Mining Journal Article on AALArticle in The Mining Journal on AAL Pretty big publication. Good to get their insights.
Advantage in lithium lead
Up until a month ago, one could be forgiven for putting Advantage Lithium in the Vancouver-based battery metal basket; a pack of companies looking to leverage investor appetite by buying up land and flipping it for a quick buck. In November, it challenged this stereotype in the most unexpected of ways.
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Daniel Gleeson
· 21 Dec 2016
The deal it struck with Orocobre, a company that found, financed and constructed the only large-scale brine operation to come into production in the past 20 years, is a game changer.
For US$37 million in shares and the granting of a 1% royalty and first right of refusal on the Cauchari project, Advantage is getting hold of the Australia and Canada-listed company’s entire exploration portfolio in the lithium triangle of Argentina. Within this was a 50% stake in the Cauchari project, which hosted 470,000 tonnes of lithium carbonate equivalent (LCE) inferred resources, that is positioned just 20km south of Orocobre’s Olaroz operation.
On top of this, it was welcoming Orocobre as a cornerstone investor and acquiring the project team that had found and explored Cauchari for the past six or so years.
The deal, which was announced before Orocobre had outlined a plan to double output at Olaroz, shocked investors throughout Canada and Australia.
In Vancouver and Toronto, analysts were baffled as to how a company valued at a little over $50 million could get hold of such assets and such expertise for so little cash. In Sydney and Perth, their counterparts were asking why an established producer would divest strategically-located assets at the height of the lithium boom.
David Sidoo, CEO of Advantage, explained the deal rationale to
Mining Journal over lunch in London this month.
For Orocobre, it was a matter of knowing it had good assets it could explore further, but that these same projects had no ascribed value within their portfolio at the moment. At the same time, it did not have the management time to move them forward with any real pace while it was still ramping up (and planning to double capacity) its existing operation and had its Borax Argentina assets to concentrate on.
Needless to say, there was a long list of companies looking to take the assets off its hands.
This is where Advantage, a company headed up by a former American Football player (Sidoo) with fundraising credentials and a team full of exploration success, managed to push itself to the top of this very long list.
The Venture-listed company had to prove to Orocobre it was not just a “transaction-oriented” lithium stereotype and that it would actually explore the portfolio of assets, according to Sidoo.
While Advantage has not been shy on the M&A front, acquiring stakes, options or outright assets in the US, Mexico and Argentina since listing in August, its work on the Clayton NE project in Nevada has highlighted an exploration intent that many of its peers lack.
Prior to this deal, it had outlined a 1,500m drill programme that has already seen three boreholes sunk at the project, which lies just 110m from Albermarle’s Silver Peak mine. It has also carried out all-important brine flow analysis at Clayton NE showing the asset is not just geographically close to the US’ only producing lithium mine, but also geologically similar.
At the same time, it has a board full of names familiar to many in the Americas exploration game. Sidoo founded American Oil & Gas, which was sold to Hess in a more than $630 million deal, while Ross McElroy and Dev Randhawa – both Advantage directors – have been prolific in exploring and proving up projects in uranium in Canada. In Callum Grant, the company has an engineer with proven prowess in South America, while Doug Leishman on the advisory board has more than 30 years of industry experience to call on.
A measure of Orocobre’s confidence in Advantage’s ability to get the best out of these assets was seen in the structure of the deal in question.
The company will get no cash payment for the deal, instead receiving Advantage shares – it will own 31% of the company at closing – and two board seats, which CEO Richard Seville and general counsel Rick Anthon intend to take up.
At the same time, it agreed to let Miguel Peral and his team at Cauchari come across to Advantage to help explore the assets, which could be key in leveraging the $10-15 million Orocobre had already spent on the portfolio, according to Sidoo.
Orocobre and company insiders have also agreed to a pooling agreement whereby their stock is tied up for 36 months, Sidoo said, showing they have no intention of cashing in their stock if the share price shoots up.
In the meantime, though, Advantage has eyes on increasing its 50% stake in Cauchari to 75%. Even before the deal has closed, it has laid out a $7 million budget for work over the next 36 months – exceeding the $5 million requirement to gain the extra 25% interest – and has a five hole, fully permitted drill programme ready to go once it is given the Cauchari keys.
With an exploration target of 0.25-5.6 million tonnes of LCE set by Orocobre and only six drill holes sunk to a maximum depth of 170m to prove up the 470,000t resource, there is a massive amount of potential at the project, which the company plans on exploring.
On top of this, it will use part of the $15-25 million equity raise it has to carry out as part of the deal to fund early-stage work on the other five projects, one of which (Antofalla) is close to a project Albermarle believes hosts the biggest lithium reserve in Argentina.
All of this doesn’t mean to say the company is going to be drilling like mad at the project to delineate tens of millions of tonnes of LCE as quickly as possible. Advantage’s strategy is shown by the three-year deadline it has given itself to get to a production decision at Cauchari.
Many in the industry will view such a timeline with scepticism, acknowledging the struggles Orocobre had on the way to first production at Olaroz, but Sidoo thinks the hard work its new partner has carried out since the start of the decade – with communities, permitting and technology – will allow Advantage a much smoother run into production.
“They have unlocked the key,” Sidoo said, explaining that the chemistry of the brines at Cauchari, which he thinks is an extension of the same salar as Olaroz, means it could potentially run concentrate through Orocobre’s facility, cutting out the need for a cost-intensive plant.
Without this latter requirement, Advantage Lithium can work up a much smaller-scale plan than Orocobre had to draw up to justify the Olaroz build.
Such an option is a differentiator in the lithium space. No-one really knows when the stock and price run will end and if investors will actually fund capital plans that amount to hundreds of millions of dollars in many cases.
The more one goes over the facts of the deal, which should be completed in the March quarter, the more astounding it appears.
Advantage has been able to get hold of a significant stake in a game-changing asset in a premier lithium jurisdiction, while retaining an experienced partner that has a blue print to production.
This TSX-V-listed company is now in a basket of its own.