Chalice landed a deal with Mitsubishi – So why did the stock sell off 20%?
A partnership with Mitsubishi turned out to be a non-binding MOU, disappointing investors after months of anticipation.
Source: iStock
Mentioned
KEY POINTS
- Chalice Mining's announced partnership with Mitsubishi for its Gonneville Project is a non-binding MOU, disappointing investors after months of anticipation
- The market reacted negatively to the vague announcement, with Chalice's stock closing down 19.5% despite initially opening 6.9% higher
- Gonneville's economic viability heavily depends on palladium prices, which are currently at 4-year lows, explaining Mitsubishi's cautious approach with a non-binding agreement
Chalice Mining (ASX: CHN) has spent much of this year hinting at ongoing discussions with potential strategic partners for its Gonneville PGE-Nickel-Copper-Cobalt Project in Western Australia
However, after months of building anticipation, the company's big reveal turned out to be a mere non-binding memorandum of understanding with Mitsubishi.
Dangle the carrot
Pretty much every single announcement year-to-date has hinted at ongoing discussions for a major backer or partner for Gonneville.
Corporate update (22 Jan): "Positive progress made with potential strategic partners for the Gonneville Project, reinforcing the long-term strategic nature and value of the project"
Quarterly Activities & Cashflow Report (31 Jan): "Positive progress made with potential strategic partners for the Project."
Gonneville Resource Remodeled to Support Selective Mining (23 April): "A strategic partner progress is continuing in parallel with the progress of development studies and regulatory approval."
Gonneville Project Metallurgical Testwork and PFS Update (11 June): "Chalice commenced a process in April 2023 to attract a tier-1 strategic partner for Gonneville, with financial, technical and marketing capabilities to assist Chalice in developing the Project."
'Strategic' MOU
At first glance, the announcement seems promising: Mitsubishi will collaborate with Chalice during the ongoing pre-feasibility study, with the intent to form a strategic partnership for Gonneville's development.
Chalice touts Mitsubishi as a tier-1 strategic partner, citing its history of successfully funding and developing major mining projects worldwide. The announcement highlights Mitsubishi's broad capabilities, including equity and debt financing, marketing, and project development.
But how much weight does this announcement carry when it's merely a non-binding memorandum of understanding?
Playing in shorters
The market's skepticism towards Chalice is already evident, with the company ranking as the 8th most shorted stock on the ASX, carrying a 9.29% short interest.
A binding deal with details about funding and project development could have triggered a short squeeze. Instead, the vague announcement lacking specifics was met with a harsh market reaction.
Chalice shares initially opened 6.9% higher, but the enthusiasm was short-lived. The stock spent the entire session in decline, ultimately closing down 19.5%.
Chalice Mining intraday chart on Wednesday, 3 July 2024 (Source: TradingView)
C'mon Palladium
Chalice's Gonneville scoping study (released in August 2023) outlined some fairly robust project economics including:
Post tax net present value (NPV) of between $2.8 billion to $4.2 billion
Capex of between $1.6 billion to $2.3 billion
A payback period of approximately two years for both cases
Post tax-free cash flow of between $440 million and $690 million per annum over the life of the mine
However, these projections rely on optimistic commodity price assumptions, particularly a palladium price of US$2,000 per ounce. With palladium expected to generate about 55% of Gonneville's revenue but currently trading at around US$1,000 per ounce, Chalice essentially becomes a leveraged play on palladium prices, (with added funding and development risks).
In an ideal scenario where palladium surpasses US$2,000 per ounce, Gonneville could be lucrative and cash generating project. However, with palladium prices hovering near 4-year lows, Mitsubishi's decision to opt for a non-binding MOU becomes more understandable.
