5yr Senior Secured - IPT 11-12%
IAM CM View
The Hastings new bond issue is no doubt an attractive asset in an attractive sector, which has a NAIF facility parri-passu to the bond deal. The main risk is construction risk; however, bondholders are protected by having security over all assets, a relatively strict bond escrow drawdown mechanism (being subject to cost-to-complete tests on each drawdown), while the Equity Spend Condition reduces bond amount at risk early in the project’s life. The bond structure also includes financial maintenance covenants and amortises after 42 months, reducing the refinance risk.
The initial estimates are that Yangibana will generate an average EBITDA of c.AUD190m pa (excluding SG&A) during the bond tenor from start of production vs total debt of c.AUD467m (USD350m bond) – so around 2.5x debt/average EBITDA. Furthermore, this assumes a base case price of NdPr which is well below current pricing – see Pareto Research below which shows base case pricing. We note Hastings has secured offtake agreements for 84% of expected volume to be produced during the bond tenor – so there is limited slippage here. On recoverability, the bond asset backing is significantly strong and will still be covered by discounted cashflows (DCF) at prices 25% below base case. In terms of rare earth applications, Hastings is in the light rare earths complex. For e.g., Lynas, mines cerium (Ce) and neodymium (Nd) – so has some overlap on the high value Nd but not on Praseodymium (Pr).
Again, comparables are limited in this space. However, there are three comps below which makes the new Hastings bond look quite attractive if priced at 12%.
- CBRNRS (Coburn/Strandline): YTM of c.12% – fair, but this line will probably be called early
- JERMNG (Jervois): YTM of c.11% – cheaper
- PMBROV (Pembroke): YTM of c.10% – cheaper
One thing to note is that these three comps have earlier calls which could easily get enacted. A large part of the early call will be predicated on the progress of the projects construction and move towards production phase. Thus, the YTC would be lower than the quoted YTMs noted above and investors would be required to replace their capital into other higher-income producing bonds. Coburn/Strandline, for e.g., is just c.6 months away from first production and our base case expectation would be a call on these bonds in December 2023 at 104.80px.
Credit Strengths
- Yangibana rare earth project is a long life critical mineral mining project in a Tier-1 mining region
- High margin, low capital cost and strong project IRR
- Strong market outlook, green transition increasing demand for permanent magnets
- Highly proven management team with experience from Lynas Group, Finders Resources, Otto Energy and First Quantum Minerals
- NAIF AUD140m, 12.5 year loan facility for the development of Yangibana which ranks parri-passu to the bond deal
Credit Weaknesses
- Construction risk or commissioning delays, could result in cost overruns or increases in the Yangibana project costs above what’s budgeted
- Volatility in the price of rare earth elements, including high value Neodymium and Praseodymium (NdPr)
- The rare earths supply chain is highly dependent on China
- Offtake agreements with future customers fall through or are not gained as expected
- The development attributes are not achieved, such as size, grade, and deposit – we would note there has been a Defined Feasibility Study (DFS) which also an independent technical review.
Credit Fundamentals
Hastings is a leading Australian rare earth development company with the major asset being the Yangibana rare earth project located in WA. The company is listed on the ASX (HAS AU Equity) with a market capitalisation of c.AUD567m (as of 2nd May 2022). Major shareholders are L1 Capital and Foon Keong (Charles) Lew. Hastings is looking to raise between USD300-350m in senior secured bonds to partly finance the Yangibana project. The total project cost estimate is USD494m (or AUD658m) including a contingency buffer of USD57m (or AUD76m, of which is significantly lower compared to other prospective rare earth projects). Notably, USD347m will be injected in equity first on the Yangibana project including capex, funding cost overrun accounts, bond interest and financing fees before any release of bond proceeds from an escrow account. First release of bond proceeds from escrow account is expected to be Q2 2023. Remaining capex is estimated to be AUD370m (56% remaining) at the end of Q1 2023.
Early works commenced Q1 2022, product scheduled for 2024.
Converted to USD using an exchange rate of AUDUSD0.75. Assuming a USD350m bond raise.
Mitigating construction risks, an independent engineer will monitor the project development and control the release of bond proceeds from the escrow account on a cost-to-complete basis. The bond issue will be fully secured and amortising in nature, with a 5 year and amortisation (semi-annual repayments of 13.33%) commencing at 42 months (or 3.5 years). There will be a 60% balloon payment at maturity.
