TNG 20170526 draft - tngltd.com.au · Research Note RESEARCH NOTE – PATERSONS SECURITIES LIMITED...

Research Note

RESEARCH NOTE – PATERSONS SECURITIES LIMITED 1

All information and advice is confidential and for the private information of the person to whom it is provided and is provided without any responsibility or liability on any account whatsoever on the part of this firm or any member or employee thereof.

TNG LIMITED

SLOW MOVING BUT PEAKEING

• TNG Limited (TNG) continues to make progress in procuring the necessary support to develop its flagship Mount Peake Vanadium-Titanium-Iron (V-Ti-Fe) Project, a potential world-class project with promising financial outcomes based on its Definitive Feasibility Study (DFS). TNG has successfully signed three Life-of-Mine off-take agreements for its titanium oxide, pig iron and vanadium products planned to be extracted from Mount Peake. In December 2016, the Company signed an agreement with Sumitomo Electric Industries, and Energy Made Clean to jointly develop vanadium-based batteries, made locally for the Australian market. TNG has appointed engineering companies SMS Group (SMS) and Downer EDI Limited (Downer), for the development of the Mount Peake Project. While TNG may need to raise substantial capital to fund the development of Mount Peake, we believe the Project is of sufficient financial robustness under our long-term vanadium, titanium feedstock and magnetite price assumptions to support a significant component of debt financing, especially considering the tightening of supply in the vanadium market. We believe that TNG has a unique product position to sell three metals at low cost, long mine life, patented key processing technology and robust financial metrics. We retain our Speculative Buy with a price target of $0.34/share, as we believe that Mount Peake has the potential to become a Tier 1 asset.

• Confirmation for Darwin Refinery site: TNG received approval from the Northern Territory Government on the previous Notice of Intent (NOI, January 2017). Since then, TNG has now signed a Project Facilitation Agreement for the proposed TIVAN® refinery site at the port of Darwin. This is the first step in obtaining the land and necessary permits for the construction of the TIVAN® refinery in Darwin.

• Valuation: We value TNG at A$0.34/share using TNG’s disclosed information on the DFS. The main component of TNG’s value comes from the Mount Peake Project (Stage One only) worth an estimated A$980m or A$0.34 per share after discounting the Project’s cash flows at 12%, risking the Project by 30% and assuming a debt/equity ratio of 70/30 (given the binding agreements of three product off-takes already entered into). We modelled revenue using flat price assumptions for Titanium Dioxide (paint grade) of US$2,500/t, Vanadium Pentoxide at US$4/lb. and Pig Iron at US$350/t. As an upside case, we have also valued the Project including the potential development of Stage Two, which doubles output in year 6, with our valuation increasing to A$0.47/share.

• Sensitivities: We have tested the internal strength of the Mount Peake Project. As a result, TNG could still retain the Project if not including the production of Vanadium Pentoxide (A$606m or $0.16/share) or Pig Iron (A$447m or $0.12/share). However, it cannot exclude the production of Titanium Dioxide as it represents close to 60% of the total revenues. Meanwhile, an alternative funding of 80% of the required Capex by third parties, could decrease value (A$950m), but increase share price ($0.69/share) due to less dilution. A fully un-risked valuation, funded by third parties and discounted at 10% would value TNG at $1,580m or $1.16/share.

• Slow moving permitting but with progress: TNG continues to advance with the approval process of required permits. TNG is currently addressing questions (before 15 June 2017) to the Northern Territory Environmental Protection Authority (NTEPA) in regards to the Mount Peake project.

• Catalyst: The key catalysts in the near-term are: 1) The granting of the mining permits, which will trigger; 2) negotiation and potential finalisation of project financing arrangements, and then; 3) commencement of Project construction.

26 May 2017

12mth Rating Speculative Buy Price A$ 0.14 RIC: TNG.AX BBG: TNG AU Shares o/s m 804.5 Free Float % 76.8 Market Cap. A$m 112.6 Net Debt (Cash) A$m (8.3) Net Debt/Equity % n/a 3m Av. D. T’over A$m 0.12 52wk High/Low A$ 0.18-0.0985

Analyst: Juan Pablo Vargas de la Vega Phone: +61 8 9225 2818 Email: [email protected]

An investment in this company should be considered speculative and note assumptions employed are contingent on broader market conditions remaining supportive. These can change at short notice. Recommendations are current at the time of publication.

