S32

Assumptions, and risk.

S32 is a big diversified commodity producer.

They’ve FID a big zinc development (Hermosa/Taylor) and will spend more dollars on it.

Here’s the table of assumptions (I’ve highlighted the zinc price).

Here’s the current zinc price, $2500tn. So a big rise in spot required to hit the input assumptions on a DCF that generates an IRR of ~12%, according to them (you can see the 12% just above the yellow highlight).

Hence, on the earnings call, these kinds of questions.

S32 trades below book value. So a buyback would/should be accretive. Spending more money on a mine that the market already doesn’t value doesn’t seem like a great idea.

Equally, you can imagine drawing an upward sloping line of best fit through that zinc price, predicated (somewhere, in the back of one’s mind) a story of limited ex-Taylor discoveries and declining grades encountering steadily rising demand for zinc as a perfectly justifiable long run spot price assumption.

Doesn’t everyone justify new investment on the basis that future incomes will be higher? Yes in most things. Not so much in commodity land. You have to justify new supply with prices today, tomorrow at the latest, but not so much on prices ten years from now.

Anyway, this is the source of huge contention, and clearly makes for the existence of a very large “variance to market” for those keen on the stock. E.g., “Hermosa’s great, zinc’s future is strong, supply will be limited, let’s do this”, versus “why can’t you just buyback your shares”.

But worth keeping mind other competitors in zinc have not used a commodity price anything like this. S32 being unusual here.

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