The Good the Bad and the Ugly - Part 3 We are not a Duck! One of these things is not like the others.
Previously I went through some of the more challenging projects who aspired to get to Lithium heaven by producing chemicals (carbonate or hydroxide) only to end up in pergatory. I wanted to look at a peer who like us was more content to focus on concentrate production.
Sigma - The Good
We know that off-takes without investment mean nothing to a junior miner because it does not help fund construction! Sigma took a Pre-paid off-take with their first customer Mitsiu, they paid 30 million in pre-paid financing to help fund construction. This significantly strengthened the outlook of the company. Then they added the big LG Off-take, getting more attention that moved s.p. to around 10 dollars. Soon after LG, Sigma wanted to raise 60 million via a non-brokered private placement and ended up raising 136 million dollars because of sky high demand. It was just after they started construction where most of the s.p. magic happened. Blackrock invested 65 million in that P.P. taking a 5% stake in the company, validating Sigma to the investing world and taking the s.p into the 40's. You really have to appreciate what Sigma has been able to do. All other funding was equity raises via P.P. and they are currently in construction and have NO DEBT. They Own 100% of the project and they are selling CONCENTRATE! No mentions of chemical plant conversion capabilities.
Most projects today have jumped on the integrated operations band wagon because the analysts seem to believe you just have to be vertically integrated to make money. Pilbera has even partnered with POSCO to build a chemical plant, although they do now have 1.35 billion dollars of cash in the bank from all that concentrate they've been selling. Sigma is 3 Phases to ramp to over 500,000 t concentrate. Sigma's phase 1 will throw off 500 million FCF/year and 600 million with phase 2 selling concentrate. Geez, according to most "market analyst experts" they better hurry up and build an integrated operation, I mean how could you possibly survive with 600 million dollars in free cash flow.
Critical Elements - The Odd Duck!
CRE strategy is unconventional when you compare it to other Lithium Juniors and this makes us a bit of an odd duck in terms of market perception. We should have Off-takes already signed. We are fully vertically integrated, if the analysts believe this then they haven't been paying attention.
The strategic partnership linked with 100% off-take is also an odd duck. Investment houses like Blackrock want to take equity stakes and not product. In my mind this strategy does narrow the players who would fit the ideal partner profile but, If we do secure a partner as management describe, it would be a huge further de-risking step vs just off-taking that the market and other juniors don't seem to comprehend.
The benefits to this approach that cross my mind and is by no means a definitive list.
A partner who invests in the project obviously much more committed providing more stability getting us through the vulnerable stages and or market down turns.
A Strategic Partner (depending who) could provide additional Mine building Expertise
Could offer to leverage their own balance sheet in the form of a credit facility at preferred interest rates for any CAPEX funding gaps. CRE would not need to go the traditional investment bankers route with high interest rates and nasty covenants.
A large mining conglomerate may have preferred pricing arrangements for all things mining related, for example, CAT mining equipment (shovels, haulers etc.) which could also be leveraged in a Strategic Partnership.
Depending on the partners preferred product mix, could also accelerate and fund a significant share of a phase 2 chemical plant if we head down that road. One possibility is partner owns the larger share of the chem plant and cre has a smaller share. For example Phase 1 75% cre 25%partner, chem plant 75% partner, 25% cre.
The Partnership with 100% off-take should be very beneficial to potential partners. The relationship is much more than just an off-take agreement. They gain intimate knowledge of the operation of a critical supply chain, seats on the board etc. They have secured supply at better pricing than the market rate.
For example if we assume the Partnership is for 25% interest plus 100% off-take at market prices.
After their initial investment is recovered (upfront money to fund construction), they would then be buying 100 % off-take at a discount to the market price. Why is this? Their 25% share of the (revenue or profit) nets back to them as credit so they are actually only paying 82% of the market price after costs are deducted...at least this is how I'm currently viewing the investment for off-take relationship..
hope that makes sense.
Example
Cost of production per our slide deck - 550 t
partner pays market price for off take = 1850 t
CRE share @75% = 1387.5 - 412.50(75% costs) = 975 profit,
partner share @ (25%) = 462.5 - 137.5(25% costs) = 325 profit,
partners realized price paid for off-take 1,850 - 325 = 1525
This type of partnership is long term so lets extend out to the LOM currently at 17 years.
Based on our production profile avg 240,000 t sc6 the above example would result in a 72 million dollar / year saving over market prices that would kick in after the initial investment is paid back - say after 3 years. Then in the remaining years, 1 billion dollars saved over market prices (current LOM) for a critical material you need that is in tight supply?
Asking again "How much would a partner pay to fund construction for a 25% interest in Rose?"
Analyst views of the odd-duck. Analyst reports are indeed only opinion, but also viewed as "expert opinion" and holds sway with market participants. I wanted to get a better view of their consensus thinking about CRE the odd-duck.