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26 May 2017 TNG Limited



OVERVIEW TNG Limited is an Australian resources company focused on the exploration, evaluation and development of a multi-commodity resource portfolio in the Northern Territory and Western Australia. TNG is currently focused on its 100% owned Mount Peake Vanadium-Titanium-Iron (V-Ti-Fe) Project (“Mount Peake”), with a positive Definitive Feasibility Study (DFS) released in 2015 and binding Life-of-Mine off-take agreements entered into. The Company has commenced the environmental and mining approval process (expected within the next six months) and hopes to achieve Project Financing for planned commencement of construction in CY2018.

TNG has developed its 100%-owned TIVAN® processing technology. TIVAN® is a process designed primarily for extracting vanadium pentoxide from a titano-magnetite ore body and for separating titanium and iron preferably as ferric oxide and titanium dioxide. The process has the potential to be the future standard for processing of similar commercially viable ores and deposits, with confirmed economic vanadium recoveries of >93%. An ongoing optimisation to the TIVAN® process has shown potential Opex savings of $50m pa. while increasing the vanadium recovery to 98%.

Furthermore, on 10 October 2016, TNG announced that it was able to produce high-purity, commercial grade vanadium electrolyte using vanadium pentoxide from Mount Peake. As a result, on 13 December 2016, TNG announced that had signed a Memorandum of Understanding (MOU) with Sumitomo Electric Industries (SEI) and local company Energy Made Clean (EMC) to jointly develop Australian-made Vanadium Redox Flow Batteries (VRF) for the Australian market. Under the agreement, SEI will provide the proven battery technology and battery demonstration, whilst EMC will provide the market platform and support in Australia and TNG will provide the vanadium electrolyte from Mount Peake.

TNG has appointed Gresham Partners to advice on funding solutions on Mount Peake to maximise TNG’s shareholder value and minimise dilution of its share base. Mount Peake has a significant capital expenditure (Capex) of A$970m (DFS, 2015). The Company is considering collaborative options where the contract companies and/or off-takers could provide the capex required to build the mine, plant and equipment; recovering its investment via an Opex charge. Alternatively, financing entities could participate at Company or Project level or all of the above.

According to management, the Company believes that the key trigger to start Mount Peake is the approval of the Mining Licence. Once granted, it will give the green light for Downer EDI to start construction of the Mount Peake mine. TNG expects that the permits will be granted within the next six months.

UPDATE Since our last update in March 2017, we remain positive on TNG. Despite the challenges for a large project like Mount Peake, we believe that TNG remains on course to move to a project developer. All updates relate to the advancing of permits for the development of Mount Peake.

On 5 April 2017, TNG indicated that the Mount Peake Environmental Approvals has advanced to the final stages with the submission of the Environmental Impact Statement (EIS) to the Northern Territory Environmental Protection Authority (NTEPA). The environmental approvals for the mind and Darwin refinery are being progressed separately, as both are located 1,400 km from each other and require to address significant different environmental and social issues at each site. According to TNG “The EIS identified and assessed the potential environmental and social impacts of the mine and provided management and control measures to reduce or mitigate potential risks in accordance with legislative requirements, industry standards and TNG’s environment, community, and health and safety policies. Potential impacts were assessed for water resources (groundwater and surface water), biodiversity (flora, vegetation and fauna), air and greenhouse gases, noise and vibration, Aboriginal and historical heritage, socio-economics, human health and safety, waste management and rehabilitation and closure”.

On 11 May 2017, TNG provided an update on the environmental approval process mentioning that the the enviriomental approval process for the mine site has progressed further with feedback received from the NTEPA relating to the EIS submitted in April 2017.

The questions from the NTEPA to TNG relate primarily to:

• Management of surface water and groundwater at the mine site; • Management of leachate from waste rock and tailings; • Options to reduce project water demand and associated project benefits; • Potential impacts to a small number of species of flora and fauna with potential to occur in the project

area;




• Commitments to maintain consultation with Traditional Owners in relation to survey findings, management of culturally significant sites and employment opportunities.

TNG will provide a response to the questions raised. The NTEPA will review the information received in consultation with advisory bodies and then has 35 days (before 15 June 2017) to provide an assessment report and recommendations for the proposal to TNG and the Minister for the Environment.

