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Prospect Resources updated DFS, updated but is it improved?

In this article we look at the updated DFS for Prospect’s 87% owned Arcadia Igneous Lithium Project, located in Zimbabwe, and compare it to the previous DFS and the figures produced by Prospect’s peer group.

Prospect Resources Ltd -

Prospect Resources Ltd (ASX: PSC) has completed an updated definitive feasibility study (DFS) and signed a memorandum of understanding with Uranium One for offtake and potential equity investment.

The memorandum of understanding (MOU) with Uranium One Group JSC, gives Uranium One a 90-day exclusivity period to complete its due diligence. If Uranium One opts to proceed it can negotiate an equity investment into Prospect or its subsidiaries and offtake for at least 51% of potential future production.

In this article, we compare the updated DFS for Prospect’s 87% owned Arcadia Igneous Lithium Project in Zimbabwe to the previous DFS and the figures produced by Prospect’s peer group.

While the updated DFS is based on a 2.4mln tonnes (t) per annum plant, in line with the previous DFS, announced in November 2018, the average annual product production rate is reduced by 22% to 173,000t for spodumene concentrate from 212,000t in the November 2018 DFS. Petalite production is reduced by 43.5% to 122,000t per annum from 216,000t per annum previously. This moves the project from the large-scale concentrate production range to the mid-scale concentrate production range compared to its peer group.

The capital expenditure (capex) in the updated DFS has reduced by 1.8% to US$162mln from US$165mln in the November 2018 DFS. As a result, the life of mine capex intensity increased by 9% to US$35/t from US$32/t, which remains in the mid-range of its concentrate producing peer group.

Operational expenditure has increased by 20.7% to US$344/t in the updated DFS from US$285/t in the November 2018 DFS, which moves the project from the low end of the cost curve to the upper end of the cost curve compared to its concentrate producing peer group.

Meanwhile, mine life in the updated DFS increases by 29% to 15.5 years from 12 years the November 2018 DFS.

The post-tax NPV10 (net present value with a 10% discount rate) improves by 40.8% to US$645mln from US$458mln in the November 2018 DFS, while the post-tax internal rate of return (IRR) increases by 84.2% to 70% from 38%.

In summary, capex intensity and opex have both gone up, while production levels have gone down and mine life has gone up. This leaves us begging the question: How can the NPV and IRR have improved?

Well, the answer is simple; while the spodumene price used has increased marginally by 1.7% to US$701/t from US$689/t, the average life of mine petalite concentrate price increased substantially by 77.9% to US$813/t from US$457/t.

But is there any justification for such a dramatic improvement in the petalite price, when so many of the projects other metrics have decreased and is the updated DFS really a significant improvement on the previous DFS, as the company claims?

Well, perhaps and perhaps not. Prospect has changed its approach to the project on the back of a marketing strategy review, which examined the potential production and sale of a premium technical grade, ultra-low iron petalite concentrate.

This technical grade concentrate is not only given a significant premium above chemical petalite concentrate in this study but even given a premium above the chemical-grade spodumene concentrate: US$894/t for the technical grade petalite, compared to US$482/t for chemical-grade petalite and US$701/t for chemical-grade spodumene concentrate.

While this price differential is surprising is it justified? As I have not previously examined the price differences between technical and chemical grade petalite, I don’t know the answer to this.

Quick facts: Prospect Resources Ltd

Price: 0.22 AUD

ASX:PSC
Market: ASX
Market Cap: $52.97 m
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