2017 NI 43-101 Technical Study Update - salesHello fellow Verde shareholders.
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On June 16th, Mr. Veloso confirmed that the process to update and reissue the 2017 NI 43-101 compliant technical analysis will be completed by the end of 2021. This comprehensive predictive study underpinned the transition of the Verde from an exploration and development company into a production entity with ongoing extraction, processing, marketing, distribution and sales activities.
With the Company's first owned and operated processing facility (Plant 1 at Sao Gotardo) becoming operational in the summer of 2018, the Company now has 3 full years of actual production experience under its belt, with all of the actual cost and performance metrics in hand. It is therefore now possible to assess the validity of predictions of the first three years of the 2017 study, and makes an update and reissuing of the original study, using the actual numbers to date and modifying assumptions were appropriate in light of current market conditions, a timely and useful exercise.
While we will have to wait patiently for the release of the update in December, the availability of quarterly and annual financial statements allows us to at least get a jump start on the assessment of the first three years of the study, and can give some early indicators of what we can and should expect to see next December.
With production commencing in Q3 2018, the following analysis uses a July 1 - June 30 fiscal period to match to the "Year" in the 2017 Study.
Sales in tonnes 2017 Plan Actual Difference
Year 1 (July 2018 - June 2019) 609,000 54,341 (554,659)
Year 1 (July 2019 - June 2020) 611,000 176,469 (434,531)
Year 1 (July 2020 - June 2021) 5,032,000 300,000 (a) (4,732,000)
(a) includes estimate of Q2 2021 sales based on Q1 2021 YoY increase
Not surprisingly (this has been followed on a quarter to quarter basis for the last 12 quarters), the major flaw in the 2017 study numbers has been the significant under performance in the total tonnes sold. With Plant 1 now operating with a 600,000 tonne per year name plate production capacity, its maximum output to date was 250,000 tonnes in the year ending March 31, 2021. While it could theoretically have met the Year 1 and 2 Study forecasted production targets, this has not been an issue with even the year 3 estimated actual production barely hitting 50% of the plan.
The Year 3 Study prediction of 5,032,000 tonnes (the first year of "Phase 2") was clearly unattainable with Plant 1 only able to deliver, at full capacity, 600,000 tonnes. We understand that Plant 2, which is currently completing the design phase, is targeted at 1,200,000 tonnes per year. If it is fully operational by July 1, 2022, that would provide a Year 5 production capacity of 1,800,000 tonnes per year. This is still well short of the 2017 Study Year 3 target of 5,000,000 tonnes, and leaves the Year 7 (the first year of Phase 3) target of 25,000,000 tonnes a bit of a head shaker.
This simple analysis confirms what we already know, Verde's current growth limiting factor is not extraction, processing or distribution. Instead, it is getting the end user farmers to buy the finished product. Unlike a commodity producing deposit (gold, silver, copper, lithium) Verde's Glauconite Siltstone deposit does not have a constant demand market. The implication for the 2017 Study update from this now well accepted fact fs that we can expect to see a very different 35 Life of Mine production schedule. We have seen an indicator of this in Mr. Veloso's slide deck presented on June 16th. Slide 20 shows a fiscal 2021 sales target of 350,000. The next column showing the "Phase 2" 5,000,000 tonnes target has a descriptor "202?" suggesting this level of sales may not happen until possibly 2029. The "Phase 3" 25,000,000 production target is identified as "203?", so a level not expected until 2030, or as late as 2039.
As we well know, pushing production and revenues further into the future can significantly impact a NPV valuation, especially using an 8% discount factor. With this in mind, we should anticipate and accept a significant reduction from the NPV figures (about $2 billion US) in the 2017 Study.
Cheers,
S.