VXR has a cracking project coming up for FID, all with a...

VXR has a cracking project coming up for FID, all with a perfect alignment of the stars IMO. Sure it's obviously cheap but so much depends on how the equity raise is managed IMO, no other material news to come. Project summary as stands:

NPV AUD$472M is 3 x capex and only modest AUD$170M (incl contingency and OC). Simply don't see many better outside the DRC lol, all against current market cap of $60M odd. 
IRR of 51%
Tier 1 mining jurisdiction near Port Hedland 
Granted ML, all agreements in place (EPA sign off is over finer details of the end of mine rehab, nothing critical)
Copper and Zinc in demand, Cu especially seen by all analysts as going into rather heavy under-supply beginning 2023 until near end of decade
Cu prices of USD $10,000/t predicted by Capital Econs the other day. Concentrate will be highly sort after
Open pit starter (low risk, quick payback)
Good management team building. Young, smart and ambitious guys
etc,etc

Even after recent price rise, valuation is cheap considering the above, instead of comparing against the last cap raise price and December market crash lows. Just look at some of the market caps of other early stage base metal juniors drilling out new discoveries, exciting drill intercepts, but in reality, many years of capital raises and feasibility studies away from a mine. VXR has 13.5Mt at 3.5% Cu equitv, but all of those sensational discovery drill holes are many, many years old and long forgotten. VXR has pulled together a fantastic DFS at the right time for Cu/Zn prices, right AUDUSD, right mining approach, and all when the market is barking for new, safe jurisdiction base metal mines. 

So why is VXR cheap? Firstly, the project was long forgotten, company unloved and shareholders well sick of value destroying share dilution. Unfortunately, the fantastic DFS was released in October, right at the start of the Wall St falling apart, and thus got not traction, jumped to 24c quickly but sold back down into next cap raise. Secondly, shareholders and the market are waiting for the final mine financing equity raise which traditionally will be heavily discounted and incredibly diluting (but bloody great for last minute brokers and their private clients).  In a nut shell, the share price reflects the fear of dilution (which becomes self-fulfilling the lower the price gets sold down) and any upside hangs on what sort of equity raise management comes up with, and at what price.

However, there is another less common way to raise equity, selling down at project level instead of selling down at the shareholding level. Galena recently pulled off a great example of this type of win-win deal by selling 40% of their lead basemetal deposit to Toho, a large Japanese smelter conglomerate. The deal injected AUD$10M into G1A for company costs and AUD$80M into the new 60:40 joint venture to develop the mine.



G1A also has a tier 1 jurisdiction located deposit, on granted MLs, with a very similar capex and 3 x NPV project, except it is Pb and only completed PFS to date. G1A was in very much the same boat as VXR with a low market cap approaching the time to raise a very significant amount of equity to finance the mine development. At 16c during December, G1A looked to have little chance to raise $100M on market to develop to mine as VXR didn't. The alternative share issue raise facing G1A looked something like this:

377M shares fully diluted, at 16c to raise $90M =562M new shares (that assumes G1A share price got up to 20c before being whacked with a huge capital raise). The 377M old shareholders would have effectively sold 60% of the company (562/939 total shares) to raise equity for finance. Instead they only sold 40% of the project at the equivalent of 23.1c per share ($10M to G1A+ 60% of $80M = $48M in JV). Valuation is now 60% ownership of a pre-tax NPV10 $450M (no tax but ignoring cash, future mine life extension or exploration upside etc) at $270M or 72c per share. If G1A went to market equity raise, previous shareholders would have owned 40% of the $450M NPV = $180M, or 0.48c per share valuation. JV project level sell down HUGELY better outcome for existing shareholders.

Not just was heavy dilution avoided, but the share price can now rise without hundreds of millions of cheap new 16c shares being sold into the market daily for quick profits from all those broker clients cleaning up for a short investment. If G1A instead issued new shares at 20c instead of 16c (if that were ever possible) changes the dilution from 60% to 55% instead of 40% at project sell down. In fact, for the original 377M G1A shareholders to maintain a 60% beneficial ownership of the company after a market equity raise the management would have had to issue 251M new shares at 36c... pretty much double to going share price lol, never going to happen.

What about VXR then,how would our alternatives look based on similar options?

262M shares fully diluted, at 18c to raise $90M =500M new shares so existing shareholders keep 34.4% beneficial ownership. Raising at 20c = 450M new shares so existing shareholders keep 36.8% beneficial ownership. If I get silly and say VXR managed to raise $90M at 0.25c per share = 360 new shares so existing shareholders keep 42% beneficial ownership. The only reason VXR is at 25c today is because the market loves the G1A deal and thinks management can do a similar project level sell down and avoid terrible dilution. Otherwise with no more good news to come shares would be back under 20c before you could blink.

