Rex Minerals (ASX:RXM) has released the outcome of the feasibility study it has conducted on its Hillside copper-gold project in South Australia. The project will cost A$480M to develop (including a relatively low A$40M contingency, so one better keeps A$500M in mind as definitive capex). This should result in an operation producing just over 75 million pounds of copper per year, as well as almost 25,000 ounces of gold at a C1 cash cost of $1.61 per pound of copper.
The economics are a little bit disappointing as the IRR based on a copper price of $3/lbs is just 14%. The after-tax NPV8% is A$188M which is fine compared to Rex’ market capitalization, but it will be tough to build a project with an NPV that is less than 40% of the initially needed risk capital.
Another point of attention is the exchange rate used by Rex Minerals. The company used an USD/AUD exchange rate of 1.33 for the capital expenditures (which is totally find and in line with the current exchange rate), but Rex is using an exchange rate of 1.40 for the production process. This could potentially mean the company is underestimating the production costs by 7% based on the current USD/AUD exchange rate. We hope Rex Minerals is right, but let’s be clear; this feasibility study wasn’t extremely conservative if you look at the used copper price and exchange rates. But on the positive side, using an 8% discount rate for an Australian project is quite conservative and we would have loved to see a sensitivity analysis to check the after-tax NPV using a lower discount rate of just 6%.
> Click here to go to Rex’ website
Disclosure: The author holds no position in Rex Minerals. Please see our disclaimer for current positions.
