Chalice Mining (ASX: CHN) (OTCPK: CGMLF) shares have dropped 25% today. CHN shares are down on the assumptions being made in the just released scoping study. The Gonnevills nickel, cop[per, pgm mine looks viable - ish. Assume away any environmental concerns and it’s definitely doable. But a scoping study is meant to demonstrate the economic viability of a project. The Definitive Feasibility Study (DFS) comes later, which proves - absolutely proves - all of the assumptions being made. So, when doing a scoping study it’s possible to make assumptions about future prices. But when doing so those assumptions have to be things that the market accepts as being at least vaguely and somewhat reasonable. Which isn’t - to put it mildly - what is happening here.
In fact the market is asking “You What?” of the assumptions being made by Chalice: “Palladium is expected to provide about 55 per cent of revenue from the mine, and Chalice’s study assumed the metal would fetch $US2000 an ounce over the life of the mine. Palladium was fetching $US1218 an ounce on Wednesday, with the price down 30 per cent since January 1.” That’s not the only odd assumption being made but it is the biggie. Further, it’s worse than just being a bit high. As we can see it’s about 80% above the current price even if the Pd price has been up at that $2,000 an ounce in recent years.
What makes it much worse is that the major use of palladium is in catalytic convertors for cars. But we’re all moving to EVs, which don’t need them. So the palladium market is about to lose its major price support. For those convertors are about 85% of the demand. Betting that the palladium price will rise from here is, well, it’s odd.
Chalice Mining share price from Google Finance
But it’s worse than that. Catalytic convertors are recycled at end of life. Which means that as we move to EVs then that stock of Pd contained within the current car fleet becomes available for other uses. The stock is far larger than the annual mining number. So the price pressure over the next couple of decades is going to be down, down, down on palladium. It’s not that Chalice is using an unreliable number, they’re using an unbelievable number.
It gets worse too: “He said that given forecast demand, “it’s hard to believe a lower PGE (platinum group element metals) price environment than what we are seeing today”.
Mr Dorsch said “we are just not seeing” and reduction in forecast demand for the metals, particularly given the expected increase in production of plug-in hybrid cars.” No wonder the shares tanked for that’s a most unreasonable assumption. In the rich countries - Europe and North America - we expect to see nothing but EVs in a decade or so. Meaning that the stock of pgms in the current car fleet is going to be hitting the market.