Running Commentary on the SP Movements., page-6486

Here’s a left-field speculation that will probably be unpopular as it doesn’t involve a quick takeover.

As I see it, there are 3 feasible options
1. Chinese takeover AVZ
2. JV with Chinese to develop entire project
3. Chinese buy rights to ore from one mine (Roche Dure) and AVZ keeps the other Kitolo. AVZ gains tolling agreement with expansion buy-ins for the ore concentrator/ converter


A few hints lead me to suspect Option 3 but I will put some context into it first.
4. Management and Airguide have lots of skin in the game. Question: would you take $0.50 now or $2 in 2 years? Personally, I wouldn’t leave town at the first sight of gold. I doubt ML would want to leave the M-K project so soon either, he’d follow it. I know ML has been talking about Scheme of Arrangements, but the offer would seriously need to be too good to refuse for every major shareholder to accept given the immense potential value of this resource in a few years. That could be pretty damn expensive.
5. The Chinese have all information about the project currently available. They’ve probably already done preliminary PFS/ DFS equivalents on this project. My point is, why is Airguide and Nigel still there? They are legal and finance guys, not lithium experts. They certainly wouldn’t be helping decide a takeover price, much less prepare the legal docs as that would be given to a big law firm. No, there’s something else brewing “news expected and unexpected” were MLs words and that implies something contrary to our popular opinion of a full takeover.
6. This project is big enough for two mines: Manono (Roche Dure) and Kitolo (Carriere de Celeste). Why spend so much money and buy both if realistically you only need 1 for decades of mining? Strategic value to keep off the market? Seems like a heavy price. We also know that AVZ is drilling and JORCing Manono as an immediate priority. Why not simultaneously or consecutively? If both were being sold they would both be drilled ASAP. If that was the intention it would have been announced.
7. JVs can be troublesome. Look at the Greenbushes expansion- a small company with the tantalum rights is holding up a $300m mine expansion +$700m converter. Seriously? The tantalum is worth nothing compared to the lithium

So that leads me to the options.

Option 1 is the “expected” news and what everyone is holding out for. Option 2 leaves the buyer potentially exposed to bottlenecks per point 7. But I think Option 3 makes the most sense to build shareholder value over time while keeping the Chinese happy. ML has repeatedly said the Chinese are looking for lithium acquisitions but we know the problems with blocking stakes and shareholder approval. And per point 4, would you really trade serious future value (gained by developing the project) for a quick buck (accepting takeover)? Everyone here knows the value of this M-K project is worth many billions. 8Horse has done great work in that department and is ML endorsed.

Now, ML has also repeatedly hinted at “easter eggs” and “unexpected news”. Lets go back a step. We know the M-K project has 3 stakeholders: AVZ 60%, 30% Cominiere, 10% Dathomir. So really, AVZ is in control of the project and receives 60% of the profits from the operation. However, AVZ has all of the sale rights.

My left field speculation is an agreement where AVZ (as project controller) sells the right to the raw ore from Manono (so DSO at cost of mining) which is effectively a lithium acquisition for the Chinese. After all, they have all the sale rights, so who can stop them? To make this deal economical, the M-K project stakeholders receive perpetual tolling rights across downstream processing facilities located nearby, using their ore mined at Kitolo. The M-K project also has the ability to buy into further expansions.

It sounds confusing but this effectively how it would look in practise:

The Manono JORC comes back good, so the Chinese agree to give the M-K Project a 5Mtpa concentrator and converter tolling right at their nearby facility in exchange for any mined ore at cost from Manono. So the M-K project now has a 5Mtpa right which they can use Kitolo ore for. But China wants an 5Mtpa operation too for their Manono ore, so they have to build a total 10Mtpa operation. Ultimately, AVZ receives 60% of the profits earned from the 5Mtpa M-K project operation, Cominiere 30% and Dathomir 10%. Later, if China wants to increase it to a total 15Mtpa operation, then the M-K project can buy into it.

A lot of wins in my opinion. The M-K project stakeholders don’t need to pay for initial facility capex, only tolling, and are fast tracked to production. Those stakeholders already have enough problems to deal with such as electricity, roads and railways. AVZ and its shareholders become remain exposed to the lithium boom. China gets their lithium acquisition for half the cost of the initial processing facilities and no bottlenecking JV- only have to offer expansion rights. Importantly, no dilution to AVZ shareholders.


That’s what I think the crew over in China could be doing, getting the legal/ finance details of such a complex deal finalised.

Does that seem so unreasonable? Certainly fits “unexpected easter egg” criteria. Sorry it’s not a takeover, but I do think it builds more shareholder value. Unpopular speculation over.