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Message: First Effort NPV Analysis

courtesy of billlc on SH

Dundee Securities did an analysis of Quest's (v.QRM) Strange Lake project to produce 13000 tons of REOs/yr. I tried to recreate their Net Present Value analysis (some information is missing and some inconsistent) and came fairly close. That effort is the 2/23/2011 9:36:36pm post on the v.GWG board.

The target here is to do a Dundee type NPV analysis for PAW. It is a first effort and hopefully some of you will have better numbers. The biggest problem is costs. But first we have to estimate if the resources of Mrima Hill could support a 13000 ton/yr operation. The website has a color coded map of Mrima showing concentrations and a second map with niobium results. From Map 1 it is estimated that the area of 6% grade covers at least 6 blocks 200m x 200m (m here means meters) or 240000m^2. The holes have been drilled to 30 meters or more so the ore body is estimated to be 7.2 million cubic meters. Estimating that a cubic foot of ore weighs 80 lbs and doing conversions the ore body is about 9.88m tons (m now is millions). With a 6% grade and 77% recovery, the TREO (total rare earth oxides) is 456500 tons or 15.5 times the 29400 current estimate for GWG's Steenkampskraal mine. This is far more than enough to support production of 13000 tons/yr for 20 years.
Quest also has projected byproduct sales of niobium Nb and zirconium Zr. Converting the Zr to an Nb equivalent, Quest has a combined Nb grade of .45%. Map 2 and other descriptions indicate that PAW has an Nb grade triple that of Quest. In the Dundee analysis the byproduct proceeds exceed cash costs driving net cash costs negative. With an even richer byproduct we should expect that PAW's cash costs would be even more negative.

REVENUES. Dundee used a price of $19.68/kg of REO and $25 for Nb. PAW has a lesser amount of HREEs so it is assumed that Paw will get $16.40/kg or 5/6 as much as Quest. There are 907.2 kg/ton. Multiplying out, the REO revenue is $193.4m and $63.9m for the Nb. Now comes the tough part, costs. We could use the help of mining, chemical, and metallurgical engineers.

COST OVERVIEW. There is a processing facility flowchart from a great poster on v.GWG, wwwater (2/11/2011 2:14:40pm). I am dividing it into 3 parts, mining, crushing-milling-physical separation (CMP), and then chemical leaching-acid-solvent (LAS) operations. Dundee's cash operating costs for Quest were $101.50 per tonne (I am guessing that here they mean a metric ton) are $4.86 USD for mining (seems low - Quest is underground and under lake, Mrima should be surface mining), $64.37 for milling (CMP) and $32.28 for chemicals, etc and administration and transportation. Mining and CMP costs should be determined by the amount of raw ore processed, the chemical costs proportional to both the volume of ore and also REO product produced. Changing from tonnes to tons gives mining costs of $4.42 instead of 4.86, 58.52 instead of 64.37, and 29.35 instead of 32.28.

CASH COSTS. Costs in Kenya should be less than in the north of Canada but for the moment we will use the Dundee numbers for Canada. To find mining costs we have to calculate the number of tons of raw ore that have to be mined to obtain 13000 tons of REO. The answer is 281385 (281385 x .06 x 77% = 13000). Quest, because of its low grade had to mine 1,500,000 tonnes or 1,650,000 tons or almost six times as much raw ore to get its 13000 tons of product.

CASH COSTS: For mining: 4.42 x 281385 = $1,243,210. For milling etc. 58.52 x 281385 = $16,466,139. The chemical processing costs are trickier since they are a function of the input and the output. PAW has a rich 6% feed going into this section of the flow diagram, QRM only a 1% feed. QRM's cost is $48.42m to refine its low grade feed. Pending engineering help I assume PAW's cost to be half or $24.21m. Again converting tonnes to tons gives this stage a cost of $22,099,091. Adding these costs together gives a total of $39,808,440.

CAPITAL COSTS AND DEPRECIATION. Quest's initial plant and equipment costs (rounded) are $740m, with $100m for working capital, and $80m for sustaining capital (replacement). Assume that the allotments are proportional to the cash costs. Then mining equipment is $37m, Crushing-milling $481m, and processing $222m. PAW (open pit) because of its richer ore has to mine less than 1/5th of what Quest mines. So, it is assumed that mining equipment will be 1/5th of Quest or $7.4m. Similar argument for crushing-milling which comes in at $96.2m. A 50% factor rather than 20% is applied to the chemical processing sector giving $111m. The total is $214.6. Add $50m for working capital and $40m for replacement gives a total of $304.6m. Adding another $95.4m as a "fudge factor" brings the total to $400m which is split over the next two years. Depreciating straight line over 20 years gives an annual depreciation of $20m. Quest has an additional terminal flow for the return of working capital and the value of the unmined resource, I am skipping this.

INCOME AND CASH FLOW STATEMENTS. With rounding: REO Revenue 193.4m + Nb Revenue 63.9 - Cash Cost 39.8m - Depreciation 20m = EBT (earnings before tax) 197.5m. Tax at 35% is 69.1m, EAT = 128.4m, and adding back depreciation gives an annual Cash Flow of $148.4m.

CASH FLOW TIMELINE. The cash outflow for the next two years is -200 and -200. Then there are 20 cash inflows of $148.4m.

THE TIME VALUE OF MONEY: NPV. Quest was discounted at different interest rates but 10% was the main result. The first number in the time line is divided by 1.10, the second by 1.10^2, the third by 1.10^3, and so on. Then added together. The NPV is $697.4 which divided by the 85m shares out gives a value of $8.20/share, and this gives zero value to the tantalum operation in Mozambique. Where is Phil Rizzuto when we need him?

TIME FOR CRITICISM. To start I think 15% is a better discount factor. NPV15 = $4.44/share. Pile on.

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