HAR 0.00% 5.5¢ haranga resources limited.

I have been looking at this company for a while now wondering...

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    I have been looking at this company for a while now wondering what the investment case and would like to invite some discussion.

    The end goal of the company is to provide cash flows so my key point of reference is the project NPV consistently referred to in presentations etc

    NPV details:
    Project NPV of $457.8m using inputs of 3 million tonnes per annum over 16 years, an average price of US $131.5, a Discount rate of 12.5%, cash cost of $AU64.0 and initial CAPEX of 562.4 million.

    So looking at a couple of these inputs brings about a few conclusions:

    The discount rate is too low.

    I think that the risk premium should probably be around 11% for the following reasons:

    Technical risks
    Production risk is high since IMO this management group has very low experience in moving a mine from exploration to production. As a result I think there is a high risk that production forecasts will not be met. Risk that mine development is achieved more slowly than expected is high. Reserve risk is probably lower since they have drilled so many holes to prove up the resource.

    Economic risks:
    Price or revenue risk – High variability in possible future prices of ore, especially for lower quality ore which will have variable input costs to achieve a saleable grade. .

    FX risk is high – cash cost of per tonne is in AUD. There is considerable risk of movements in exchange rates over time.

    Political risks
    There has been considerable evidence of late of high levels of political risk in Mongolia. Rio Tinto’s expansion of the Oyu Tolgoi project has been beset with issues such as delays and profit sharing arguments. These delays have put pressure on the company because they have had lending agreements in place with international financiers of the project which may need to be refinanced. Haranga would be exposed to similar issues and does not have the cash backing to support such issues as effectively as RIO.

    Environmental factors - Significant environmental issues have been present for Rio and I don’t think this would be different for Haranga.

    Given the levels of technical, economic and political risks I would ascribe a risk premium of around 11% for this project. Adding the risk free rate of a 10 year Aussie government bond (currently just above 4%) brings a discount rate of approximately 15%.

    “The Company is now working towards improving the economics of this scenario based on additional adjusted input data including but not limited to; Initial mine blocks that are being optimized by the Whittle model and a grid line for power supply instead of diesel electricity generation.”

    So the company might be able to reduce the cost of production to some degree by decreasing the cost of power; both due to changes in power supply cost and consumption due to a coarser grind. However, the risk of cost overruns is high.

    I have constructed a simple DCF model using the inputs originally used by the company. After an initial investment of $562.4 million for Capex and two years for mine construction, the NPV in my model comes out at around $475million.

    A sale price of $131 per tonne is very optimistic and the DCF is very sensitive to the production levels in the earlier years. Therefore, the company would need to ramp up production to 3 million tonnes per annum very quickly.

    Changing the parameters in isolation:

    Discount rate of 15% - Brings the NPV down to around $330million.
    Cost per tonne at 70 - NPV moves to 400 million
    Reduce realised price of ore to 110 AUD per tonne. – NPV of $160million

    Changing the above parameters in concert:
    NPV of -35million

    The mine is close to infrastructure which is good but a rail spur may need to be constructed which would increase the need for CAPEX. I am unsure if the cash cost of production assumption used includes the cost of delivery of the product. If it doesn’t this is an extra factor that needs to be considered.

    Current cash is $3 million and payments to employees and suppliers are high at around $2million per annum. The company is going to run out of cash quickly and likely to need a capital raising just to sustain normal business activities.

    If they can raise capital what are they going to use it for?

    I won't be surprised to see lots of options being issued at 5 cents either.

    Of course all of the above is IMO and not to be relied upon for making an investment decision.


 
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