Should the government do more to help developers?

As long ago as September 2008, TNG announced that it was ready to commence drilling at its Mount Peake prospect in the Northern Territory.As it turned out, the announcement made little impact on the company's then market value of A$9 million. Investors made a wise decision if they chose to ignore the company for the next dozen or so years. By March 2020, the company's share price was just 19% higher. Over the past year, as central banks have pumped cheap money into the capital markets, some of the riskiest investments have been among the best performers. TNG has produced a return of 112% since the COVID-19 equity market panic at the end of March 2020. Even so, the median gain across the entire population of ASX listed resource companies has been 140%. It was easy enough to find something better.Today's market capitalisation of A$115 million could be construed as a modest price for an investment recently accorded major project status by the Australian government.Newly appointed TNG chief financial officer Jonathan Fisher briefed investors last week about the progress of the budding vanadium-titanium-iron mine developer, enthusiastically characterising the opportunity as "an absolute killer investment proposition".Underpinning the investment attractiveness is a flat near surface 2,000 x 350 x 100 metre orebody. The 160 million tonne resource containing 0.28% vanadium pentoxide and 5.3% titanium dioxide includes proven and probable reserves of 41.1 million tonnes.An updated November 2017 feasibility study had posited an A$853 million upfront capital requirement to produce cash flows of $11.7 billion over 17 years from processing 81 million tonnes of ore.Critical to the financial outcome is the company's planned proprietary processing route.Conventional production techniques used to process one tonne of titano-magnetite concentrate would result in revenue of US$115 from the production and sale of 6.3 kilograms of vanadium pentoxide, according to Fisher. The company's TIVAN processing technology, on the other hand, would result in revenue of US$726 of which 63% would be attributable to titanium dioxide and 19% to vanadium pentoxide. The balance would come from sales of iron oxide fines.The company believes that all three products will sell at premium prices to the relevant benchmarks.The TIVAN technology, permitting three saleable products rather than one, is being hailed by the company as both more profitable and more environmentally friendly than alternative options.Although located in central Australia, the project is near all relevant infrastructure including an underutilised rail link to Darwin and a gas pipeline. Beneficiated ore, transported to Darwin, would be processed at a purpose-built plant adjacent to the port, providing ready access to Asian markets.The company has also found offtake partners for all of the anticipated production, at least for this first stage of the project. Fisher referred to a possible duplicate plant sometime in the future.So, what's not to like? For one, final environmental approvals and land access agreements are not yet finalised although, with support from all levels of government and traditional land owners, no problems are expected.The big gap in the investment story is ‘no funding'. The company had just A$14.9 million in cash at the end of March. KPMG is advising directors on capital access and Germany's KfW IPEX-Bank has been given a mandate to raise up to US$600 million.TNG is by no means the first company to stall at a similar stage. This is often the most risky point in the life cycle of a mineral development project. Equity investor scepticism about how quickly debt funding can be arranged also depresses prices, further raising the cost of capital.Fisher was upbeat about the Mount Peake funding prospects, asserting that "we will get this project financed" to which ordinary equity investors are just as likely to say "we have heard that before".While Fisher was downplaying the likelihood of a funding shortfall, the Rex Minerals chief executive was about to highlight a similar funding challenge for his Hillside project in South Australia.Speaking to investors at an investment forum this week, Richard Laufmann also drew attention to the unique attributes of his copper project. A A$585 million capital outlay, in this case, could generate annual EBITDA of A$153 million. And that was with an assumed copper price of US$3/lb. The Rex boss told investors that copper prices would push well above US$7/lb. At the same time, Laufmann criticised politicians for their indifference to the plight of project developers.Laufmann described a world unable to pursue new energy sources due to insufficient supplies of copper, even at currently inflated prices, as an emerging tragedy. You would think that politicians would be lining up to help, he complained.The Australian government could ensure projects such as Mount Peake and Hillside get the funding they need easily enough, if it had a mind to do so. Australian politicians have been philosophically united for many decades against putting public money at risk for the sake of private returns.But the mood is changing. Efforts to lower carbon emissions are now riddled with government decisions about what works and what does not. *John Robertson is the chief investment strategist for PortfolioDirect, an Australia-based equity research and resource stock rating group. He has worked as a policy economist, business strategist and investment professional for nearly 30 years, after starting his career as a federal treasury economist in Canberra, Australia.

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