RE:RE:RE:RE:RE:Capital Raise for Production PlantBigBangOrigins wrote:
Valuation
1) valuation 101 says that if a partner is going gain majority ownership of a company, then they need to pay a premium for that right.
And negotiating 101 says that in a market with 1) short-term declining fundamentals (lithium price will be going down during 2019, probably), 2) a depressed share price and 3) when you actually must raise the money or simply suspend operations, the premium the partner will pay will be shockingly low.
2) Your NPV of $1.45B is highly optimistic based on the current s/p because the market seems to be discounting all the future cashflows of the 3Q project at a much higher discount rate, than the 8% you have used in your calculation. The discount rate for juniors is generally never that low and I would suggest doing a full regression analysis to arrive to the market based cost of capital for yourself. Either way, the discount rate is easily north of 10%.
The published NPV is just a schedule of cash flows that is conditioned on the resource proving up and the capex being spent and the operations running smoothly.
The market price of shares deals with many different issues, and in this case I disagree that the market is using a higher discount rate. That's simplistic. The market in this case is discounting a down price for the commodity, increasing production by major players, and as a result they are discounting a failure to raise capex on good financial terms. All of those issues are central to the investment thesis and none of these is about discount rates directly. It's better to think about fundamental issues directly and not mask them behind very indirect concepts like discount rates.
3) Also, I would suggest having a look at the Cauchari project transaction that occurred earlier in the year to give you a valuation reference point to work off of.
That was then, and now is a different market.
1) The partner taking home 40% of the project value when they own 74% of the shares doesn't add up.
Probably you are right, but it would be better to put forward specifics for your own proposed transaction. I don't think it adds up to $2.30/share any time soon, unless you change the size of the resource (which might happen).
2) You can't use the $2.30 s/p from my scenario and apply it to numbers calculated in yours because the share counts in each of our scenarios are completely different, thus the market cap post financing in each of our scenarios will be completely different.
So modify my numbers with your own. I don't think it adds up to $2.30/share, if the resource and NPV remain at the levels I gave.