The Yangibana project is comprised of a conventional mining (open pit) operation and a beneficiation processing plant at Yangibana, as well as a hydrometallurgical processing plant at Onslow, WA. The project has a mine-life of 15 years with 16.7Mt of reserves and 27.4mt of resources. The Yangibana project will produce a high-grade Mixed Rare Earth Carbonate (MREC) with 90% of revenue derived from high value Neodymium and Praseodymium (NdPr). Yangibana contains an average Life of Mine (LOM) NdPr of 36%. The LOM operational margin will sit in the first-quartile of the global cash margin curve for rare earth producers. Post-tax NPV8 of c.AUD1b with a project post-tax IRR of 26%.
NdPr demand is correlated to permanent magnet demand for wind turbines and EV motors as it is a key component. The demand for NdPr is expected to grow 6.9% yoy from 2022-2038. Wind turbines, hybrid EVs, plug-in EVs and EVs are expected to account for up to 84% of the total demand by 2038. The Yangibana project will have annual MREC production capacity of 15,000t with a minimum binding offtake requirement of 10,000t MREC pa for 36 months to be in place prior to the first drawdown of bond proceeds.
In terms of rare earth applications, Hastings is in the light rare earths complex. For e.g., Lynas, mines cerium (Ce) and neodymium (Nd) – so has some overlap on the high value Nd but not on Praseodymium (Pr).
The debt structure is complemented by the Federal Government’s Northern Australia Infrastructure Facility (NAIF) agreeing to supply a AUD140m, 12.5 year loan facility for the development of Yangibana. Bond terms require Hastings at the date of the release of the first bond proceeds (est Q2 2023) to have binding offtake commitments of 10,000t MREC pa for 36 months in place.
Financials
Relative Value / Corporate Structure
The Issuer is Yangibana Pty Ltd which is a wholly owned subsidiary of Hastings. Guarantees will be provided by:
- Hastings Technology Metals Ltd (the Ultimate Parent)
- Dorothyeum Rare Earths Pty Ltd (the Parent)
- Gascoyne Metals Pty Ltd
The Bond Issue will be secured by, inter alia, Account Bank Deed, Guarantees, general security deeds, mining tenement mortgages, mortgage of lease, etc
Again, comparables are limited in this space. However, there are three comps below which makes the new Hastings bond look quite attractive if priced at 12%.
- CBRNRS (Coburn/Strandline): YTM of c.12% – fair, but this line will probably be called early
- JERMNG (Jervois): YTM of c.11% – cheaper
- PMBROV (Pembroke): YTM of c.10% – cheaper
One thing to note is that these three comps have earlier calls which could easily get enacted. A large part of the early call will be predicated on the progress of the projects construction and move towards production phase. Thus, the YTC would be lower than the quoted YTMs noted above and investors would be required to replace their capital into other higher-income producing bonds. Coburn/Strandline, for e.g., is just c.6 months away from first production and our base case expectation would be a call on these bonds in December 2023 at 104.80px.
