Fitzy: recoveries and palladium coming good for Chalice

It has been a horror year for Chalice Mining. Its market cap has been smashed from its April high of A$3 billion to $620 million (reports Barry FitzGerald on MiningNews).


The $2.38 billion value hit would normally be enough for a company to run and hide. But that is not the style of its youthful managing director Alex Dorsch.

The mechanical engineer and former man McKinsey man was the headline act at the LME Downunder dinner during Melbourne Cup week in the Plaza Ballroom at the Regent Theatre in Collins Street.

The location of the gala event was apt. The Melbourne City Council wanted to tear the Regent down in the 1970s. But public and union pressure prevailed, and the building was restored to its former glory.

The market has been busy tearing down Chalice in 2023, more specifically its world-scale Julimar nickel-copper-PGE discovery inboard of the Yilgarn craton margin some 70km north-east of Perth.

The release in late August of a scoping study in to the development of the Gonneville deposit at the southern end of the previously unrecognised 30km Julimar magmatic intrusive proved to be a wrecking ball.

Chalice's share price was already under pressure from the general weakness in metal prices and the broader equities market at the time. But the scoping study accelerated the process, with Chalice's pre-scoping study market cap diving from $1.96 billion to this week's $620 million.

Unfortunately, history dictates that was is said at a LME Downunder dinner speech stays within the Spanish barque confines of the Plaza Ballroom.

But an impression is okay.

"He was stoical. He knows the job ahead and is confident in the resource,'' was how one penguin suited attendee described Dorsch's dinner speech.

Following the market backlash to the August scoping study - mainly due to metal recoveries and a price deck well ahead of spot prices - Dorsch said at the time that Chalice would be going away to work on project enhancements.

He also noted the price deck - it had palladium at close to double the prevailing spot price - was not Chalice's, it was the work of the respected consultant, AME. And besides, Gonneville is not slated for first production until 2029 so any price assumption was crystal balling stuff.

Chalice's share price nevertheless remained under the pump.

But the opening weeks of November might well be seen as a turning point for Chalice and its Gonneville ambition.
Coinciding with his LME Downunder address, Dorsch announced the first of many project metallurgy enhancements that will find their way in to a more comprehensive pre-feasibility study targeted for mid-2025.

Specifically, on-going hydrometallurgical testwork has confirmed the potential for higher recoveries from "intermediate'' concentrates than what was assumed in the scoping study. It is one for the metallurgists but essentially the update highlighted the potential for a 2-3% improvement in hydrometallurgical recoveries of all six of Gonneville's payable metals.

Chalice said consideration of a bulk flotation flowsheet, not considered in the scoping study but common in PGE-dominant orebodies in South Africa and Canada, had the potential to further improve overall metallurgical recoveries and payabilities.

Thought is also being given to targeting higher-grade material - recoveries are sensitive to higher grades - in the early years of to underpin a development a starter project with lower upfront capex requirements.

Again, the enhancement work is on-going and goes to the project enhancements that Dorsch highlighted would be coming as the project moves towards a final investment decision, possibly with the backing of a strategic partner with downstream processing expertise, a trading house, an end-user, or another mining group.

Gina Rinehart's Hancock Prospecting is alert to what might come of the partnering process with her reported 4.9% Chalice stake. She has made a splash in the lithium space of late (Azure Minerals and Liontown Resouces) and seems keen to build a critical metals presence as a long-term diversification from iron ore.

Gonneville's magic mix of metals fits the bill. But action ahead of the release of the pre-feasibility study in mid-2025 seems unlikely.

The other scoping study factor that turned the market against Gonneville in August was the use of a US$2000/oz long-term palladium price assumption. The price was on its way down to a recent five-year low of $950/oz.

So much for western world sanctions against Russia - the world's biggest producer with 43% of production - in response to its invasion of Ukraine. But palladium has been working its way back up in recent weeks.

Overnight it closed at $1080/oz, a 13% improvement on its recent low. It is still well short of the $2000/oz used in the scoping study but at least the direction is right for a project like Gonneville with its high-sensitivity to palladium prices.

Bell Potter analyst David Coates said in a recent research note - that although Gonneville is highly leveraged to the currently depressed palladium price, the project would still be "generating respectable post-tax free cash flow.''

"We apply spot prices to our modelled assumptions to calculate recovered, payable metal values of A$63/t of ore milled. From this we calculate pre-tax all-in-sustaining cost margins of $15-20/t and post-tax margins (depending on depreciation and tax incentives) of $14-15/t milled for free cash flow at the project level of $100-220 million per annum,'' he said.

"This demonstrates that Gonneville has the ability to make money through the cycle - a key attribute of long-life, multi-generational assets and an attraction for strategic partners.''

Coates has a $5.40 a share valuation on the stock (Bell Potter Securities was the lead manager to a $70 million Chalice placement at $7.30 a share in May).

Macquire left its price target on the stock unchanged at $3.10 a share following the metallurgical testwork update.

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