 

With a $472M NPV after raising $90M at 20c the VXR valuation would be $0.66/share for712M shares fully diluted, a huge win for the 20c placement holders but a huge give away by the old shareholders. Maybe VXR would trade at 50% of full pre-tax NPV valuation (say 33c/share) but more likely sub 30c while the brokers and friends took 30-50% profits for the next two years.

With a JV project level sell down of 40% for $10 + $80M into JV, 262M shares into 60% of $472M NPV = $1.08 per share valuation for existing VXR shareholders. Trading at 50% discount that is 54c share price without hundreds of millions of cheap broker shares selling into the market every day. Just think about the difference in share valuations between the traditional heavily discounted and highly diluting broker raise at 20c verses a project level JV sell down of 40%.... two thirds higher share price with a JV sell down! The valuation is higher still at spot and forecast metal prices, including capex add-back and exploration upside.

Why then doesn't every junior do the JV sell down then? Traditionally perhaps the markets were not so cynical about valuing mine developers so low cum capital raise that the share price was not so heavily discounted. After decades of the brokers/instos keeping all the profits at the last minute by selling down prior to the final equity capital raise (shorting and playing games) investors will no longer stand in front of that train like idiots. Nobody supports a share price that has a huge cap raise coming and thus share get sold so low that it almost isn't feasible to raise on market. Mostly, finding partners to invest at the JV level was also difficult to impossible, just a rare event for anything below a Tier 1 world class asset. 

But as new mines are getting harder to find in safe jurisdictions and so off-take companies are looking at JV investments as a worthwhile (I would say still heavily discounted and financially rewarding) way to lock down off-take agreements. Happening a lot now in the lithium space (eg KDR, MIN etc). The same is obviously now the case for high quality, high return (NPV 3x capex, 50% IRR and +$500M NPV at current prices) base metal projects in Oz with desirable concentrate off take. VXR is so like G1A in terms of size, scale, security, capex, mine life and profitability heading into a predicted shortfall of supply. Quality projects should be able to attract direct investment even if many can’t.

Why wouldn't management find a JV partner type sell down? Some management are known to work a little too closely with brokers who will whisper sweet nothings about "aftermarket support", "critical liquidity for new institutions to come on board", "secure a relationship for ongoing sell side support" and other rubbish. Maybe finding a buyer and hammering out a JV deal is too hard, too leftfield, just easier go through the brokers. Maybe the project just isn't good enough value to sell, though G1A has clearly proved by comparison that VXR is good enough! SFX are a current example of a company struggling to find a project level investor to avoid huge dilution. However, SFX's roughly $600M capex (plus contingency, OC, recent blowouts etc) for $600M NPV over 42 years looks a lot harder to sell than VXR $180M capex for $472M NPV over 10 years. Maybe management are simply not up the task of selling the project to a project level investor?

 

An alternative direct investment possibility is a cornerstone investment into the company at a significant premium to market via share placement to secure off-take. It may be that an offtake partner simply doesn't want to get involved with a joint venture, to employ JV management and manage a JV board, or to run a separate set of investment books, but is happy to invest into the company directly and participate that way. If an offtake partner was prepared to invest say $25M into VXR at 33c it would go a long way to re-rating the stock and supporting a broker equity cap raise at a much higher and less diluting price than otherwise expected (say 27c instead of 20c). This values VXR post financing to circa $0.82/share, (compared to $0.66/share with 20c raise), better but not as big an uplift as a very large JV project sell down.

I'm here for a BIG jump in valuation that would follow a G1A type project level investor to fund our share of equity and get finance underway. I hope management don't let me down and use the share price re-rating, based on expectations of a project level investor, to go the easy, heavily diluting discounted equity raise to the brokers and be done with it for a small jump in the share price. Slides in VXR presentations plus comments on HC from a presentation AJ made in Sydney couple of weeks ago all suggest that management are all over this opportunity and valuation upside. China has hit the stimulus again hard, the Fed has basically admitted it has, and always will have, the stock markets back which are roaring up again with easy money… all the possible tail winds are with us. A copper supply deficit is looming and VXR is about to build a cheap, highly profitable, 10 year Cu-Zn mine in the safest of jurisdictions with great exploration upside.

 

I'll leave it individual’s judgement whether AJ and the team has what it takes to make a transformational 3^rd party investment related equity raise for mine. All my valuations and figures are back of the envelope stuff, ignore multiple plus/minus factors, may well be wrong and are not to be relied upon. Please DYOR and let me know if I have made any egregious errors.

Good luck