Chalice Mining's blowout: How a high-profile scoping study went so wrong

Shares in Chalice Mining (ASX: CHN) cratered more than 20% on Wednesday after its long-awaited scoping study opted for lofty commodity price assumptions such as US$2,000 an ounce for palladium compared to current levels of US$1,250 an ounce.

The study outlines Chalice's Gonneville deposit as a "new long-life, low-cost, low-carbon green metals project in Western Australia". But to find out the exact economics of the project, you'd have to scroll all the way down to page 8 and then page 12 for its key assumptions.

In this piece, we'll break down all the interesting tidbits about Gonneville's economics.

Gonneville at a glance

The scoping study models a 15 million tonnes per annum (Mtpa) and 30Mtpa case. The below outlines outputs and metrics at the midpoint of the two cases.

Production

• Annual palladium, platinum and gold production between 280,000 to 470,000 ounces

• Annual nickel production between 9,000 to 16,000 tonnes

• Annual copper production between 10,000 to 16,000 tonnes

• Annual cobalt production between 800 to 1,400 tonnes

Economics

• Post tax net present value of between $2.8 billion to $4.2 billion

• Capex of between $1.6 billion to $2.3 billion

• A payback period of approximately 2 years for both cases

• Post tax-free cash flow of between $440 million and $690 million per annum over the life of the mine.

At face value, Chalice is set to produce a lot of metals, at a decent NPV (relative to its market cap of around $1.5 billion) with a relatively short payback period.

But here's where things get a little tricky.

Bullish commodity price assumptions

The scoping study is based on some rather outlandish commodity price assumptions, which we'll highlight and compare with current spot prices.

Source: Chalice Mining Scoping Study | Current prices from TradingEconomics

Palladium is expected to account for approximately 55% of revenue from the mine, followed by nickel (24%), copper (12%) and cobalt (4%).

Chalice has an assumed life of mine average annual revenue between $1.3 billion and $2.1 billion (or $1.7 billion at the midpoint).

If we replace the US$2,000 palladium price assumption with spot prices, that would theoretically lower the midpoint LoM revenue figure from $1.7 billion to $1.33 billion.

And that's just looking at prices and leaving other assumptions such as grade, recovery and payability unchanged.

In response to the commodity price assumptions, Chalice managing director Alex Dorsch said "There is about seven plus years until we are actually producing any metal, so we are not talking about producing in the current commodity price environment, nor have we designed our operation in the current spot price, commodity price environment," the Australian Financial Review reported.

“We are designing a 20-year operation ... we are trying to understand those long-term dynamics as best as possible."

Another lofty assumption

The weighted average cost of capital (WACC) measures the cost of a company's debt and equity.

The scoping study assumes a WACC (real) of 6.5%, which might sound a little optimistic given the current interest rate environment.

Ratings gone wrong

At the beginning of August, Macquarie was Outperform rated on Chalice with a $9.20 target price.

"The Gonneville deposit is world-class and remains open at depth and along strike. The release of the scoping study, which should confirm capex and opex and key metallurgical recovery rates, particularly for palladium and nickel, is the key focus area in the near term," the analysts said in the note.

Interestingly, Macquarie's long-term palladium assumption (which only goes as far as mid-2027) is around US$1,000 an ounce.

Source: Macquarie Research