Had a closer look at the share valuation that was done by Hannam & Partners (H&P) and I would like to point out the following:
1. The Mineral Resource for the PCM is (ORN announcement 5 Feb):
a. Deep Sulphide 22.6Mt @ 3.71% Zn and 1.17% Cu
b. Supergene & Oxide 1.5Mt @ 2.27% Zn and 2.06% Cu (average for combined Supergene & Oxide)
The DCF model prepared by Hannam & Partners:
a. only included 15.1Mt @ 3.7% Zn and 1.17% Cu of the Deep Sulphide - 7.5Mt not included in their DCF calculations - 250kt Zn and 79kt Cu not included in the DCF calculations
b. included 2.65Mt @ 1.4% Zn and 1.25% Cu of the Supergene & Oxide - tonnes are higher, but at much lower grades - 16.95kt Zn less and 1.79kt Cu more in their DCF calculations
See page 13 of the H&P report - Prieska Project key inputs and summary DCF model.
2. Significant infrastructure advantages - see ORN announcement 5 Feb:
PCM has significant underground development in place that includes -
a. over 37km of underground excavations including roadways, pump stations, workshops and a crusher chamber;
b. a decline roadway and three vertical vent shafts; and
c. concrete-lined, 1km deep, vertical hoisting shaft (Hutchings Shaft) - shaft barrel is topped by a rectangular concrete headframe which is 68.6m high
The above provides access to the Deep Sulphide resource. The detailed visual and mechanical inspection of the top 380m of Hutchings Shaft was completed by ORN and the following was stated in the announcement of 5 Feb -
a. Condition of shaft concrete lining and steelwork exceeds expectation
b. Shaft steelwork mechanical integrity unaffected by having been submerged
c. Shaft amenable to refurbishment and re-use
The above means that there will be a huge CAPEX saving and more importantly the time that is saved from not needing to develop a 1km vertical shaft (3-4 years). In the ORN valuation that was done by Independent Investment Research, the replacement cost of this development was stated to be well north of A$100m.
H&P has placed no value on the existing mining infrastructure in their DCF model - they have assumed upfront CAPEX of US$300m and stated that this is " in line with typical base metal project capital intensities" - see page 4 & 12 of H&P report. PCM project is not the typical base metal project as it comes with existing mine development infrastructure - upfront CAPEX should therefore be closer to US$200m than US$300m.
3. Key assumptions - summary DCF model (page 13 of the H&P report)
The prices used for Zn, Cu, Au & Ag in the key assumptions of the DCF model do not calculate to the gross revenues under the Sales section of the summary DCF model. For example FY23, Gross Zn revenue is reported to be US$129m, however if one takes the price US$3400 used, times the Zn in conc 40kt, it should be US$136m.
The prices used in the summary DCF model are:
a. Zn - US$3225 and not the reported US$3400
b. Cu - US$6600 and not the reported US$6900
c. Au - US$1100 and not the reported US$1300
d. Ag - US$13.85 and not the reported US$16.5
4. Discount of 40% applied for pre-BFS status
H&P has applied a 40% discount to the DCF for the pre-BFS status - "Applying a target multiple of 0.6x to our DCF to account for the project’s pre-BFS status, and placing a US$6m value on Orion’s other early stage projects (based on an EV/Resource multiple), and adjusting for net debt, we derive a target price of AUD 9.5 cents/share (post the dilutive impact of convertible notes), implying 94% upside from the current share price".
I do not have a problem with the 40% discount that was applied to the DCF to compensate for the pre-BFS status, but then the valuation should be for ORN as things stand at the moment, the date when the valuation was done - ie, the ORN share price currently should be trading at 9.5c according to their DCF calcs. H&P on the first page of the report, top right hand corner states that the 9.5c is the target price for 31 Dec 2018 - by then the BFS would have been completed and the uncertainty regarding the BFS gone. Therefore, per the DCF calcs of H&P, the current share price should be 9.5c and the ORN share price should be reported as currently being undervalued by 94%.
5. Adjusted DCF calculation to include paragraph 1, 2 & 3 above - result in ORN share price of AUD 17.25c
The DCF calculation done by H&P should be adjusted - I have adjusted it for the following:
a. Using the Mineral Resource for PCM's Deep Sulphides as reported by ORN - Deep Sulphide 22.6Mt @ 3.71% Zn and 1.17% Cu - Supergene & Oxides tonnages and grades used by H&P in their DCF calc not adjusted
b. Using upfront CAPEX of US$225m instead of US$300m - reduced FY19E CAPEX by US$50m and FY22E CAPEX by US$25m
c. Using the prices stated under the "Key assumptions" per the H&P summary DCF model and correcting the Sales section
Adjusted DCF outputs will then be: (compare to bottom of page 13 of H&P valuation)
|
Column 1 |
Column 2 |
| 1 |
DCF @ 10% WACC |
US$477m |
| 2 |
IRR[/B] |
74% |
| 3 |
Attributable DCF (73.3% stake)[/B] |
US$350m |
Compare to table on page 14 of H&P valuation
|
Column 1 |
Column 2 |
Column 3 |
Column 4 |
Column 5 |
| 1 |
Adjusted -valuation / Price target derivation table |
|
|
|
|
| 2 |
|
|
NPV |
Target multiple |
Target Value |
| 3 |
PCM Project |
US$m |
350 |
0.6 |
210 |
| 4 |
Jacomynspan |
US$m |
6 |
1 |
6 |
| 5 |
Net cash / (debt) |
US$m |
(11) |
1 |
(11) |
| 6 |
Total |
US$m |
345 |
|
205 |
| 7 |
Shares out |
m |
1523 |
|
1523 |
| 8 |
NPV / Target Price |
US c |
22.65 |
|
13.46 |
| 9 |
NPV / Target Price |
AUD c |
29.04 |
|
17.25 |
| 10 |
|
|
|
|
|
The current ORN share price should therefore
currently be around 17.25c.
There is another 30% of the Deep Sulphide resource to the SE - SE Target extension which is currently under permit application (see my previous post) and not included in the mineral resource statement. This area could potentially be an additional 9.69Mt that will be added to the resource in the next couple of months - total Deep Sulphide resource then 32.29Mt. If this additional tonnes are plugged into the DCF model it pushes the value of the PCM's attributable portion up by US$40m which takes the share price valuation to 19.26c
There was also no value placed on the Fraser Range and Connors Arc projects.
