Australian Strategic Materials (ASM) whipsaws on optimisation results

Emerging integrated rare earths producer Australian Strategic Materials (ASM) has returned “strong financial results” following the outcome of an optimisation study for its Dubbo Project.

The Dubbo Project is situated in Western NSW and represents a large, diverse resource of rare earths, zirconium and other critical metals used in batteries and electronics. The company has a “mine to metal” strategy to extract, refine and manufacture high-purity metals and alloys, supplying directly to manufacturing sectors. 

The optimisation work confirmed a strong expected rate of return for the project, with a pre-tax net present value (NPV) of $2.36bn and a mine life of 20 years. 

The project will require a forecasted $1.68bn in initial capital costs and $287m in annual operating costs. At full production capacity, its expected to generate $15.8bn in revenue with annual free cash flows of $425m. 

Improving the project’s Environmental, Social, and Governance (ESG) performance was a clear priority for the optimisation study. It is understood that new strategies will be deployed to facilitate ESG benefits such as reducing water consumption, reducing the handling of chemicals and reducing the number of trucks on local roads. 

The company’s managing director David Woodall believes the optimisation work supports a “strong go forward case” for the development of Dubbo. 

“These exciting outcomes allow the ASM team to focus on progressing the financing, engineering, and construction strategy, and to secure offtake agreements for the integrated metals business.”

Why the selloff? 

ASM had an encouraging open, rallying 5.9% at the morning bell. But by 10:40 am, a flurry of selling activity would drive its shares to down -11.2%. 

The optimisation study draws from long-term price assumptions for its basket of metals, to which every metal is expected to increase in price.

While rare earths and critical metals are clearly in demand, the assumptions make the project highly sensitive to any price changes. The company’s sensitivity analysis flagged that a -15% decrease in revenue would wipe $600m off the project’s NPV. 

From a valuation perspective, ASM has ballooned to a market capitalisation of $1.6bn, on par with its post-tax NPV of $1.58bn.