Satellite images from TA2, page-15

As it happened I actually listened to Part 1 of the interview with Koala and I agree that they sometimes had a tough time staying on-topic and the guest would often go off on tangents. Thats not to say that the tangents aren't interesting or insightful its just that the information is a bit random.

I made notes as I went, and it was a far-reaching and wide interview with a potted history of M&A and copper fundamentals before the relevant bit for us as AZS holders came in.

My takeaway notes from the discussion:

Part 1

Q: Anonymity? Online meritocracy, Koala was on gardening leave, and HotCopper is anonymous, so the discussion about Twitter was interesting as it has “de-institutionalized” and broken the gatekeeper operation of financial institutions. Just like YouTube and social media have disrupted the traditional news media outlets.

Koala’s background - Investment Bank analyst interested in:

1) Genuine tier 1 M&A targets 1^st quartile long life assets

2) Value trade non-consensus hi conviction on a specific commodity

3) Call option dynamics by virtue of stage or pricing dynamics

Long resource cycles, funds cannot lose big $ for 2 years, Big companies need Tier 1 orebodies because of costs/inefficiencies and effort and mine life (nothing controversial in that). Tier 1 are so big that they have their own “optionality” to expand when necessary.

Most important factor is where are you on the cost curve? An interesting discussion about how this is often overlooked by the market.

M&A is hard, the bigger the M&A headcount the more people to convince inside and the target to do a deal. Corporate PTSD after last cycle misadventures in HPAL, Magma Copper, Alcan M&A, Mozambique coal, Shale Oil etc etc

Ivanhoe had to give away 50-75% of Kamoa-Kakula to Chinese to make it happen (fair point) – who else except for Freidland wanted to go into the DRC for a world class asset? No-one except Freidland would develop it – if that was anywhere else someone would have done a takeover or M&A to get it. (agree).

Why is the expected Cu shortage not happening yet? Because majors can expand brownfields like Grasberg, Kamoa-Kakula, and Escondida, Olympic Dam (much more arguable now in an inflationary environment and some of those jurisdictions are not as good as they were previously).

Freeport & BHP went into oil and gas. Glencore is the only major not to rerate yet.

Market has been asking major miners for dividends, “give me my money back”, buybacks aren’t accretive, don’t take any risks, don’t borrow money, we don’t think/trust you with this free cash, we think you’ll do something silly with it, don’t expand your business, ESG, dispose of profitable assets in “uncool” commodities bah blah blah…the one thing omitted from this macro investment discussion was the effect of higher for longer interest rates, and baked in inflation, other resource guests they have had on are saying that inflation is the big "different thing" in the last few years that effects every decision-making process from the individual investors right up to large multinational corporations and the entire investment community.

Oyu Tolgai story extra 2 years and multibillions overbudget, “drama, and headaches” that RIO did to themselves have hurt the minority partners, also Mongolian government shenanigans not fully explored. So an interesting example of the trauma that a majority partner and or the jurisdiction can do to you if you are a minority partner/shareholder.

Exploration discovery makes huge wealth and uplift in value quickly, (look at the AZS share price) do you want to sell and pay capital gains tax and buy xmas presents with the money, or do you want to maintain ownership of the asset when its producing cash and paying dividends in the future? Why not shares in a producing major? (Relevant questions for any resource commodity business in my opinion, even Li?)

Q: Whats with the ChrisGina blocking stake strategy in WA Lithium?

“I don’t think it makes sense to drill another hole in WA for more Li.” (Obviously contestable and a bit clickbait) - the Koala argues that these blocking stakes have almost “sterilized” the orebodies of LTR, AZS, WC8, DLI etc and there may be a bit of frustration that this co-ordination might have taken the frothy top out of sentiment and some of the upside for retailers.

He also argues that there is insufficient labour expertise and materials to construct multiple Li mines in WA, this is debatable because they will be sequenced by the controllers of the rock, LTR is already being built and MIN and Gina can sequence the development if they have effective control to avoid the competition for labour and resources e.g. “smooth out the supply growth”. People learnt the hard way that simultaneously building 3 LNG plants in Gladstone ended up being value-destructive for everyone and I think that ChisGina and other people want to avoid this again.

This is another way of saying what I and many others have deduced that the Ellison & Reinhart approach to hoard or at least block/sequence all the rock is a direct challenge to the Chinese dominance of the upstream and particularly downstream parts of the Li industry, and is their logical response to price manipulation that we saw in the previous Li boom and bust (the fate of Bald Hill being a “How Not to do Lithium 101 training manual). Post Covid lack of trust in supply chains and post trade sanctions against Australian farmers, coal miners etc has woken up FIRB so that no Chinese company will be able to make further ownership inroads into any ASX listed Li developers or producers. Sure Chris and Gina are in it for a buck, but they have seen similar stories before and have a long-term bullish view about Li and want to do it in a better way in the future, with acceptable (i.e. anyone except China) partners – hence I think they will be open to deals with Albermarle, SQM, Livent and future South Korean, Indian and Japanese partners.

Matt saying open pits are much simpler and lower risk to execute in WA – strongly agree because everyone underground is losing money at the moment, except for very high-grade gold mines. Despite this, Matts opinions is that the LTR orebody is the best chance for a world first profitable volume underground hard rock Li mine (once the teething issues are sorted out). I’m personally agnostic about this, but it will be interesting to see how it unfolds.

Q: How do you see the future of Lithium?

It’s the Iron Ore of 30 years ago, Koala dismisses the wall of mythical DLE methods, the slow and expansion of brine that is difficult to scale up, unlike hard rock Li. In this respect his opinions are probably similar to Chris Ellison and Gina Reinhart and a lot of hard rock shareholders like us in AZS. Leipolite in China and Africa is the phantom 4^th quartile of the cost curve, but it exists, and that cost curve is not flat like BHP and others maintain. There are hints but not specifics that the Chinese vertical integration is a lever that the Chinese are willing to pull, that seems economically irrational, but is actually probably a long-term strategy to disrupt and manipulate Li feedstock prices to keep the downstream capacity and IP all within China. My additional comments would be that this seems entirely plausible as the Chinese do it with domestic coal production and their domestic iron ore industry that serve no purpose other than to disrupt and disjoint the normal forces of supply and demand and price discovery, along with fictional stockpile numbers of commodities that suit the agenda of Beijing and are not reality.

“Price volatility” is quality's best friend. When people panic you can buy assets cheaply. (pretty fair comment)

A lot of WA hard rock Li assets require flotation, which means water and capital for plants, so they will work, but they take time to permit and build (fair comment), not many special orebodies can deliver in spec Li precursors reliably to all these downstream processors which will be fussy about contaminants and specs as they try to make better and better batteries.

He didn’t address the core issue of too much downstream capacity chasing too little upstream hard rock supply which I think is one of the most important dynamics of the future Li market and supply chains. And these supply chains will be political beasts subject to the whims of politicians (IRA act and compliance, FIRB restrictions) and not apolitical boring tradeable fungible commodities like Iron Ore in the 1990s.