Most view us as integrated, phase 1, phase 2 both rolled in the same model and spit out a value. But, in doing this they have to make assumptions that are ridiculous. Management's talk about Phase 1, then Phase 2 gives us optionality but not integration - Odd duck again! On this point I'll say managements approach to communicating this may not really help clarify the situation.
Apparently, technical grade spodumene is a challenge, not for CRE to produce but for analysts at Eight Capital to value. They state, A specialty product used in the glass and ceramics industries, and customers have historically paid a premium for iron-free spodumene. However, as very few suppliers are able to serve this market (odd-duck yet again), it is difficult to confirm pricing. As such, we are using a discounted price relative to what CRE has used in the DFS. Confirmation of technical grade spodumene prices should be possible once CRE has entered into off-take agreements. So they are waiting for Off-takes to really put a fair value on this company! One of the most respected pricing sources "Garrit Fuelling" provided our Price Deck for the update F.S. yet this analyst who likely only learned to spell Lithium a couple of years ago is unable to accept our F.S numbers as presented.
Cantor Fitzgerald on Tech grade spodumene
The Greenbushes mine in Australia the only large source of the technical grade spodumene to the glass ceramics and glass market as the mine has an area of low iron spodumene. As technical grade material is relatively rare, lithium carbonate is often used as a substitute (along with additional aluminosilicates) and as such, technical grade material prices follow that of lithium carbonate and a significant premium to chemical grade material. Maybe this will help the Eight capital folks figure out pricing of tech grade material.
Canaccord was once our Investment advisor. If anyone should have a grasp to understand our strategy it should be them right? I understand Canaccord "re-instated coverage" likely means a new analyst covering the stock, but the file of information they have on us should be 3 feet thick.
We assess successful permitting by end of 2023 a delay to management guidence wrong (2022)
construction start spring 2024, wrong (2023)
Spod Production starting 2026, wrong (2025)t Hydroxide prod starting 2028 wrong
Phase 1 CAPEX est 556 million. wrong - JSL has stated raising 400U.S. so 485CDN which includes a buffer!
Phase 2 CAPEX est 564 million.
CAPEX required 1.2 billion
Fully funded to Phase 2 with 485 million shares outstanding - big assumption
Equity will be raised at 1.65 so additional 255 million shares - big asss assumption
Phase 2 conversion cost $3,000 t LioH, Life of Mine cost 9,032 t LioH after Phase 2. Funny our LioH study does not even cite any numbers.
(Note: They state they used Frontier Lithiums CAPEX number for phase 2 in our project. They really did this, the numbers are from Frontiers PEA.)
So here Canaccord twisted themselves into a knot to make us Integrated. They then state, "Depending on the partner terms, it could also be far less dilutive than our current (BIG ASSS) financing assumptions."
Analysts don't really know what to do with us.
The idea to be vertically integrated has gathered steam over the last few years and seems to have put blinders on many analysts. I don't believe during the Helm days a chemical plant was even part of the conversation.
Even the Quebec ministers are pounding the table saying lithium concentrate should be converted in Quebec.
In our current presentations and chemical plant study, management have so made so many disclaimers attached to this thing stating, there are no guarantee's a plant would ever be built. It's like blowing up a balloon and sticking a pin in it at the same time. I thought the Hydroxide study was pretty light on financial details, in fact it didn't have any! The chemical plant was also modelled based on long term world pricing for concentrate and assuming no feed stock would come from the Rose Project. But, but vertically integrated?
Why would they do that?
Management have been saying a partner will take 100% of the material produced at the mine. By definition this means
there will be no concentrate available from Rose to feed our own hydroxide plant. But, but vertically integrated!
So we apparently are an odd duck, analyst opinions mostly value us as an odd duck. They seem to be missing the point. We are not a duck but a goose!
I couldn't really complete this analyst review without looking at Cantor Fitzgerald, our current financial advisors. They put out a detailed report in May 2021. Did they listen to what management have been telling them about our strategy?
Cantors Take!
The model 100% ownership, valuation DCF 8%, NAV 741 million, based on 202 million shares 733 million NPV and 375 million CAPEX. NAV at 741 million or 3.95 per share then apply a .6x NAV multiple discount to get 2.40.
Interestingly no assumption about debt or dilution in the model just value us based on what is knowable.
Then add the disclaimer that financing thru debt and equity is required to raise the 375 million CAPEX.
With 95% of estimated revenues derived from the lithium concentrates, the Rose project is most highly levered to the price of lithium. We calculate that for every
10% change in the price of lithium there is a 32% change in our target.
This model is a bit off today with shares out and CAPEX but still useful. This a model based only on phase 1 -
Is someone listening? They provided a chart showing the SC6 price progression and new s.p. targets.
As this was May 2021, The chart
stops with SC6 at $957 with a s.p. target of $4.42.
