I have crossed paths with you before on Twitter, however, I was unable to locate our tweet exchange. I suspect that you may have deleted some of your tweets for whatever reason.
You tweeted the above on Monday night & I responded as follows:
To which you replied:
Before I present my rebuttal, let me answer your questions from Monday evening.
1/ What’s in a number?
Everything. You clearly don’t understand how capital markets work. For you, raising A$2.6 billion is just a number. The logic you use, by way of example, is Oyu Tolgoi. Huddle up. I have something to share with you. Oyu Tolgoi is partly owned by Rio Tinto. MC in the tens of billions (at times, hundreds of billions). SRL has a MC of circa A$140m. A company with a MC of A$140m isn’t raising A$2.6 billion anytime soon. It is pipe dream/pie in the sky thinking, but we will touch on that more later. For now, all you need to understand is that SRL is not RIO. So, numbers count.
2/ Using your logic, spending $7Bn on something like Oyu Tolgoi is just a complete waste of money is it?
Not at all, but nice attempt at using a straw man argument. Read my tweet again. It clearly indicates that I think it would be painful for a minnow like SRL to attempt to raise A$2.6 billion.
Moving on.
I note that you created a new thread over at SRL on the 9th October. In it, you have leaned heavily on Canaccord’s 3 September 2021 report - adding little insights & commentary along the way such as this humdinger:
Your thread was well received, regardless of its naivety and erroneousness. Perhaps, you were emboldened to shoot off a few tweets and posts in the JRV thread because you genuinely wanted to generate some robust discussion. I would like to believe that, but I don’t. I have concluded that you are nothing more than a confirmation bias hunter. You are here because you are convinced that SRL offers compelling value, that JRV is fully priced & that investors should ‘see’ what you magically see & “jump ship to (this) value”. This isn’t a new view you have formed, is it? You have held it for a long time & have spent years hunting for material that confirms your bias. Even as circumstances have changed over the years, you have remained staunch in your view.
Here is a post you left in the JRV thread back in September 2019 - less than 2 months after the eCobalt merger and ICO acquisition.
Two years ago, you weren’t overly enamoured with JRV, were you? And no matter what has happened in the interim (ICO, SMP, Kokkola, huge amounts of capital raised, institutionalising the register, appointments, etc) you haven’t changed your mind at all. Why?
“People who were right a lot of the time were people who often changed their minds”. - Jeff Bezos.
It has been a rough ride for you over the years, hasn’t it, Zempheth?
From your HotCopper posting history, I can see that you have held CLQ (now SRL) since at least February 2015. I assume you jumped onboard not long after CLQ acquired the Sunrise Project from Ivanhoe Mines back in late 2014/early 2015. Coming up to 7 years next Feb, hey? That’s a decent hold. I think 6 years is my longest. And it is especially remarkable given that it is a speccy. What a journey it has been for you. Years of feasibility studies. That crazy cobalt price run in 2017 that topped out in early 2018. From memory, CLQ passed or came close to a billion dollar market cap at one point, right? I remember that time well. I trust that you managed to take some money off the table during those halcyon days. I feel sorry for those who held on and rode it all the way up and then into a terminal spiral down. Talk about falling off a cliff.
It must have hurt when the Chinese flirted with developing it. Signing a development deal in 2018 and then seeing that terminated in 2019. Even after that debacle, a final investment decision was slated for mid-2020. But, here we are almost 18 months later sans funding. I could have sworn they even looked at selling 50% of Sunrise. Guess it never materialised. Quite an emotional rollercoaster, especially for those who held on. Again, I empathise with these investors. I know what it is like to be in a similar position. Thankfully, I managed to extricate myself from it and haven’t looked back ever since. I can relate. Importantly, I learnt from the experience. Many don't.
It doesn’t matter what you and I think. The market speaks for itself. I won’t dig out the historical charts beyond a year. Let’s just have a look at how the market has viewed SRL & JRV in 2021.
SRL
JRV
SRL: YTD -38%
JRV: YTD +54.82%
“Scoreboard, scoreboard”. Classic old footy chant.
Some serious shareholder price destruction vs some excellent shareholder price growth going on here. The market tells the story. And it just doesn’t agree with your “SRL is on another level” (implication being this is a good level - when it clearly isn’t) bullishness, nor your view that the SP is “depressed” (it is what it is and for a reason).
Anyone listening to you earlier in the year has done themselves out of a margin of 92.82% (diff between -38% and +54.82%). And you want those who have made bank to now listen to you and “jump ship”? I don’t think people are that stark raving mad.
Have you ever stopped and wondered why the SRL SP is (to adopt your words) “so depressed”? And this is with the price of cobalt up 65.83% YTD. Love that "leverage to the metal price". Imagine where the SP would be if the cobalt price was in negative territory for the year. Yikes!
Maybe this has something to do with it.
SRL is still searching for a funding solution after 7 long years.
Well, of course they are.
Sunrise was discovered in 1998 and it is still in the ground. And that is because it requires a gargantuan A$2.6 billion to get it into production (if we are to believe SRL's figures).
“What’s in a number?”
