AVZ (ASX) Running discussion on SP

Hi all,

Below are 8 pertinent rules for the Lithium industry that have guided me well thus far. However, please note that the below is my opinion only and therefore should not be considered as advice of any kind.

RULE NO.1 - Never underestimate the power and swiftness (exponential growth) of a major technology disruption, with the next IMO being the Clean Disruption of Energy and Transportation. China (excluding Tesla) was first out of the gate with substantial EV penetration, but now watch Europe lead the way before the USA and other territories follow suit. Meanwhile, ICE sales worldwide continue to plummet as customers hold off until a suitable and affordable EV for their lifestyle is available.

Soon there will be many EV models to choose from (and they will only improve in terms of quality, performance, range, upfront costs etc.)

January 2020 European EV Sales - a few of the highlights:

Italy: January EV sales Up 587% !!
https://cleantechnica.com/2020/02/1...ng-for-italys-ev-market-january-sales-up-587/

France:

UK: EVs 5.9% market share (+145% YoY). Note: This is prior to new model launches and the BIK tax reduction from April 2020 for EVs from 16% to 0%.

Germany: BEVs (+61% YoY) and PHEVs +307%) commanding a 6.5% market share
https://europe.autonews.com/sales-market/tesla-gains-traction-german-sales-fall-7-january

'As if there was no mistaking... we have entered 2020'

RULE NO.2 - Never underestimate the enormous value (and potential value) of a truly Homogenous, High Grade and Humungous (HHH) Tier 1 quality Lithium Deposit. T1 HHH Lithium deposits are as rare as hens teeth and IMO there are ONLY TWO that we know exist on the planet.

[Sidenote to all WA spodumene investors (excluding those invested in Tianqi and Albermarle's Greenbushes): A truly homogenous deposit does not mean 5 - 15m intercepts that are 200m below the surface, nor does Tier 1 mean significant levels of impurities (including Fe) that can only be removed via costly processes, nor does High Grade = 0.9 - 1.3%. i.e. please do not refer to mediocre deposits as Tier 1 in the future unless the deposit is worthy of that description]

RULE NO.3 - Never underestimate the significant re-rate that occurs when a successful explorer/ developer (in this case one who controls THE World's largest Lithium deposit) transitions into a low-cost producer. IMO 10-15 cents per share will seem very cheap in a couple of years. 50c -$1.00 is my medium term expectation if the demand for AVZ's premium product is what I think it will be by 2022.

RULE NO.4 - Never underestimate the power of technical analysis, especially once it decides to begin to mirror vastly improved fundamentals. Ignore the Golden Cross (both MA & EMA versions), increased volume and MACD Cross positive (refer monthly chart) at your peril. Refer to posts 42769642 & 42771787 for further reference.

RULE NO.5 - Ignore the power of imminent future investment from Global Green Energy Funds at your peril.

RULE NO. 6 - IGNORE the daily NOISE i.e. clowns, frogs, village idiots etc. trying to save face by posting multiple one liners per day, professional uprampers and downrampers seeking to gain (profit or vanity) at your expense, bedroom keyboard warriors insisting that they know more than industry professionals and just LOVE to create havoc on social media.

RULE NO.7 - when investing in a chosen product, LISTEN to product specialty analysts and commentators only (meaning Lithium experts as opposed to general commodity or general market experts). For example, Rodney Hooper (who is quite a conservative Lithium analyst IMO) has predicted that BG Lithium Hydroxide will be the first Lithium product to recover from the current oversupply situation. This is great news for long-life, low cost Tier 1 SC6 producers.

'The Western OEM EV battery qualified hydroxide market is smaller than you think. Only a few producers are qualified. Those that believe new Chinese chemical producers will add significant volumes to that market in the near term are likely to be disappointed. With offtake deals signed in 2019 (VW and BMW with Ganfeng) and existing deals with Tesla, I remain of the belief that this will be the first market to tighten as other OEMs look to secure their needs.'

