Entry : Maximum buy price $0.55
Position size : 10,000
Stop loss : $0.35
Target price : $0.75
FFX is a company with two projects in Mail (Africa), the first a gold mine which they are restarting and the second is a soon the be developed Lithium mine.
In August 2020, FFX acquired an 80% interest in the Morila gold mine from Barrick and AngloGold for AUD $38.4 Million. The gold mine as an All-In-Sustaining-Cost (ASIC) US$1,124/ OZ, given the current gold price of around US $1,800 a mine life of 10 years and average production of 160,000 ounces this project on its own is likely to be very profitable over the next few years.
But the part of the business that interests me given the current environment for Lithium is the Goulamina Lithium project.
The release of the Definitive Feasibility Study (DFS) in October 2020 proved that Goulamina Lithium project had big upside potential
The DFS hit all the right notes that investors like to see with mining projects
- Long mine life 23 years
- Capital Cost of US$194 Million – Low cost to get into production
- Pre- tax IRR 55.8%
- All in sustaining cost (AISC) Years 1 -5 US$306 per tonne
- pre-tax Net Present Value (NPV) of AUD$1.7 Billion. This is based on an average sale price of US$666 per tonne of concentrate. The current spot price is around US$900. So NPV numbers look to be conservative
Despite the positive DFS study the company had trouble raising the finance required to progress the Lithium project so they appointed Macquarie Bank to run a process to realise the value in the project.
The Macquarie Bank process to realise value lead to a joint venture with Ganfeng, who are the worlds largest lithium producer by production capacity with the technical expertise and financial capability to support the Goulamina lithium project.
Under the 50:50 joint venture, Ganfeng will inject US$130 Million equity into the project as well as arranging or providing itself up to US$64 Million in debt financing. Offtake agreements have also been signed for Gangfend to take 100% of spodumene concentrate for the life of the mine.
The equity and debt financing is essentially the entire capital requirement to establish the mining operation as per the DFS and get the mine into production by 2023.
Both Gangfeng and FFX has signed binding agreements to facilitating joint venture transactions. Ganfeng is currently seeking regulatory approvals from Chinese authorities, which are expected to take three months. Once approval is received around December 2021 the first instalment of US$39 Million in equity investment is due.
Once the transaction with Ganfeng is completed in late 2021, FFX will begin the process of spinning out its 50% interest in the Lithium business into a separate ASX listed company. The demerger completion is expected during the March 2022 quarter.
This process has the potential to unlock a substantial amount of value for FFX shareholders as the two projects of FFX will be worth more when they can trade on their own.
It is not our intention to be in both companies for the long term the announcements over the next 2 to 6 months can lead to a reweighting of the share price
What are the key risks
- Sovereign risk – Mali and Africa in general are not in the most stable of countries to operate in
- Gangfeng – Can they get regulatory approval for a deal with an Australian company given the current tensions between the Australian and Chinese Governments
- Mine risk – Re-starting production at an old gold mine and developing a new Lithium mine always run the risk of unexpected problems or delays
- Gold & Lithium price risks
Despite the risk, the upside potential more than justifies an initial investment into the company.