Initiation of Coverage on Diatreme Resources (ASX: DRX)


December 17, 2023
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One of the key elements of the drive towards the decarbonisation of the global economy, and the use of renewable energy, is solar power. In 2022 the International Energy Agency (IEA) forecast that by 2027 installed solar generation capacity (both distributed and grid-scale) could more than double to over 3,000 GW globally from the actual 2022 figures of 1,183 GW, overtaking all other forms of electricity generation.

Extrapolating growth out to 2030 indicates a total installed solar panel capacity of between 4,000 and 5,000 GW, with annual production of between 500 GW and 700 GW of photovoltaic (“PV”) panels, compared to 236 GW in 2022, with China currently producing ~80%, and the broader Asia region over 90%.

One of the key ingredients of solar panels is PV glass, with a usage intensity of around 50 kg per kW or 50,000 tonnes per GW. The major component, at ~72%, of the glass is high purity silica sand (“HPSS”), with the above forecasts indicating that the annual demand for HPSS could grow from the current ~8 Mtpa to 26 Mtpa by 2030.

This is expected to lead to a supply crunch, with Diatreme Resources ideally placed to enter the market. Diatreme is the 73.2% owner of the Northern Silica Project (“NSP”), with Sibelco, a multinational industrial minerals company holding the balance, having made a total A$48 million investment at the corporate and project level, with the Project now funded through to any decision to mine.

Diatreme has recently completed a robust Scoping Study on the NSP, based on a 25 year mine life, producing 3 Mtpa of HPSS for two years, and then 5 Mtpa for 23 years from 2026 and delivering an after tax NPV of A$829 million. This is a base case, with current resources and exploration targets having the capacity to supply a multi-decade operation. Metallurgical test work has shown that the product can meet the stringent quality requirements for this sector of the sand markets.

The NSP is located at Cape Flattery in Far North Queensland, adjacent to Mitsubishi’s current Cape Flattery Sands (“CFS”) operations, which currently produces at ~3 Mtpa, and which is exported through a gazetted port adjacent to the mining and processing area. Although looking to develop their own facilities adjacent to, and then on the existing jetty, there may be the potential for infrastructure sharing with Mitsubishi.

Given that silica sand is a bulk commodity, being located next to an export facility is a significant
positive for the Project, given that FOB transport costs can significantly affect the economics of bulk projects. Secondly, being in an area of existing mining should be a positive as far as permitting and stakeholder engagement is concerned.

We have a risked base case valuation for Diatreme of A$0.074/share, with A$0.042 being attributable to Diatreme’s equity share in the NSP – Diatreme’s unrisked equity share of the NSP is A$0.21/share. We see upside to this valuation with ongoing activities (which include a current PFS and then DFS), and material advances in technical aspects, permitting and stakeholder, including Traditional Owner, negotiations.