Big quarter for the development of Tres Estrades
Since our last note in March, AGR has moved towards completion of its trade-off study, which we believe will have major ramifications for the development strategy of Tres Estrades. Shareholders have also approved the secondary listing on the TSX-V and as part of that process a C$10.5m capital raise has been completed providing enough funds to complete its BFS. AGR has entered into a non-binding MOU to provide up to 100% of the project financing to build the Tres Estrades. Significant exploration success proximal to Tres Estrades, which is likely to contribute to an increase in resources, rounds off a very active quarter for AGR.
- Trade-off study likely to have the largest impact on development strategy: As mentioned in our previous note, we believe the trade-off study would have large ramifications for the development strategy of the project. Although details of the study are yet to be released AGR has given an indication as to the order of change in some of the inputs. We have updated our model accordingly. Refinement of the development strategy could optimise these financial metrics even further. In our view, the major change is the ‘right-sizing’ of the project to the local market in Brazil and the strategy to develop on higher grade, saprolite ore only in the first few years.
- Lower OPEX and CAPEX: AGR’s strategy to start on saprolite ore and reducing the target run-of-mine (ROM) production from 4.5Mtpa to 3.0Mtpa resulting in phosrock production at circa 300Ktpa, has materially lowered the start-up CAPEX. The intention to use coal rather than diesel as a fuel to dry the phosrock concentrate will also reduce operating costs. Our modelling shows that the NPV is largely maintained at lower production rates but the IRR and payback are greatly improved.
- TSX-V listing complete and C$10.5m raised: Working capital to complete the BFS has been secured through a secondary listing on the TSX-V and a coincident placement for C$10.8m to north American institutional and sophisticated investors. AGR also completed a 1-for-5 share crunch to modify its capital structure to conform to north American standards.
- Non-binding MOU to finance up to 100% of project build: AGR has also announced a non-binding MOU with NYC-based Nebari US, a mining financing group, after extensive due diligence by Nebari. Final terms are subject to negotiation and upon successful completion of the BFS, final DD, permitting and off-take agreements.
- IRR doubles: We have reworked our DCF model with some of key assumptions listed above. We derive a new valuation with an NPV marginally lower (-5%) than in our previous valuation but at a significantly higher IRR which has essentially doubled to 91.2%, principally by concentrating on purely saprolite ore in the first 5 years to maximise early cashflow and reduce CAPEX.
- We retain our Speculative Buy Recommendation on AGR and reduce our valuation by 5% to A$369m, of $2.92 per share from A$410.2m, or $3.08 per share. We continue to risk-weigh our price target at 50% to achieve a PT of $1.46 to account for financing and execution risk.
Trade-off study to deliver major project enhancement
By mid-June AGR were over 50% through their BFS on the Tres Estrades phosphate project. However, AGR are concurrently undertaking a trade-off study to enhance project metrics and to hone the development strategy to the local market, whilst at the same time, aiming to lift project IRR and reduce financial risk.
As highlighted in our last report, the first 4-5 years of operations will focus on production from the higher-grade oxide resources where grades are +10% P2O5. Not only will the high grades provide increased early cashflow over a staged development model involving production from both oxide and transitional/fresh portions of the deposit, but the early oxide only development model has significant ramifications for initial capital requirements.
AGR has emphasised the reduced capex for an initial oxide only development. As the oxide material is soft, the crushing and floatation infrastructure required at start-up is minimised.
Production scale has also been reviewed. By reducing the target run-of-mine (ROM) production from 4.5Mtpa to 3.0Mtpa and placing a cap on phosrock production at circa 300Ktpa, AGR has maximised project value to shareholders whilst ‘right-sizing’ the operation for local market demand.
This strategy is also likely to affect the capex required for the TSF (tailings storage facility), water dams, waste rock storage and overall project footprint.
The trade-off study has also looked at energy requirements. The study has concluded that thermal coal, produced locally in the region, is likely to be a cheaper alternative to diesel to dry the phosrock, as envisaged in the PEA. AGR estimate that the opex saving could be in the region of US$14/t of phosrock concentrate. AGR state that a long-term supply of thermal coal is readily available in the region.
Finally, the scaling of production early in the project development to enhance early cashflows could result in the Stage 2 expansion into transitional and fresh rock being financed through internal cashflow, thereby reducing financial risk, reducing the interest burden and potentially being less dilutive to shareholders.
Other developments include the extended drilling program aimed at conversion of Inferred resources to Measured and Indicated for incorporation into the BFS and reserves. In addition, recent pilot plant testing has produced phosphate concentrates grading up to 34% P2O5. The original PEA envisaged concentrate at 30% with grades up to 32%.
Further enhancements to the financial metrics are likely to come from reduced project build times, perhaps to less than 12 months from an estimated 18 months.
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This Research report, accurately expresses the personal view of the Author.
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