Back in March I wrote an article Arianne: A Review Of Company Resources that outlined where Arianne Resources (OTCPK:DRRSF) was at based on the completion of their prefeasibility bank study and that they were planning to complete the final Bank Feasibility Study (BFS) in the fall of 2013. For those not familiar with the difference the prefeasibility study is really used to determine if additional investment should be made to complete the final BFS. The BFS is really the final step to determine the financial viability of a project. On Thursday Arianne released a very positive BFS report. Some of the highlights are listed below:
- Net Present Value ("NPV") of US$ 1,910.1 million at an 8% discount rate.
- Gross revenue, in real terms, of US$ 16,124.8 million and operating cash flow of US$ 7,379.6 million.
- Internal Rate of Return ("IRR") of 20.7% with a capital payback of 4.4 years before taxes and mining duties.
- A 25.75 year mine life (excluding pre-production) with an average annual phosphate concentrate production of 3 million tons with a grade of 38.6% P2O5 and with average mill recovery of 90.0%
- The All-In Cost onboard the Ship in the Port of Saguenay is US$ 93.7/ton life of mine (LOM) (i.e. FOB Port of Saguenay), yields an operating margin of 56% with an average selling price of $213/ton at the port.
- 75.7 million tons of saleable concentrate at 38.6% P2O5 in Proven and Probable Mineral Reserves reported at 3.5% P2O5 cut-off grade of 472.1 million tons at an average grade of 6.9 % P2O5 (taken from the Paul Zone Mineral Resource).
Chart courtesy of Stockcharts.com
Given this very positive report the question is what is the true valuation for the company? The fully diluted shares are slightly less than 100M and the current market cap is around $140M. Using the numbers from the BFS, the initial investment needed will be around $1.2B. The payback is calculated at 4.4 years. This is all based on expected selling price of their premium product at $213/ton and a cost per ton of $93/ton. Obviously the selling price of the final material is critical in all calculations. Another way to look at the numbers is to estimate cash flows for the product. When in full production they will be producing 3M tons of product per year. At $213/ton and costs of $93/ton a simple calculation would be over $300M/year in cash flow. How does this compare to some of the heavy weights in the industry? Agrium (AGU) has a market cap of $12B and did $1.2B in cash flow, CF Industries (CF) $12B and cash flow of $1.9B, Mosaic (MOS) $20B market cap and $2B in cash flow and Potash (POT) with a $27B market cap and $3.57B cash flow. These numbers would indicate a 10 times cash flow valuation is not out of the question after full production is reached or roughly a $3B market cap for Arianne down the road. It should also be noted the above mentioned majors are on average sitting on over $2B in cash.
Another important question that investors should ask is how is the company going to fund the $1.2B needed investment and what are the next steps? This was covered on the conference call that can be found on the website. The company will be hiring a financial advisor shortly and here are several financing options discussed:
- Look at strategic partners and off-take agreements
- Look at supplier financing for equipment
- Country financing against off-take agreement
- Debt/Equity financing but emphasized minimum dilution for shareholders
The key to any mining investment is resource (in this case world class), location (mining friendly Quebec), management (shareholder friendly/minimum dilution) and ability to finance. The first three Arianne has well covered and the ability to finance is next up on the plate. Of course given the compelling nature of the BFS there is another option that is a strong possibility. Since they are already in possible off-take agreements why wouldn't a possible partner just buy them out? The conservative approach claiming only a 25 year mine life only makes this proposition even stronger and with strong cash position other major fertilizer companies are always looking for investments with outstanding potential returns. The only remaining question is at what multiple from the current market cap would Arianne management consider selling this very valuable property?