Overall permits for a new mine and plant development could take a while to be approved. This is due to the consulting process that has to be carried out to address all stake holders in the process being government, community and environmental. We retain our view that once the approvals are granted, the market perception of the project will change and will attract the market attention.

CAPITAL STRUCTURE

Figure 1: Current Capitalisation

Price in AUD 0.135

Shares Outstanding 804.5

Market Capitalisation 112

- Cash (estimate) 8.3

+ Total Debt 0.0

+ Preferred Equity 0.0

+ Minority Interest 0.0

Enterprise Value 103.7

Source: TNG Limited, Patersons Securities Limited

At the time of this report, TNG has no debt or minority interests. However, TNG will potentially need to accommodate a large debt position to fund the development of the Mount Peake Project.

TNG currently has 804.5m shares on issue and trades at a market capitalisation of $112m (@ $0.135/sh). Adjusting for the net cash position of $8.3m as at 31 March 2017, TNG has an enterprise value of $103.7m. The Company currently has four tranches of unquoted options, which expire on 6 June 2017 and 13 December 2019. Currently, no options are trading in-the-money.

Figure 2: Unquoted Options

Exercise Price On Issue (m) Exercise Date

20c 25.9 15-Jun-17

15c 3.5 6-Jun-18

20c 1.5 7-Sept-19

27c 11.0 13-Dec-19

Source: TNG Limited, Patersons Securities Limited

CORPORATE TNG’s cash position as at 31 March 2017 was approximate $8.3m, after exploration, evaluation and administration costs.

TNG estimate a cash burn of $2.4m for next quarter. Thus, the Company is funded in the near term. However, the pre-production capital cost of A$970m (Stage 1) highlighted in the DFS, represents a large funding hurdle, which will need to be supported by a favourable outlook for vanadium, titanium and magnetite prices. With the off-take agreements with WOOJIN, Wogen and Gunvor, we envisage financing to be skewed towards debt and believe the need for a large capital raising and significant shareholder dilution remains controllable, though clearly a management challenge

With continued progress of regulatory and financing approvals, TNG should be in a position to commence development of the Mount Peake project by late CY2017, once its mining permits are granted.




VALUATION We have valued of TNG’s Mount Peake Project using the available and disclosed information in regards to production and costings. Hence, the assessment was performed using simple parameters as no mine plan or a detailed cost breakdown has been disclosed in the DFS. Given the new technology developed for the extraction process, Mount Peake presents new technology and an Australian first Project of its kind; we have not included in our valuation any research & development (R&D) credits that the Project may receive.

We have valued TNG at $0.34/share (after dilution), using a sum-of-parts methodology. The main component of TNG’s value comes from the Mount Peake Project (Stage one only) worth an estimated A$1,128m or A$0.34 per share. We have also included the 10.77% of TNG in Todd River Resources (est. c. A$1.4m) and the TNG’s cash position as 31 March 2017 of A$8.3m into our estimate.

We have discounted the Project’s cash flows at a 12% rate and risked 30% of the Project value to account for uncertainties with the new technology development as well as a higher cost per tonne (A$167/t vs A192/t). Our valuation includes the diluted shares from an assumed capital raising to fund the estimated capex of A$970m using 30% equity (given the binding agreements of three off-takes already in place, we see this as realistic) and using a raising price of 90% of the current share price. Using the same methodology, we have estimated the value of Stage One + Stage Two at A$1,531m or $0.47/share.

We have assumed a long-term flat price for Titanium Dioxide (paint grade) of US$2,500/t, Vanadium Pentoxide at US$4/lb and Pig Iron at US$350/t. We agree with TNG’s view on their price assumptions and believe that the expectations for each product are conservative.

Revenue-wise, the primary driver of the Mount-Peake Project is expected to be from the sales of its Titanium Dioxide (60%) followed by Pig Iron (20%) and lastly Vanadium Pentoxide (19%). As it stands, Mount Peake could operate with the sales of two commodities, Titanium dioxide and Pig Iron or Titanium Pentoxide. If the Vanadium Pentoxide revenue is removed, the Project value is reduced from A$980m to A$462m.

The Project’s Capex is an important item being US$722m (A$970m) in Stage one to A$1.5bn in Stage two. We have decided to exclude Stage Two from our price target valuation of TNG, as it remains too distant to assume it with any high degree of certainty, at this point in time.

