Kerr Allan Financial Research 16 May 2019 KAF Kurt Worden +61 2 9241 2599 ioneer Limited [email protected] ioneer Ltd is a mineral exploration and development company, focused on developing its 100% owned Rhyolite Ridge Project Lithium-Boron Project in Nevada, USA. INR has completed a Pre-Feasibility Study (PFS) envisaging production of 20,200 tpa lithium carbonate and 173,000 tpa boric acid over an initial 31 year mine life. INR is targeting completion of its Definitive Feasibility Study (DFS) in Q3 2019, with a Final Investment Decision (FID) by Q4 2019, and first production in 2021. Company Data Positioned to deliver US lithium and boron supply chain security ASX Code INR.ASX Share Price (A$/sh) 0.175 ioneer Limited’s (INR.ASX, mkt cap A$258m) Rhyolite Ridge project is one of two known large scale, ‘hard-rock’ lithium- Number of shares (m) 1,475 boron deposits globally, and its location in Nevada makes it Market Capitalisation (A$m) 258 uniquely placed to meet future US demand for these strategic Float (Total - Insiders) (%) 92.1% commodities. Our valuation of A$0.54/sh is underpinned by 12 month high / low (A$/sh) 0.14 / 0.495 Rhyolite Ridge modelled on a long term US$12,647/t lithium carbonate price, and INR securing project finance 30 day average turnover (M shares) 2.1 accompanied by a 25% sell-down of the project for US$126m. GICS Industry Group Materials Our A$0.40/sh price target reflects uncertainty on our assumed Source: Bloomberg, Thomson Reuters financing scenario. Given the deposit’s potential to be the next US lithium producer, and the opportunity to disrupt the borate Earnings Summary (June YE) 2019F 2020F 2021F 2022F market, we anticipate INR will have financing optionality to Reported Profit ($M) 0.3 (15.9) (24.7) (49.9) reduce the construction equity requirement, and in our view EPS (¢) 0.00 (0.01) (0.01) (0.02) the stock will start to re-rate as a funding strategy begins to P/E 1 (x) na na na (9.60) emerge, and as the project progresses through DFS and FID later this year. Free CFPS (¢) (0.01) (0.11) (0.11) 0.01 Rare, large scale asset in the lowest quartile of the cost curve P/CF 1 (x) (21.6) (1.6) (1.6) 18.2 EV/EBITDA 1 (x) nm nm nm 15.8 Rhyolite Ridge is a large, shallow, open-pittable, long life project which is amenable to acid leaching, and will be in the lowest quartile for lithium (1) Based on fixed, current share price. Na = not applicable; nm = not meaningful. carbonate producers due to its significant boric acid by-product credit, which underwrites 75% of operating costs at the current Reserve grade. Share Price Performance (LTM) Boron market disruptor 0.60 18.0 Daily Volume Traded On-Market Daily Close Price Rhyolite Ridge has an opportunity to disrupt the boron market dominated by 16.0 0.50 Etimine and Rio Tinto, which will be driven by ex-Rio Tinto / US Borax sales 14.0 0.40 12.0 and marketing executives now part of the INR management team. 10.0 0.30 8.0 Low ESG footprint 0.20 6.0 MillionShares The operation will not require a tailings dam or evaporation ponds, has low 4.0 Closing Price (A$/sh) ClosingPrice 0.10 2.0 water consumption compared to brine operations, can generate surplus - 0.0 ‘green’ electricity, and its outputs are linked to energy efficiency, reduced May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 emissions, and lifting agricultural yields. Economics likely to improve on drilling, acid plant savings Sum of Parts Valuation NPV Undiluted Diluted INR has flagged that recent assays from infill and extensional drilling have (as at 30 June 2020) A$M A$/sh A$/sh returned grades 15-20% above the Resource grade, which we interpret may Rhyolite Ridge (100%) 1,405 0.51 0.51 lift production during the initial years of operations. Capex has also fallen 10% with the award of the acid plant contract to SNC Lavalin. Corporate (125) (0.05) (0.05) Tax Shield 100 0.04 0.04 Quality management with the credentials to deliver Debt (242) (0.09) (0.09) INR’s board has experience in developing and financing lithium projects and running boron operations. Its US based members are also well-placed to Cash 350 0.13 0.13 work with US investors, corporates, and the US Government, which has Exploration - - - bipartisan support for new legislation to secure supply chain for lithium and Total Value of Common Equity 1,489 0.54 0.54 other minerals critical to its automotive and energy sectors. This Research has been prepared and issued by Kerr Allan Financial ASFL No 319 830 (“Kerr Allan”) and remains the property of Kerr Allan. No material contained in this Research may be reproduced or distributed, except as allowed by the Copyright Act, without the prior written approval of Kerr Allan. For updates or further information regarding this research, please contact Kerr Allan. Kerr