However, as I've opined in RULE NO.2 , there is only one of these producers that I can think of (or two if you include likely producers by 2022 ). And although I do not agree with all of Rodney's analysis, I do believe that he is on the money with regards to his view of WA spodumene producers (see below).

'The truth is that most WA spodumene producers will struggle to get their total cost of sales (not the cost of production) down below $450/t-$500/t after including exploration/depreciation/interest/sustaining capex. According to our models, we see $600/t as the mid to long-term price for SC6, subject to impurity limitations. After factoring in VAT, a 15% operating margin and conversion costs, this is consistent with our long-term chemical prices for China of $10,500-$11,000/t. If other countries begin exporting large volumes of SC6 and can undercut WA SC6 costs (incl freight), then those long-term Chinese estimates can go lower.'....

'Most future production being idled is in WA, the reason - the cost of mining and processing lithium ore in WA is too high, thanks to a combination of labour, diesel and energy rates, WA's input costs are substantially higher than the US and elsewhere. To add to miners woes, the WA government is looking to generate tax revenues while the industry is still in its infancy. The boom of 2015-2017 encouraged the state to believe that the industry can bear the cost of 5% royalties on top of 30% income taxes regardless of profitability.

High strip ratio projects are uneconomic under these conditions. WA has the benefit of proximity to China, but lower transport costs aren't enough to offset the balance. As Tianqi and Albemarle have both seen significant cost overruns at their chemical conversion plants (Kwinana/Kemerton), the prospect of a downstream "lithium valley" is waining. China and Europe have grasped the importance and revenue potential of the battery supply chain as well as both job loss threat and job creation opportunity - WA has substantial natural resources and doesn't see the need to give lithium any preferential treatment.

However, the lithium value proposition is downstream, and WA appears fundamentally uncompetitive in that area. Perhaps when Albemarle/Min Res ship Wodgina ore to be tolled or processed in China along with Talison material someone will take notice. In my opinion, the operating cost of producing hydroxide from hard rock will be at least $7,000/t (incl all royalties) in WA - above carbonate from brine that's converted into hydroxide.'

https://www.linkedin.com/pulse/2020-finally-going-year-lithium-rodney-hooper

Now let's have a look at how mediocre hard rock Lithium projects have been fairing over the last six months:

*August 2019 - Bald Hill (Alita Resources) – Entered voluntary administration

*November 2019 - Wodgina (Albermarle & Mineral Resources) – Mothballed

*December 2019 - Whabouchi (Nemaska Lithium - Canada) - Entered Creditor Protection and layed off half of its workforce

*December 2019 - Kathleen Valley (Liontown Resources) - PFS revealed first production not until 2024 and a 25% IRR based on a US$690p/t SC6 price. Results = marginal project at best based on current prices.

*December 2019 – Pilnagoora (Altura Resources) – Reduced production guidance for December Qtr by 15%, citing maintenance and lower than forecast crusher performance.

*January 2020 - Mt. Caitlin (Galaxy Resources) – Reduced mining & production rates until market conditions improve. Temporary shutdown until March.

*January 2020 - Mt. Holland (SQM & Wesfarmers) - Investment Decision delayed until 2021. i.e. until market conditions improve.

*January 2020 - Pilangoora (Pilbara Minerals) - Q4 Production Costs a whopping US $900 p/t or approx. $550 above their US$320-$350 target & approx. US$450 above the spot rate for SC6 (= unsustainable).

Have posted this before and I'll post it again:

Which brings me to;

RULE NO.8 - Never ignore the most important graph in mining in unison with quality, facts and trends etc., and know that 2020 hindsight (pun intended) can be a beautiful thing.

IMO AVZ is primed to enter production during a 'sweet spot' come 2021/22. It's gain IMO will be further maximised in part due to the carnage, misfortunes, inexperience and misdemeanors of many of it's inferior peers who IMO may no longer be relevant by then, at least in their current form. And I suspect by that time (if not well before then for some of the smart ones) investors of WA spodumene producers will eventually figure it out and be like...….

GLTA and please DYOR.

Cheers
Elpha