We do note the potential negative implications and hazards of this larger debt burden on the Company’s Balance Sheet, should TNG finance a large part of the capital requirements for the Mount Peake Project. Hence, we believe that it is important for TNG to optimise and reduce the capital & working capital requirements given the large size of the Project compared to its market cap.

We note that TNG is taking the previous point into account and has signed two project development agreements (SMS Group for the refinery and one with Downer for the mining and concentrator) which could reduce TNG’s capital requirements significantly. We will show in the sensitivities chapter the value effect on capital reduction to the Mount Peake Project. Also, a potential solution to fund the investment, is to include further third parties that can participate at the project level for Project funding, thereby reducing risk.

SENSITIVITIES

We have tested Stage 1 upside case sensitivities with a focus on the Project’s endogenous variables that affect the Company value. A table summary of the following scenarios can be seen below on Figure 3.

We will be testing the following cases:

• No Vanadium: We assume the production from titanium dioxide and pig iron are only excluding vanadium pentoxide production. Discount rate at 12% and project risked at 30%. No changes in capex or Opex.

• No TiO2: We assume the production from vanadium pentoxide and pig iron are only excluding the titanium dioxide production. Discount rate at 12% and project risked at 30%. No changes in capex or Opex

• No Pig Iron: We assume the production from vanadium pentoxide and titanium dioxide are only excluding the pig iron production. Discount rate at 12% and project risked at 30%. No changes in capex or Opex

• Base Case: assumes parameters discussed in the valuation section.




• Low Capex/ High Opex: This case assumes a 80% reduction in total Capex assuming that the mine, concentrator, refinery for the Mount Peake Project will be built by third parties. The business model assumes that the third parties will charge a higher charge per tonne in opex to recover the investment and operational margins. We have assumed that the third parties will charge 10% extra over the current cost per tonne plus an extra 15% as operational margin for the business. Overall, the cost per tonne will increase 30%.

• Unrisked Value: This scenario assumes the previous case without risking the value of the project and a discount rate of 10%.

• Stage 1 & 2: We test the upside value of expanding Mount Peake to Stage 2 assuming the same parameters as Stage 1 (Base Case).

Figure 3: TNG Share Price Sensibility Table

Cases Base Case

No Vanadium

No TiO2 No Pig Iron Low Capex/High

Opex

Unrisked Value

Stage 1 & 2

Company Value A$m 1,128 606 -1.296 447 950 1,580 1530

Discount rate % 12 12 12 12 12 10 12

Project Risked Value % 30 30 30 30 30 0 30

Opex A$/t 192 192 192 192 250 250 192

Initial Capex A$m 970 970 970 970 194 194 970

Issued Shares m 3,271 3,271 3,271 3,271 1,294 1.331 3,271

TNG A$/share 0.34 0.18 0 0.13 0.69 1.16 0.47

Source: Patersons Securities Limited Estimate

The sensitivities show that TNG is highly susceptible to capex requirements. This is due to TNG’s market value being significantly lower than the capital requirements to fund Mount Peake (A$112m vs. A$970m). We point that TNG’s value is lower when Mount Peake is funded by third parties charging a higher opex to recover the investment (A$1,128m vs. A$950m). However, the lower capex requirements translate into a lower dilution increasing the value per share of TNG ($0.34/share vs. $0.69/share).

The sensitivities also show that Mount Peake can afford to produce 2 out of 3 products but cannot exclude the titanium dioxide from its production as it represents c.60% of the total revenues.

CATALYSTS In our view, TNG has the potential to be a tier-one mining and mineral processing project and believe that the project will get to see the light of day with a potential significant return on investment. The Project has in place all the products off-take required to de-risk a large project as Mount Peake. The problem for TNG is that the market is expecting things to move at a faster peace and also meeting TNG previous indicated deadlines. Overall, TNG has a market perception problem from a large and slow moving project. We believe that these perceptions will be override as soon as the permits are granted and the development of Mount Peake commences.

We estimate that the key catalysts in the near-term are: 1) The granting of the mining permits, which will trigger; 2) negotiation and potential finalisation of project financing arrangements, and then; 3) commencement of Project construction.




RISKS • Resource risk. There is a risk that, in the future, Mineral Resources may be negatively revised,

impacting the size and quality of the Project, and that any exploration targets may not be confirmed.

