Chalice Mining (ASX:CHN) has released its long-awaited Gonneville PFS! It could deliver A$4.7bn in cash flows, but challenges remain

This morning’s release of the Gonneville PFS marks the most important moment for Chalice Mining (ASX:CHN) since Gonneville was discovered across 2020-21.

Gonneville, which will be Australia’s first ever primary Platinum Group Metal (PGM) mine, has an impressive resource with potential to deliver over 220,000/oz per annum of 3E metals (palladium, platinum and gold) along with 7kt of nickel, 8kt copper and 0.7kt cobalt, over an initial life of more than 20 years. There’s plenty of other metrics to show its potential, but challenges remain.

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Gonneville: A one of a kind discovery

In March 2020, the world was shutting down. And, Chalice Mining (then a company focused on gold with a business model of finding deposits and then selling them rather than putting them into production) stumbled across a major deposit an hour from Perth.

Julimar, or specifically the Gonneville prospect at the project, was the largest nickel sulphide discovery anywhere in the world in 2 decades and the largest PGE (Platinum Group elements) discovery in Australian history. And keep in mind that was the maiden Resource in 2021 and is just ~2km of a broader >30km long Julimar complex!

The company could not have timed its run better with the Australian government (and Western allies) keen for critical minerals, such as Palladium, Platinum, Nickel and cobalt. They are all important for emerging decarbonisation technologies, such as electric vehicles, hydrogen, energy storage and semiconductors, just to name a few. They are also important for data centres and defence. 93% of current PGM supplies from from Russia, South Africa and Zimbabwe.

Finally a Gonneville PFS!

After previous Scoping Studies, Chalice finally released a PFS (Preliminary Feasibility Study). The previous scoping studies (like any other so-called scoping studies completed by aspiring mine developers) is an initial, high-level appraisal that is largely conceptual. But a preliminary feasibility study (PFS) is a more detailed, intermediate assessment.

The study outlined the potential returns for a future mine and there were impressive figures. The cumulative free cash flow was A$4.7bn in a base case scenario with US$1,300/oz platinum, US$2,900/oz gold, US$39,000/oz cobalt. But with a ‘spot price’ scenario of US$1,500/oz palladium, US$1,660/oz platinum, US$4,250/oz gold, US$14,900/t nickel and US$12,050/t copper, this was US$6.2bn.

The NPV (using an 8% discount rate) was A$1.4bn pre-tax and A$1bn post tax with those figures being A$2bn and A$1.5bn at spot prices. The pre-tax IRR was 23%, increasing to 29% at spot pices, and a Stage 1 payback of less than 3 years.

The project would make 51% of revenue from palladium, 22% from nickel, 17% from copper and the balance from by-products. It was shown to be low-cost with US$370/oz 3E projected from Year 4 onwards with just US$50/oz in the first 3 taking account of byproduct credits. It will be the lowest cost mine in the Western world.

Chalice has invested $240m to date including >1,200 resource definition drill holes, 33 dedicated metallurgical drill holds and over 1,400 metallurgical tests and 58 geotech-logged drill holes. Once the mine is in place it will employ 500 people full time and 1,200 when it is constructed. It will deliver A$1.5bn in taxes and royalties.

And most importantly, 50% of the resource is unmined below the pit shell, and inclusion of this could substantially boost the resource.

The downsides

The key downside is the cost required to make it an operating mine. The figure has come in at $820m, including contingency. This does not include the expansion to Stage 2 (a further $20m) nor any sustaining capex. An FID has not been made yet and this will come in the first half of 2028. Chalice purports to be fully funded to this point with A$76m in investments, but a lot more money will be needed to fund construction.

Chalice has indicated this funding will be sourced from several sources including state and federal government initiatives, commercial banks, debt investors, green finance providers and offtake partners. Investors have been told there’ll be a better idea of how Gonneville will be funded at its Definitive Feasibility Study which is due in the first half of 2027.

Also keep in mind that the majority of the JROC Resource at Gonneville is in lower confidence intervals. of the 17Moz 3E, just 0.12 is Measured whilst 10M is Indicated and 6.4Moz is Inferred. Looking at the nickel resource, just 6.1kt of the 960kt is Measured and just 4.8kt of the 540kt Copper Resource is Measured.

There is also more work to do from a regulatory perspective including converting the Exploration Lease to a mining Lease and to submit Environmental Review Documents. The risk of negative community sentiment is legitimate too.

And of course, the plans for Gonneville are all contingent on commodity prices prices. Now there is some downside that can happen below spot prices whereby the project will still be viable (i.e. with an IRR of over 15%), but this is out of the company’s control.

Conclusion

It is clear that there is potential for a substantially lucrative project at Gonneville. But it is still some time away from production and that is even if it all goes to plan. The DFS won’t be complete until the first half of 2027, then funding and environmental approvals in the first half of 2028. And then, first production in early 2030…again, assuming it all goes to plan.

Chalice investors should be prepared to wait until then to realise returns…they’ll be disappointed if they expect a 50-100% return in a few months unless commodity prices rally by a very similar amount.

The parties that should be happiest in light of today’s news are Western governments (the Australian, West Australian and other Western governments). In Gonneville, they have a new source of revenue and for critical minerals other than Russia or China.