPEX and I separately calculated they spent AUD $39.8M over 5 years plus I estimate they need to spend another $20M on working capital (they still have a long way to go)
    • A4N (HPA project) the PFS identifies CAPEX AUD $198M and no working capital figure is available. Their approach is unique and they are conducting test work but looking at the other projects I think easily a minimum of AUD $30M of working capital required (anything less than this would be very, very optimistic for a project that is using a quite unique development strategy).
    • PLL (Lithium project) - CAPEX and working capital figures are from their latest scoping study (converted from USD)
    • LTR (Lithium project) - CAPEX figure is from their scoping study, no working capital figure is provided but based on AJM's experience they would need a minimum of $30M working capital (my estimate) to get to production. This is similar to the working capital estimated by PLL/
    Comparison of the data in a chart below. My estimates marked in amber, otherwise actual figures from studies used. ADN's data is on a 75% project basis.

    A picture tells 1000 words below.

    Screen Shot 2019-11-08 at 10.16.46 pm.png

    Dilutive Effects



    ATC share issue in May 2014 was 108M shares. Current share issue is 743M shares. That's 588% dilution and largely driven by the $39.8M spend over the last 5 years ... and in addition 49% of the interest in the ATC HPA projetc effectively sold.

    AJM share issue before the placement in 2016 was 1.23B shares. There will be approximately 2.7B shares issued (as at 22 November 2019). That's 119% dilution.

    As can be seen from the examples above for ATC and AJM, high dilution effects are exacerbated by projects with very high CAPEX and working capital burdens as the CAPEX is very difficult to fund. Debt is very difficult to secure (look at ATC's experience) and very large equity components are needed. Lots of share placements and capital raises.

    ... looking at the set of projects above, which do you think is likely to have the lowest dilution ... ?
 
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