There was a price linking mechanism along with PLS offtake deals heavily linked to Li2CO3 pricing in China. Go back through old company announcements and you will find them.
However it seems, like certain floor prices, the Li Chem price linking mechanism went out the door as producers pushed to shift product. In the case of PLS there was a balance between keeping customers by supplying smaller quantities (including some movement of lesser quality legacy product) and making use of the downtime to rectify what were significant plant issues. Given the strong balance sheet there was no urgent need to pressure offtakers to take product they did not require at the time or contribute to further tanking the spodumene market price.
For those that have now decided the ACCC should get involved to block the acquisition, keep in mind PLS could have run AJM out of town earlier by undercutting on price - particularly to Ganfeng. They chose to act responsibly in that regard and there is nothing anticompetitve about bidding for a competitor that has defaulted on their senior secured debt.
The single most important decisions PLS management took were to initiate a major dilutive CR and focus their attention on rectifying plant performance issues. Combined these endeavours played a major role in attracting ~5% finance from global bank BNP Paribas and "not a charity" CEFC.
The work not just fixing physical plant issues but fine tuning elements like flotation reagents has provided PLS with valuable knowledge to apply learnings to the AJM plant if their bid is successful for ALO.
The difference in colour of the 2 company's SC can be seen clearly in this picture and I'm reliably informed a major factor was reagent choices for flotation. IIRC the PLS product is darker (right hand side). Company reports suggest PLS achieves Lithia (Li2O) recoveries of between 72 & 78% while AJM had multiple recent quarters at 60%.
If PLS can lift recoveries from the ALO plant to 75% that is effectively a production increase of 25% from the same throughput. This improvement would exceed ALO plant nameplate output (220k wmt pa) by more than 10k wmt pa taking it above 230k wmt pa. It should go without saying it also maximises the use of Lithia in the ALO reserves - as at only 60% recovery, much is heading into the tailings dam.
As Coach Kenny has pointed out, there are many obvious synergies achievable from a combined operation and its not just restricted to head office as suggested by some detractors. Logistics will play a sizeable role, one obvious saving is that I believe a single camp would suffice for both S1 operational needs.
Material cost savings should be achievable by streamlining the 2 operations and that is something that no other potential bidder will benefit from, even if they manage to submit a binding proposal in time. I imagine it is now down to a matter of days.
If there is a superior offer for PLS to match I would hope the PLS BOD considers funding shortfall from an extended underwritten rights issue to holders, as the 36c price would be heavily subscribed IMO. Perhaps a bonus issue of asx tradable options would also be a welcome move for those that placed faith in the company.
The list of credible ALO potential suitors is quite short and appears to be entwined with Chinese enterprises that carry FIRB risk for any binding proposal... one of those entities already holds an equity stake in PLS and stands to benefit handsomely through SP appreciation although I must admit this would unlikely compare to the savings they have made by playing AJM and PLS off against each other and then applying similar pricing to Mt Marion.
To speculate, I think PLS not chasing a deal for Weihua (Now known as Shenzhen "Shengxin" LiNeng Group) was a sign they have discussed the possibility with Ganfeng to continue to supply product or perhaps even ongoing talks with POSCO as to how best meet their needs.
Whatever the rationale, it's nice for the Australian industry to finally stop undercutting each other on negotiations and it is beginning to reflect in SC pricing... I will also note while the AJM mine and plant is on C&M, I imagine the stockpile is still being moved as quickly as possible, so supply in real terms has yet to dry up.
That said, the combination of increased demand for Li Chems (which lags OEM and Cell Maker demand to some degree) and the newly found price negotiating leverage independents have found from the removal of AJM supply into the near term future has already seen pricing for SC6 rise from a relatively long period of a flat low.
In the meantime value has been stripped from ALO (Altura Lithium Operations - the company that is a secured asset against the noteholder debt that those financiers and PLS have formally agreed to terms) for potential competing bids.
This removal of value will impact AJM "insider's" ability to convince those that were keen to get involved in a restructure of sorts for AJM (the listed entity). A simpler more attractive proposition for AJM figures like James Brown and Allan Buckner is to put together a new vehicle to buy ALO and make a clean break from AJM equity holders including ShanShan that gained approval for an "unfair" longterm offtake deal when AJM had no choice but to sign.
That hypothetical assumes the group that failed to put together a suitable restructure deal after many months - going right back to last year would be reasonable - can repackage a deal that came up short in the space of a matter of days. IMO they have not displayed that level of competence previously.
That task is made even more difficult with operations on C&M, remaining stockpiles of finished product being sold, critical staff gutted, assurances from PLS they won't provide access for ALO to mine part of their reserves, the loss of a key offtaker to GXY, and today it seems to have gone undiscussed that AJM's incestuous sister company SYA has pulled out of the relationship regarding the earn in agreement for a number of tenements that were seen as a large speculative part of AJM's future.
Hopefully there will be a return to the old normal, that in itself was fleeting, as Chinese customers learn that ignoring the safe guards built into contracts results in additional costs and headaches with their own downstream customers when a key supplier goes under.
Yes, these days spodumene supply can typically be switched without significant equipment chanes, however there is a period of fine tuning and their own customers will be heavily on their backs monitoring each batch closely to ensure specifications are retained.
There was a time when converters with rotary kilns had issues processing fines / blended fines (PLS) as opposed to coarse (GXY) due to dust "blowout" etc, however most plants have been retrofitted. Here is a handy flowchart for a rotary kiln type calciner that is capable of converting fines SC from alpha to beta spodumene (I like to consider it the front end initial stages of a conversion plant):
I would imagine the tier 1 players have an easier time due to credibility and proven ability to adapt to changes previously, however many smaller to midsize independent converters may find themselves receiving lower pricing or looking for replacement customers. Time consuming and potentially expensive exercise.
I would add that I consider the PLM and AJM products the closest in the industry to a commodity given their proximity and quite similar ore characteristics. Not completely interchangeable, but minor differences converters should be able to handle.
Now for those that claim AJM didn't have a large impact on pricing due to it's size, keep in mind how little spod is "sold" as opposed to run through closed "bubble" integrated operations - talking Talison (Greenbushes - Tianqi and Albemarle) partners here.
PLS, GXY, AJM were the price setters for high quality spod and Ganfeng used the resulting "market price" to set pricing at Mt Marion.
While PLS and GXY heavily moderated, AJM was the largest contributor of the 3 to exports sold to independent converters. AJM regularly celebrated outshipping their independent peers, and I will repeat because this is such an important often understood point; while they may be small compared to the likes of Greenbushes, they were a dominant player in setting market pricing because of the way the market is structured.
Result was the market price crashing through their own floor of US$550 dmt FOB (Pt Hedland) to below US$400 dmt CIF (China).
There is a lot of celebration going on at the moment, and I understand the relief due to the SP rises across the industry after a devastating cyclical low compounded by Covid, but keep in mind we are a long way from pricing levels for idled built capacity to be brought online - and frankly there is a massive amount of available capacity between Greenbushes and Wodgina in Australia - and further still from incentive pricing for indpendent brownfield expansions or even the long list of juniors that are close to shovel ready.
I expect plenty of rallies and pull backs in response to what should be a fairly controlled release of spodumene product onto the market thay may translate to stable price increases. Stability is very important IMO for investor confidence. I agree with most about the overall medium to long term trend.
Will also note I've read some questioning why on earth anyone would sell at the moment... well some are holding 100% returns from not many days ago (some much much more from the Covid low) and in fairness there is merit worth considering to those discussing TA voodoo and RSI overbought indicators.
Beat of luck. Sentiment change to none.
(20min delay)