Summary of the Terms
| Issuer: | Yangibana Pty Ltd | |
| Issuer Group | Means the Issuer, Gascoyne Metals Pty Ltd (“Gascoyne”) and all of the Issuer’s and Gascoyne’s Subsidiaries from time to time | |
| Guarantors | Means the Ultimate Parent (Hastings Technology Metals Ltd), the Parent (Dorothyeum Rare Earth Pty Ltd) and Gascoyne (each a “Guarantor”) and any other Issuer Group Company | |
| Status | Senior secured | |
| Amount | USD [300-350] million | |
| Purpose of the Bond Issue (existing): | The net proceeds from the Bond Issue will be paid into the Escrow Account(s) on the Issue Date and thereafter be applied by the Issuer in payment of capital and operating expenses, interest payments, G&A costs and working capital expenditures associated with the development, construction and completion of the Yangibana rare earths project (“Project”) (except for any Permitted CapEx Increase) | |
| Tenor | 5 years | |
| Coupon Rate | []% p.a., semi-annual payments | |
| Issue Price | [100]% of the Nominal Amount | |
| Amortization | Semi-annually repayments of 13.33% of the Issue Amount commencing 42 months following the Issue Date. The remaining outstanding amount equal to USD 210 million shall be repaid at the Maturity Date | |
| Call options | Make Whole up to the Interest Payment Date falling 36 months after the Issue Date, thereafter callable at the Nominal Amount + 40/20% of the Coupon Rate after 36/48 months and at 100% of the Nominal Amount after 54 months (plus accrued and unpaid interest redeemed Bonds) | |
| Security | To include, inter alia, Account Bank Deed, Guarantees, general security deeds, mining tenement mortgages, mortgage of lease, etc | |
| Financial Covenants | • Minimum Liquidity of not less than USD 15 million (or the equivalent) up to the date of the Initial Release from the Escrow Account(s), and USD 30 million any time thereafter, • Minimum Current Ratio of 1:1, and • Minimum Equity Ratio of 35% – applicable to the Issuer Group |
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| Release from Escrow | Any release from the Escrow Account(s) is subject to fulfilment of all the Pre-Disbursement Conditions Precedent including evidence that Total Equity Commitment less six months of interest has been spent on financing capital expenditures, working capital and servicing Permitted Financial Indebtedness incurred in connection with the development of the Project and evidence of binding obligations to purchase a minimum of 10,000 tonnes per annum of product from the Project under the Offtake contracts for the period up to the Maturity Date. Furthermore, the Cost-to-Complete Test to be countersigned by the Independent Engineer. There shall be minimum 6 drawdowns, of which the first drawdown is forecasted to take place in Q2 2023 | |
| General undertakings applicable to the Issuer and Gascoyne | To include, inter alia, pari passu ranking, authorizations, merger and demerger restrictions, continuation of business, corporate status, compliance with laws, arm’s length transactions, insurances, permits and land access and reporting requirements | |
| Special undertakings applicable to the Issuer and Gascoyne | To include, inter alia, distribution restrictions, subsidiaries’ distributions, disposal of asset/business, ownership of assets, ownership of any Issuer Group Company, negative pledge, financial indebtedness and financial support restrictions, investment and acquisition restrictions, project documents, changes to project documents, offtake contracts, subordinated loans, intracompany loans, general inspection rights, operation, maintenance and completion, ESG requirements, and royalties restrictions | |
| Ultimate Parent undertaking | To include, inter alia, ownership of the Parent, subordinated loans, negative pledge and reporting requirements | |
| Parent Undertakings | To include, inter alia, ownership of the Issuer, subordinated loans, negative pledge, financial indebtedness and financial support restrictions | |
| Permitted Distribution | Means any Distribution by the Issuer to its shareholders, once the following conditions are met: (i) Twelve months have lapsed since receipt of Project Completion Confirmation by the Trustee; (Ii) any Distribution does not exceed 50% of the Issuer’s consolidated net profit after tax and (iii) the Liquidity is at a minimum of the amount equal to the Nominal Amount of the Outstanding Bonds immediately after such Distribution is made | |
| Change of Control | Investor’s put at 101% | |
| Pre-Disbursement Longstop Date | 18 months after the Issue Date | |
| Equity Long Stop Date | 4 months after the Issue Date | |
| Project Completion Cut-Off Date | 3.5 years after the Issue Date | |
| Listing | The Issuer shall ensure that an application will be made for the Bonds to be listed on an Exchange with 12 months from the Issue Date | |
| Governing Law | Norwegian for the Bond Terms, Australian law for the Security documents | |
| Trustee | Nordic Trustee AS | |
| Independent Engineer | Behre Dolbear Australia Pty Ltd or SRK Consulting (Australasia) | |
| Sole Manager | Pareto Securities | |
About Matthew Macreadie
Matthew’s current responsibilities include providing credit commentary/views on the bond market and specific issuers, with the aim of aiding investors to make better risk-return decisions.
Prior to joining Income Asset Management, Matthew spent eight years working as a Credit Portfolio Manager at Aberdeen Standard, where he was responsible for the credit portfolio construction and security selection across a wide range of financial and non-financial sectors.
Matthew began his career at KPMG working in Auditing and Assurance within the consumer and industrials group. Matthew holds a Masters of Applied Finance from Macquarie University and a Bachelor of Commerce from UNSW.