Do you have any idea how difficult it is for minnows with small market caps to raise A$100m? It is extremely difficult. 26 times that amount is absurd. You have clearly underestimated how difficult it is to raise such large amounts of capital. The market understands this. And the longer the funding issue can has been kicked down the road, the greater the market has punished SRL. And worse than this, you seem to be completely ignoring the funding elephant in the room. As I have previously stated, large deposits with long LOM often have significant upfront capex. Investors often focus too heavily on project size & NPV numbers without considering how such projects can be funded. As Mondy stated, if you can’t fund it, there is no leverage.
Instead, you have decided to focus on the company that has the highest ‘estimated’ EBITDA & EBITDA margins in (wait for it) 2028!!! Bahahahahahahaha. What could possibly go wrong with earnings forecasts for 7 years from now?
What makes this even more laughable is that one company (JRV) is fully funded, ‘currently’ has an earnings stream (via Kokkola) and will be in production in 8 months from now. In 12 months from now, we will be able to see real earnings. And we have a clear strategy to grow them. You are talking about ‘imaginary’ earnings because SRL has no clear path towards creating any earnings. What is the probability of a fully-funded company on the cusp of producer status, with global ambitions and multiple assets, still creating earnings in 2028 vs a laggard minnow who have no funding solution after 7 years? The market values actual earnings and future forecasted earnings that have a realistic chance of being realised, not imaginary ones with little to no chance of being realised. “On another level in terms of risk/reward”. Yeah, right. I only see risk, no reward with SRL.
I thought you had (perhaps) been seduced by broker reports, but I realise you have simply used them to confirm the bias you have held for 7 years. You have been dazzled by the figures, especially the EBITDA numbers and “peer leading earnings margins”. You need to learn how to crawl before you walk. Projects with low/modest capex & sunk capital (like JRV) offer distinct advantages over capex goliaths. It is the reason why JRV has progressed from project acquisition to full funding within 2 years. These projects have a tendency to ‘get up’.
My view is that laterites will have their time in the sun, but that time isn’t now. No one gives a hoot that you have the self-professed “best laterite in the world”. I can name a stack of laterites out there that aren’t going anywhere fast. The reality is that they are options on higher nickel and cobalt prices. Sunrise has AISC of US$41.7/lb according to the report you shared. It isn’t even close to being in the money. That’s a long way to go just to breakeven, but we are on the way. And no - SRL’s SP is not responding to the increase in the price of cobalt right now, so I don’t understand where you are getting this idea of SRL having the highest possible leverage to the metal price from. That’s your assumption. All I see is a stock responding to ongoing financing uncertainty.
Something else I picked up on was how you cherrypicked the Canaccord report. While you frothed at the EBITDA numbers and margins and loved the sensitivity analysis (only as good as the underlying assumptions), you took umbrage with one of their assumptions. Canaccord put capex at A$3.23 billion and think it prudent to (wait for it) raise an additional A$1 billion in capital. I am not making this stuff up. So, all up A$3.5 billion. The nightmare just keeps getting worse. “Hello, we are a $140m dollar capped company & we want $3.5 billion. Thanks a billion, Mr. Market”.
Canaccord have split the cap at 1 bill in equity & 2.5 bill in debt. Sure. No worries. How one may ask? Selling part of the asset (tried and failed), streaming (ouch - lose upside), equity (diluted into oblivion), debt (get outta here). I love how they referred to the “capital hurdle” in the report - like it is something easy to scale. Choice use of words. I would have written “insurmountable wall”. You must be hoping that off-take partners will help scale that wall. Who knows what will happen in the end - maybe SRL will eventually be taken out by a large miner for pennies. Wouldn’t be hard. Or will Bobby Friedland - financier extraordinaire - save the day? Or does he have other intentions for the company? So many unknowns with SRL. Therein lies the risk. It is massive.
You may think JRV is fully valued, however, you haven’t considered the possibility that they may acquire additional assets. They certainly have form. Canaccord acknowledged that upside remains if JRV can secure low-cost nickel to feed the SMP. I have previously speculated that I think they will acquire another nickel asset to complete vertical integration across both cobalt and nickel. No, Canaccord, JRV will no longer source MHP via third parties as was written in the report. And it is funny how they assigned little to no value to Nico-Young (our laterite), while pumping SRL’s…well…err…laterite. I guess that is all SRL has, so it makes sense.
Canaccord have stated that Sunrise will require 3 years to construct from finance completion. And they have construction starting from 2023. So, 2026 is the best case scenario? What happens in the next 5 years? Assuming you jumped onboard in early 2015, you will have been holding for 11-12 years before you see any earnings. I can’t fault your conviction.
But, here is another little tip for you. While you wait, you forfeit the opportunity cost of time. Think of all those opportunities you will be missing out had you deployed your capital elsewhere. And should SRL fail to resolve the funding issue, your capital will continue to be stranded. And I guess that is what an investment in SRL really boils down to. A simple question as to whether one thinks a funding solution can be found or not and how long it will take. Too risky for mine right now. Would rather have my capital in a company that has grown its MC from 125m (when I first invested) to its current MC of $833m. I will continue to back Bryce and his team in - as they move towards building the next Xstrata MKII. JRV is grounded in reality, not fantasy - like SRL.
Conclusion: You have backed the wrong horse, Zempheth.
(20min delay)