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Chalice Mining shares tumble 25% amid concerns over multi-billion dollar project costs

Chalice Mining (ASX:CHN) witnessed a 25% drop in shares on Wednesday as short-term investors and speculators reacted to the initial cost estimates of the Gonneville critical minerals project near Perth, ranging from $1.6 billion to $2.3 billion.

Additionally, concerns arose regarding the scoping study’s overly optimistic assumptions about metal prices. Whether due to these factors or others, investors panicked, realising that Chalice’s future identity would shift from a speculative miner to a company tied to a productive asset. Consequently, the company would be susceptible to the unpredictable fluctuations of market realities, including prices, demand, volume, and various other variables akin to those faced daily by industry giants like BHP, Fortescue, and IGO.

The market’s swift reaction was primarily driven by headlines, causing many to overlook crucial details in the project’s scoping study. Notably, the study highlighted a rapid two-year payback period and projected gross profit margins exceeding 40% (contingent on prices of key metals such as copper, nickel, cobalt, gold, palladium, and platinum).

Regrettably, investors seem oblivious to the fact that the stated costs are preliminary and do not yet account for potential partnerships. Chalice has been engaged in discussions with over 40 global companies regarding potential collaboration on the project.

Chalice remains confident that acquiring the necessary funds to initiate the project won’t be an issue. This endeavor marks the first of potentially several mining projects along the 30-kilometer Julimar line of strike, situated 70 kilometers northeast of Perth, over the next century.

The scoping study presented two options: one involving the extraction of 15 million tons of ore annually at a cost of $1.6 billion, and the other encompassing a 30 million ton per year operation with a price tag of $2.3 billion.

Notably, Chalice indicated that it would not finalise investment decisions until 2026, with initial production not anticipated until 2029.

The capital costs outlined in the study exceeded analysts’ expectations. For instance, Macquarie analysts in July estimated a capital expenditure of approximately $1.34 billion until 2029 for the mine’s development. However, these estimates seem to have disregarded the rising costs within the mining, construction, and infrastructure sectors. Notable examples include the Snowy 2 renewable project’s costs doubling to $12 billion and Fortescue Metals’ Iron Bridge magnetite mine experiencing a billion-dollar-plus write-down to recalibrate its cost structure.

Notably, the recent market reaction failed to acknowledge that Chalice had successfully raised $200 million from the market since unveiling the Gonneville and Julimar prospects in early 2019. The company’s accomplishments include substantiating one of Australia’s most significant mineral discoveries in decades.

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