HMW Project Valuation, page-12

@HOOPZ , not wishing to be critical of your work as you do excellent work here members of this forum enjoy reading as do I but in the interest of furthering the discussion and testing your thinking I would pushback on you on PE ratios in your valuation ;

First up a query though ;

1. Very few lithium producers get to 100 % Battery Grade production within a couple of years. Most are mucking around with it for years. Orocobre now AKE via its Galaxy merger, has been mucking around it with it for near on ten years and still only have like 60 % of their production at Battery Grade last time I looked ( I own shares in AKE, hence how I know this) . How are you handling this real world artifact in your valuation model ? For mine you need to have some additional discount factor on the future revenue stream in the modelling that allows for this dilution to the earnings profile. In the real world you will find BG production % will ramp up but then will level off at some point that will be chemistry dependent. Admittedly HMW has excellent chemistry including low Mg which helps us. In fact this is where hybrid DLE techniques can also help which companies like Livent have but we dont have this tech and its not generally available to the industry as this is an inhouse secret of Livent.

On a side note this question of chemistry is the most overlooked & crazy part of Galan's valuation relative to it's peers. Lke is on a mediocre salar concentration and impurity wise and while personally I dont feel they absolutely need dle to get the project working they purposefully went down that path to try and differentiate themselves in what will be either a high payoff or high fail move. Risk = Reward in this world and good luck to them but glad we are not being this adventurous particularly as JP says, we simply don't need to do this.

The other point I am trying to make here with BG pricing and timeframes is BG is a lot of hard work and a steep learning curve. Chloride is orders of magnitude easier to do. Its hard to factor that into an NPV analysis but people need to be cognizant of this changing risk profile in terms of cost over runs, delays with getting to production and in the end failure to actually pull it of with 100 % of your output etc etc . In fact valuation theory would suggest one probably should use a lower discount factor when weighing up chloride vs carbonate to account for such a huge risk differential. In the longer term but doing carbonate will protect the business better as your becoming in effect a chemical producer not a seller of a commodity, which to some degree puts a moat around you from the vagaries of short run supply and demand.

2 PE ratios. This is the main area I want to test your thinking on. You are using 12,15 & 18 as a earnings multiplier for low , med and high valuation scenarios. I am struggling a bit with this as this is well above what the market is working on. Rio Tinto's current forward PE is about 6.5 and analysts usually predict it in the 6-10 range. BHP's is pretty similar. These are massive companies as you know with diversified portfolios of commodities to lower commodity specific risk and importantly are multi jurisdictional to lower country risk and hence are not dependent on a couple of operating assets in high risk jurisdictions as we would be once we get HMW into production in Argentina. Personally I think the market undervalues these sorts of diversified commodity producers a lot and they may well move to higher PE ratios over the next decade as equity markets realise particularly with things like the EV transition that the world actually needs hard tangible commodities that one digs out of the ground more than the next bit of junk software that silicon valley has dreamt up.

Admittedly BHP, Rio etc are commodity companies so that does suppress their PE ratios as this makes their earnings profiles more risky and so one could argue speciality chemical producers might/ should demand higher PE ratios. There is some evidence to support this theory. If one looks at Livent there's is currently high at around 18 but its trending down fast as you move out to a 5 year forecast. Its high now as the market is expecting a step change in their earnings profile that is already priced in. But as you move out in time it renormalises back to around 10-12 range. SQM's is around 9 on average looking forward, again hovering around 10. Albermarle is about 12 and the market expects it to hover in the 10-12 range over the next 5 years. These are all multi asset companies with proven production profiles and marketing channels and the average is somewhere around 10-12 mark. So my critique is the 12 you have used should probably be the high end and the low end probably should be around 6, as Galan will start with one operating asset in Argentina that is in a high country risk jurisdiction.

The other issue now too is a world of interest rates at or near Zero is gone now and may not be coming back anytime soon which has flow on effects to how the market works out and prices in risk. Higher inflation is likely hear to stay for the medium term . This is pressuring PE ratios down as the risk free rate moves up.

Anyway would like to understand why you working on 12-18 ?