I thought to myself,
soooo what happens to the s.p. when SC6 price rises above $957? Being the industrious one that I am,
I extended their progression further out to account for current $1,852 price deck assumption. The following is that progression as Cantor states: a 10% rise in the SC6 price increases the s.p target by 32%. Well start the progression from their base case.
| SC6 Price | S.P. Target |
| 750.00 | 2.40 |
| 825.00 | 3.17 |
| 907.50 | 4.18 |
| 998.25 | 5.52 |
| 1,098.08 | 7.29 |
| 1,207.88 | 9.62 |
| 1,328.67 | 12.70 |
| 1,461.54 | 16.76 |
| 1,607.69 | 22.12 |
| 1,768.46 | 29.20 |
| 1,945.31 | 38.54 |
$38.54 -
Not Possible! This is
their assessment not mine (just hiding in plain site so to speak), shows the share price sensitivity to current prices. I guess they couldn't imagine where prices would be today. This does assume however, we keep 100% of the project and no debt or dilution.
Looking alot more like how the market views Sigma at these levels. So I thought ok let's give up 25% of the project using simple revenue share and see what happens.
I increase the SC6 price by 10%, then reduced it by 25% at each level to get CRE's 75% share of the revenue
I rolled the share price tgt progresson forward using the discounted SC price and start the progression where it lines up with Cantor's base case.
| SC6 Price | SC5 @ 75% | sp tgt |
| 750.00 | 562.50 | |
| 825.00 | 618.75 | |
| 907.50 | 680.63 | |
| 998.25 | 748.69 | 2.40 |
| 1,098.08 | 823.56 | 3.17 |
| 1,207.88 | 905.91 | 4.18 |
| 1,328.67 | 996.50 | 5.52 |
| 1,461.54 | 1,096.15 | 7.29 |
| 1,607.69 | 1,205.77 | 9.62 |
| 1,768.46 | 1,326.35 | 12.70 |
| 1,945.31 | 1,458.98 | 16.76 |
So at 1945.31 SC6 price discount 25% S.P. at 16.75 This assumes we gave up 25% still no dilution or debt factored in. Management believe that the partner investment will cover the biggest part of CAPEX, debt and dilution may be pretty small.
Their initial 2.40 target price from which these progressions are based using a .6x NAV multiple.
Note, peers that have partners (off-take partners) trade at .8x to .9x NAV and
established producers trade at .9x to 1.4x NAV
This is really the first indication from an analyst report I've seen (although it's hidden) where our s.p. would reflect the levels of where peers are actually trading in the market. At 16.75 our market cap is now more in line with peers at 3.85 billion on 230 million shares.
I believe Cantor upgrade the target again back in Jan 2022 to 3.00 but don't know what pricing assumptions changed. However Spot was at least 50% lower than where it is today and my price progression s.p. would be sitting at 3.17 so I'd think it's still a close approximation!
Management have said a deal will be based on fair value. Likely some type of discount to NPV or NAV.
Is there anything else management have done to indicate this could be true. They updated the F.S. before any deal has been announced, revalueing NPV from CDN $726 million to CND$2.35 billion. If you were planning a low value deal would you have done this?
Why the disconnect in the market I can't honestly say, but the re-rating after deal terms are disclosed should be something to watch!
My guess,
The permit was the final trigger for the short list of potential partners to lay cards on the table with final offers.
The deal - Who is holding all the cards. First question, Who
currently has locally sourced concentrate available for the North American market.
Answer - No One! Second question - The nearest term producers of concentrate, Sayona/Piedmont, 1 H 2023 have off-take agreements with each other but neither has announced an off-take agreement with an actual North American 3rd party customer, only 3-5 months from production.
Do they have any available concentrate? Third question, If I were one of the corporations in North America in need of concentrate and staring at the answers to the above questions with billion dollar factories ready to come on-line in the next 24 months, would I be nervous.
Fourth question, If i just spent 6-8 months poking around CRE's data room knowing that other contenders are doing the same...at what point do I blink, realize I need to pull the trigger, and I better make them an offer they can't refuse...before someone else does!
Fifth question, If proximity to supply is very important and I'm setting up shop in Becancour, should I be getting very very anxious about now!
How much would I be willing to pay to get a 25% interest and exclusive access the only source of Tech grade concentrate in North America starting in 2025. The Hydroxide plant study Press release we did back in the summer state - "
The Corporation has held discussions with several automobile manufacturers, cathode manufacturers, trading houses and cell manufacturers. You never know when old notes all of a sudden become very interesting again.
Most people understand Steffen built Rockwood Lithium that was sold to Albemarle. Most people I think do not know that Chemetall Gmbh was the division that Steffen ran before moving to the Rockwood Lithium division. Both divisions were sold to Albermarle in 2015.
Albemarle then sold the Chemetall unit to BASF in 2016. BASF is building a battery and recycling plant in Becancour
expected to be operational in 2025. It will produce 100,000 tonnes of
cathode material per year...Sooo Steffen maybe also has friends at BASF Becancour.
I mentioned earlier JSL said in the P.I. financial presentation that spod goes by truck to metagami then by rail to Becancour. Rose will come on line
beginning in 2025. Lot's coincidences happening in Becancour these days!
BASF Revenue 2021, 25.9 billion dollars.
Cheers