Lithium Scoping Study very positive
The compliant Scoping Study on their 75% owned near surface Mina do Barroso hard rock lithium (spodumene) project in Portugal is very encouraging with a post-tax Internal Rate of Return (IRR) of 48.6% and a post-tax Net Present Value of US$241m, assuming an 8% discount rate.
The company has modelled a series of open pits that mine around 14.4 million tonnes of ore grading an average 1.07% lithium oxide (Li₂O) over an eleven year period at a rate of 1.3 million tonnes per annum (tpa). A conventional gravity and flotation plant produces 175,000 tpa of 6% Li₂O spodumene concentrates, which are trucked to Porto and shipped to China. In China, these concentrates are converted in a hydrometallurgical plant producing lithium carbonate used for batteries. The company also believes it can obtain useful by-product revenues from otherwise waste materials.
The up-front capital expenditure for the mine, the mill and the dry stack tailings facility amounts to $108.8m, with low mining capital costs due to the use of contract miners. Life of Mine sustaining expenditure of $11.8m, plus an overall contingency of $27.2m, brings the total projected capital bill to $147.8m. The tax take is a high 32.3% and reflects the 9% corporate tax surcharge introduced in response to Portugal’s financial difficulties. The company should be able to reduce the tax take with capital allowances, investment incentives and effective use of gearing, while the local tax rate could decline in the future as Portugal’s overall financial position improves.
With an existing Mining Licence, they intend to fast track this project and hope to start construction in Q2 2019, with first production by Q1 2020. With a 2.1 year payback, any exposure to forecast declines in lithium prices from 2021 onwards, if forthcoming, is minimised, particularly as the operating cost including insurance and freight to the Chinese customer is only $271 per tonne ($/t) of concentrates. This compares to the $685/t spodumene concentrate price assumed for this study, current prices of around $900/t and recently reports of high quality 6% Li₂O concentrates being sold for prices even higher than this.
75% of $241m converted into sterling at £1=US$1.34 equals £135m. We had previously valued Mina do Barroso at £45m, using other resource valuations as a guide. Bearing in mind the uncertainties that come with a Scoping Study, debate over the appropriate discount rate to use and a slight unease over the high tax rate, we significantly increase our Mina do Barroso valuation to £90m and overall Savannah Resources share price target to 17p each.
£90m is a 33% discount to £135m, thus offering scope for increases as the environmental permit is upgraded and the mineral resource, the project’s capital costs and financial structure is firmed up. We continue to value the company’s Mozambiquan and Omani projects at £25m and £5m respectively, giving an overall valuation of £120m or17p/share.
*Whitman Howard is Equity Adviser to Savannah Resources
