21 March 2019
(ASX:BSE) | A$0.30 | US$234m | Buy | TP : A$0.46
PFS for Toliara Project Delivered on Schedule and Confirms Significant Potential
Base Resources has published a positive PFS on its Toliara mineral sands project in Madagascar. The PFS has a company assessed NPV10 of US$671m (pre-debt, post tax real) and an IRR of 22.4%.
The company is already working on the DFS which it aims to complete by the end of 2019, ahead of a final investment decision in 1Q20. Mining would then be able to start in October 2021, with mineral separation plant (MSP) production commencing in January 2022. Production remains steady over the 33 year LOM producing an average of 805.4ktpa of ilmenite (sulphate, chloride, and slag), 54.2ktpa of zircon, and 8.4ktpa of rutile. Under the commodity price assumption of the PFS, this is expected to produce annual average revenue of US$254m, and EBITDA of US$165m.
The capital cost is estimated at US$439m (+20%/-10%) based on preliminary engineering and budget quotes from vendors and includes 15% contingencies but excludes any pre-final investment decision (FID) costs. Pre-FID expenditure of US$34.3m (from April 2019) is required to fund progression of the project including early work activities required to meet the overall project schedule timelines. Estimated operating costs of US$95/t produced (including US$6/t royalties) have been derived from experience gained at Base Resources’ existing Kwale operations in Kenya.
Mining is planned to deliver 13Mtpa to the wet concentrator plant (WCP) in the first 3.5 years before increasing to 19Mtpa for the remaining mine life. The increase to a 19Mtpa mining rate would require US$67m capex and is subject to obtaining appropriate environmental permitting.
The total mining inventory (the Mineral Resource that forms the basis of the PFS) stands at 588Mt at 6.6% Heavy Mineral (HM) and 4.9% slimes, from Measured and Indicated material only and gives a 33 year LOM. The Mineral Resource estimate stands at 1,290Mt at 5.1% HM and 6.4% slimes.
The selected mining method is conventional dozer trap with in-pit tailings deposition, enabling a short 3-4 year cycle from initial clearing to final rehabilitation. The primary focus of the 2018 metallurgical testwork programme was to advance the flowsheet design for the WCP and MSP and estimate the resultant recoveries and final product qualities (ilmenite 96.7%, zircon 98.6%, and rutile 95.6% test recoveries).
Existing infrastructure required for the development of Toliara is limited. The project scope addresses this through building a product haul and access road, a dedicated export facility, a hybrid power plant, a bore field for water supply and a permanent camp.
COMMENT: Base Resources believes that the Toliara project is one of the best mineral sands development opportunities in the world and the new PFS certainly confirms its potential with its large resource, high average revenue to cost ratio of 3.06 (Kwale currently 2.7), and NPV10 of US$671m. The PFS has been delivered on schedule following the company’s purchase of the project in early 2018 and an updated resource announced in January 2019. Importantly, this is a sound strategic fit for the company and, along with resource expansion at Kwale, will give Base Resources a strong resource and production platform.
Toliara is a complex greenfields project that will be constructed on a remote site in a developing country with limited construction resources. However, Base Resources has had considerable experience delivering and operating the Kwale operations in Kenya and we believe that the normal technical, financial, and political risks appear manageable.
We have compared the PFS parameters with our original model constructed at the time of the original acquisition in early 2018. The latest PFS delivers a lot of information and the following data is available for direct comparison. The 22% IRR is in line with our estimate, and the NPV is some 65% above our original estimate. We had estimated capex at US$400m (PFS - US$439m), production at 16Mtpa (19Mtpa) over a 26 year LOM (33 years), operating costs before royalties at US$81/t of product (US$89/t), ilmenite recovery of 89% (95%), and a long term ilmenite price of US$185/t (US$196/t). Base Resources points out that the NPV is most sensitive to commodity price forecasts.
It is expected that the deferred acquisition consideration (US$17m) and pre-FID costs will be funded internally from cash generated by the Kwale operations or utilisation of the existing US$75m revolving credit facility, depending on timing.
The ultimate funding mix for construction and start-up will be determined prior to the FID and will be dependent on Base Resources’ internally generated cashflow position and forecasts for the construction and ramp-up period, market outlook, debt availability and cost, and scope of any strategic offtake joint venture at the time. We believe that the PFS confirms the project’s ability to comfortably support the funding of this project.
The positive PFS report for Toliara continues to help de-risk the company’s valuation. We will follow up with a more detailed report and adjust our valuation for the project in due course. With continued strong cashflow generation from Kwale, the exciting potential presented by Toliara, and a supportive mineral sands outlook, we maintain our BUY rating and our TP of A$0.46/share.
Figure 1: Toliara Investment Valuation
Source: Company announcement
Figure 2: Site visit to Toliara project in February 2019
Source: RFC Ambrian