RE: VIS - Q for you this time , teehee18 Mar 2023 10:52
Good Morning MO. You are not the only one struggling with investment decisions at the moment.
In stable situations where prices/costs do not move around a lot modelling cash flows to come up with a project NPV is a very useful way of assessing an investment proposal. Stating the obvious, that usefulness diminishes rapidly if there is considerable variability in the input numbers.
However, mostly the key inputs are assessed for their impact on the final NPV figure - i.e. a sensitivity analysis - which lets the reader know how much the end figure (the NPV) changes for a normally small change in the input variable. e.g. If the Lithium Hydroxide price rises 1% by how much does the NPV change?
The degree of sensitivity for many inputs often depends on the level of fixed costs within the model. i.e. the higher the level of fixed costs the greater the sensitivity of the NPV to changes in the variables.
Unusually in the last 12 months or so, because of the War in Ukraine, many costs that were not expected (pre-war) to change much, have changed a lot, and have become key variables e.g. energy costs.
In some cases the changes have been so great that the modelling has been rendered redundant as the whole industrial set-up has had to be re-configured. An example of this is Tungsten West where modelling for the planned flowsheet was ditched because the flowsheet had to change.
If, now we have more stability, and some prices return to more normal levels, it will be possible to give more credence to the models that are presented to investors, and the ability to make decisions will return.
My view is that COST inputs within models will become more reliable again and models will become more reliable as a result. Other key inputs are more difficult - for instance interest rates. These lie behind and are part of the discount rate used in the model to bring future cash flows back to a current value or NPV. (Net Present Value) Unfortunately the end result - the NPV tends to be very sensitive to the discount rate (influenced by interest rates). So although costs may have stabilised somewhat, interest rates have not.
However, what is a risk in deciding to invest in a start up project, has to be compared with a risk of staying in cash - the risk of erosion of value through inflation being a prime risk. Risk of being in OR out of a project may have risen recently. If one invests in a project which comes off, and a product results, then there is a good chance the product will protect the investor from inflation.
The big questions are:-Has the medium term outlook for lithium changed? Are we still going to be massively short of supply? Whatever happens to demand for EVs, electrification is underway and demand for batteries, cabling, transformers etc, looks set to continue to rise for decades. Mines take ages to open. We look to be set for shortages and high prices for years.
I hope that is helpful, sorry if I have blathered on about stu
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