Allan does or seeks to undertake business with companies covered in its research and therefore, Investors should consider this report as only a single factor in making their investment decisions. For explanations regarding other important disclosures, please refer to the disclosure section at the end of this document. Kerr Allan Financial ioneer Ltd. Kerr Allan Research ioneer Limited 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E General Assumptions Revenue Inflation Real, %pa 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% Cost Inflation Real, %pa 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% AUDUSD 0.71 0.71 0.71 0.71 0.71 0.71 0.71 0.71 0.71 CIF China Lithium Carbonate (applied) US$/t, real - - - 9,603 9,954 10,542 10,864 11,257 12,147 CIF Asia Boric Acid (applied) US$/t, real - - - 700 700 700 700 700 700 Ownership % 100% 75% 75% 75% 75% 75% 75% 75% 75% Upper & Lower Zone (1,050ppm Li cut-off and 0.5% B cut-off) Tonnes kt 121,400 121,400 121,400 119,785 117,389 114,754 112,248 109,992 107,593 Lithium Carbonate grade % Li2CO3 0.95% 0.95% 0.95% 0.95% 0.94% 0.93% 0.93% 0.93% 0.93% Contained Lithium Carbonate t Li2CO3 1,153,179 1,153,179 1,153,179 1,131,999 1,101,500 1,069,249 1,043,101 1,020,157 996,909 Boric Acid grade % H3BO3 7.19% 7.19% 7.19% 7.20% 7.20% 7.19% 7.20% 7.18% 7.15% Contained Boric Acid t H3BO3 8,729,825 8,729,825 8,729,825 8,623,613 8,451,115 8,250,878 8,076,884 7,895,129 7,689,227 Reserves Upper & Lower Zone (1,050ppm Li cut-off and 0.5% B cut-off) Tonnes kt 15,800 15,800 15,800 14,185 11,789 9,154 6,648 4,392 1,993 Lithium Carbonate grade % Li2CO3 1.17% 1.17% 1.17% 1.16% 1.13% 1.11% 1.13% 1.19% 1.45% Contained Lithium Carbonate t Li2CO3 185,179 185,179 185,179 164,000 133,500 101,249 75,102 52,158 28,909 Boric Acid grade % H3BO3 7.48% 7.48% 7.48% 7.58% 7.66% 7.68% 7.96% 7.90% 7.09% Contained Boric Acid t H3BO3 1,181,824 1,181,824 1,181,824 1,075,612 903,114 702,877 528,883 347,128 141,225 Recovered Product Lithium Carbonate t Li2CO3 - - - 17,325 24,949 26,381 21,389 18,769 19,017 Boric Acid t H3BO3 - - - 88,687 144,036 167,198 145,285 151,765 171,929 Lithium Carbonate Equivalent t LCE - - - 23,767 35,046 37,484 30,750 28,206 28,900 Mining US$/t Li2CO3 - - - 3,816 2,375 2,606 3,214 3,663 3,615 Processing US$/t Li2CO3 - - - 5,720 3,972 3,784 4,250 4,345 4,289 Transport & Selling Costs US$/t Li2CO3 - - - 975 1,080 1,170 1,243 1,450 1,603 Sub-Total Cash Operating Costs US$/t Li2CO3 - - - 10,511 7,427 7,560 8,707 9,458 9,506 Less: Boric Acid credit US$/t Li2CO3 - - - (2,544) (2,869) (3,150) (3,376) (4,019) (4,493) Total Cash Operating Costs (with credit) US$/t Li2CO3 - - - 7,967 4,557 4,410 5,331 5,439 5,013 Add: NPM Tax US$/t Li2CO3 - - - 57 104 126 87 88 143 Total Cash Operating Costs (incl NPM tax) US$/t Li2CO3 - - - 8,024 4,662 4,537 5,418 5,527 5,156 Income Statement Revenue A$'000 1,324 - - 257,747 401,088 461,952 398,359 385,613 437,336 Operating expenses A$'000 - - - (204,588) (218,303) (244,696) (233,228) (226,782) (234,818) Corporate costs A$'000 (4,311) (8,187) (9,387) (10,639) (10,851) (11,069) (11,290) (11,516) (11,747) Other costs A$'000 (205) - - - - - - - - EBITDA A$'000 (3,192) (8,187) (9,387) 42,520 171,934 206,187 153,840 147,315 190,772 D&A expense A$'000 - (477) (1,772) (78,389) (78,875) (83,796) (90,697) (92,853) (93,379) Interest expenses A$'000 - - (13,572) (14,004) (12,235) (8,935) (5,510) (2,287) - Other finance costs A$'000 - (7,252) - - - - - - - Finance income A$'000 2,769 - - - - - - - - Income tax expense A$'000 - - - - - - - (718) (8,993) Movements in financial derivatives A$'000 706 - - - - - - - - Extraordinary items A$'000 - 177,423 - - - - - - - NPAT A$'000 283 161,507 (24,731) (49,873) 80,824 113,455 57,633 51,458 88,400 Cash Flow Statement Cash flows from operating activities Receipts from customers (inclusive of GST) A$'000 - - - 228,717 393,163 459,900 405,376 386,196 428,200 Receipts from Corporate (inclusive of GST) A$'000 685 - - - - - - - - Interest received A$'000 876 - - - - - - - - Payments to suppliers (inclusive of GST) A$'000 (2,710) - - (188,522) (214,571) (244,138) (235,153) (226,383) (233,893) Corporate Costs (inclusive of GST) A$'000 (5,169) (7,780) (9,372) (10,535) (10,834) (11,051) (11,272) (11,497) (11,727) Payments for exploration and evaluation (12,605) - - - - - - - - A$'000 expenditure (inclusive of GST) Tax paid A$'000 - - - - - - - (718) (8,993) Cash flows from investing activities Proceeds from disposal of property, plant, - 177,423 - - - - - - - A$'000 and equipment Proceeds from sale of other financial assets A$'000 - - - - - - - - - Payments for property, plant and equipment A$'000 (20,178) (290,824) (295,186) (3,358) (3,425) (44,805) (49,487) (3,634) (3,707) Payments for acquired exploration