I spent part of my weekend re-acquainting myself with our President Steffen Haber - who will be instrumental going forward hammering out the Strategic partner/financing and off-take deal. I also cobbled together some background on where we were (The Helm Deal) to compare to where we are today.
I Relistened to 2 interviews Steffen did 2 years ago with the advantage of hindsight -
He articulates why this deposit is so special and his amazing foresight into the state of where the market would be today. Steffen Haber is brilliant!
This RSD youtube interview of JSL and Steffen from sept 2020.
RSD interview of Steffen Haber from Oct 2020
You could say without the Permits in hand alot of Haber's experience has been sidelined.
It's like Babe Ruth been sitting patiently on the bench cheering the team but now he gets
to step up to the plate.
In 2015 we made a deal with a secret strategic partner (turned out to be Helm) based on our PEA that used $6,000/t as price assumption for carbonate. While not contract pricing but as Tinker pointed recently Carb spot was recently sitting at an increadible $110,000 t CDN.
Helm funded our F.S. study with a loan (4.5 million) and based on a successfull F.S. they would fund 25% of CAPEX (85 million investment) for 25% of the project. They would get a take or pay off-take for 100% of production at market prices. This would have left us with an additional 260 million to raise thru debt/equity. The deal was supposed to close at the end of 2017 and the market was booming near it's highs and our S.P. had run to 1.86. That deal fell through. At the time it was stunning.
My take on why the deal didn't close - The initial deal happened in 2015 which was before Steffen joined the company in Nov of 2016. The closing negotiations were in 2017, management now with the addition of Dr.Haber likely wanted more than 85 million for the 25% stake because the market had come such along way since 2015, Helm said No. I do still wonder, did Steffen Haber actually convince management not to giving away so much for so little?
Optionality - JSL's new favourite word, he mentioned this in the P.I. Financial presentation a few weeks ago.
We've seen management have been opposed (stubbornly it seemed) to doing off-takes over the past few years or integrating the hydroxide conversion plant into one phase. As a result phase one mine and concentrator gives us a reasonable capex of 400 million, instead of around 950 maybe a billion in todays money to build an integrated operation. I remember Steffen saying years ago that with Spodumene esp. tech grade you can capture 80% of the upside without having to go through the complexities involving conversion to carb/hydroxide.
We are in the enviable position still having 100% of the off-take available. RK Equity mentioned MinRes Ceo Ellison say "In today's market If you own the rock, you are god!"
Howard also recently noted in a tweet, Maquarie update spod/carb price forecast into 2025/2026 by 100% just this past August, then a couple of week ago they raised it again by another 125% into 2027/2028. It would appear our $1852 F.S. price assumtion may be quckly becoming stale again.
Our strategy of (1 strategic partner - preferred or a couple of partners if need be) that will invest in the construction AND take 100% of the off-take. We currently require 400 million Capex total.
The partner will fund the biggest chunk of the construction cost in exchange for a % of the project and the off-take. Then we add some debt financing to fill the the funding gap and only if there is a remaining balance will they need to do an equity financing. Steffen has said for many years he believes phase 1 could be financed mostly by partner investment and debt.
This strategy is certainly unconventional when you look around the current landscape of what juniors are doing. Most just sign off-takes. These off-takes are promises to buy product when and if the company ever manages to reach production...No money changes hands to fund them through construction.
Fastmarkets had a commentary a while ago stating Contracts referencing a fixed price always have a winner and a loser. Lithium contracts have often referenced a fixed price and benefit from simplicity, but “it’s not a win-win situation,” Jimenez said. “We have seen already that these types of mechanisms have produced significant changes in management at the companies on the wrong side of the bet.”
The wrong side of the bet.
Even where some money did change hands like Piedmont/Sayona back in Jan 2021 (about 20 million) in this case but Sayona now in the un-favourable position of selling 50% of their spodumene production to Piedmont capped at a maximum fixed price of $900/t beginning sometime in 2023 for the "Life of mine operations"
Piedmont did benefit from the big TSLA off-take announcement in Sept 2020. At the time the announcement sent the S.P. flying. As no money changed hands they were smart enough to leverage that high S.P. to buy into Sayona and Atlantic Lithium and raise about 295 million through p.p.'s. Yet they still have not raised any money to fund construction for the integrated mine in North Carolina. Recently the federal grant of 147 million from the U.S. gov't is to help fund the 600 million dollar Tennessee hydroxide plant not the N/C mine. Anyone noticed Piedmont seem to be back burnering (is that a word?) their own N/C mining operation. Piedmont's off-take with TSLA is a fixed price for 60,000 t /year concentrate for 5 years. This deal was made at the time concentrate was selling for 450 t...My guess Piedmont will get even less than the 900 max price Sayona is going to get.
The right side of the bet.
Sigma (SGML), a canadian company with hard rock mine in brazil will be selling concentrate to off-take partner LG chem. I consider SGML our closest comparable and more advanced peer. The take or pay off-take with LG signed last year for 60,000-100,000 t of concentrate using prices linked to the market price of battery grade Hydroxide. If you haven't reviewed their latest presentation some interesting slides (page 68) regarding longer term concentrate price assumptions and you can get a sense to why our F.S is using $1,852 as longer term contract prices. Rodney Hooper seems to think their/and our price assumptions are too low going out to 2030 and he's modelling 500-600 higher prices so our NPV would be even higher with his numbers. Sigma's first offtake was with Mitsui which was a 30 million dollar pre-paid credit faciltiy that gave Mitsui the right to buy 1/3 of Sigma's production for 2 5 year terms at prevailing market prices
Sigma started their journey with Phase 1, strikingly similar to CRE. at 33 million tonnes but with an 8 year mine life because they are using a high production profile. If you trace through the journey from Phase 1 (8 year mine life), adding phase 2 (13 year mine life), working on phase 3. They expanded and drilled out the deposit to about 80 million t. and increased their production profile. Did financings along the way through credit facilities, equity p.p's and soon to be producer as construction has begun. Their market cap is 4.55 billion, Jan 2021 the s.p. was 3.00, most of the gains occurred over the past 18 months with the s.p. about 48 bucks.
Summarizing, 85 million for 25% interest wasn't good enough when the avg spod contract price assumption was 750 dollars. Today that price assumption sits at $1,852, or $2,400 if you believe Rodney. Let that sink in! That is 2 and 1/2 time the Helm deal number and Rodney's number is just over 3 times. As JSL mentions in the last RK Equity interview with the 50,000 t of Tech grade converted back to spod we have a total of about a 240,000 t total chemical grade production profile! Sigma phase 1 is 270,000 t concentrate.
The current NPV 2.375 billion CDN is about 3 times the F.S used in the final 2017 negotiations.
The difference between when the original deal was formed with Helm and today is staggering!
Without even getting into the geo-political changes and the race to friend-shore the supply chains etc.
My biggest question is "In today's market how much would a partner pay to fund construction for a 25 percent interest in Rose? One additional thought to the off-take deal. North America needs to have the ability to do Auctions for locally source materials in the spot market like Pilbera is doing...It might be useful to agree with a partner to take some product to auction periodically and share that revenue especially if the spot market remains frothy($7,900t recently)!.
Cheers