• Commodity price risk. Declines in Titanium Dioxide, Pig Iron or Vanadium Pentoxide prices would negatively impact the revenues and profitability of TNG’s project.

• Exchange rate risk. TNG share price is denominated in A$ and yet its commodities are priced in

US$. Any rise in the A$ may reduce translational impact of US$ into A$.

• Operating risk. Problems may occur during the mining, processing, transporting and selling of products that may negatively impact revenues, costs, and profit. These problems may or may not be foreseen in any feasibility, economic assessment, scoping, or conceptual studies undertaken by the company or other parties.

• Funding risk. The Company may not be able to source the necessary funding for developing its Mount Peake Project, so may require highly dilutive equity raising and/or debt that may dilute shareholders or cause TNG to not meet debt payments.

• Technology risk. Changes in technology may reduce the demand for Titanium Dioxide, Pig Iron or Vanadium Pentoxide, affecting growth, prices and the profitability of TNG.

BOARD OF DIRECTORS Managing Director - Paul Burton

Mr Burton is an Exploration Geologist and Geochemist with over 20 years' experience in exploration and mining throughout Australia and overseas.

He previously held the positions of Exploration Manager and Exploration Director with the company and has been involved in the discovery and development of the company's main projects, including its Flagship Project Mount Peake.

He has also managed successful mineral exploration and feasibility study programs for a range of different commodities, with previous career appointments including senior and executive roles at Anglo American/De Beers Ltd, Normandy Mining Ltd and Minotaur Exploration Ltd.

Mr Burton is a graduate of the University of Plymouth, UK (B.Sc Honours Geology), and of McGill University, Canada where he completed the M.Sc in Mineral Exploration.

Mr Burton is a Member of Australian Institute of Mining and Metallurgy, Australian Institute of Company Directors (GAICD), Canadian Institute of Mining, Metallurgy and Petroleum (CIM), a Fellow of the Association of Exploration Geochemists and a Member of the Institute of Directors, London.

Non-Executive Director - Rex Turkington

Mr Turkington is a highly experienced corporate advisor and economist who has worked extensively in the financial services and stockbroking industry in Australia, specialising in the exploration and mining sectors.

He has extensive experience with equities, derivatives, foreign exchange and commodities, and has participated in numerous corporate initial public offerings and capital raisings for listed exploration and mining companies.

Mr Turkington is currently a Director of an Australian corporate advisory company, offering corporate finance and investor relations advice to listed companies. He holds a first class Honours Degree in Economics, BCA. GAICD. AAFSI. ADA1. (ASX), and is an Associate of the Securities Institute of Australia.

Non-Executive Director - Stuart Crow

Mr Crow has more than 25 years’ experience in all aspects of corporate finance and investor relations in Australia and international markets and has owned and operated his own businesses in these areas for the last twelve years. He brings extensive working knowledge of capital markets to the Board.




Non-Executive Director - John Davidson

Mr Davidson is a highly-regarded renewable energy executive with more than 30 years’ experience leading major strategic business initiatives, business transformation and capital raising initiatives in a diverse range of industries, particularly the renewable energy and technology sectors. He is the founder and Managing Director of Energy Made Clean (EMC), a leading Perth based renewable energy company providing off-grid power and utility-scale solutions, which was acquired by ASX-listed Carnegie Clean Energy in 2016.

Mr Davidson has worked in strategic collaboration with TNG since 2015 on the promotion, development and growth of Australia’s emerging Vanadium Redox Flow Battery (“VRF”) market, which will help TNG to progress its strategy for full vertical integration of the vanadium supply chain. He was appointed to the Board in February 2017 as a Non-Executive Director. Mr Davidson is also an Executive Director of Carnegie Clean Energy (ASX: CCE).

Company Secretary - Mr Simon Robertson

Mr Robertson gained a Bachelor of Business from Curtin University in Western Australia and Master of Applied Finance from Macquarie University in New South Wales. He is a member of the Institute of Chartered Accountants and the Chartered Secretaries Australia.

Mr Robertson currently holds the position of Company Secretary for a number of publically listed companies and has experience in corporate finance, accounting and administration, capital raisings and ASX compliance and regulatory requirements.




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TNG 20170526 draft - tngltd.com.au · Research Note RESEARCH NOTE – PATERSONS SECURITIES LIMITED...

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