Even though I’m quite bullish on the IO price I opted to get out today. Key reasons as previously mentioned
-Debt holders (namely WAMCO) clearly have a desire to exit their equity position as evident by ongoing selling – this will place much resistance on the SP in the near term (700m+ share overhang).
-Discounts for low quality ores (58% fe) continue to persist and look likely to continue. China, in my opinion, will eventually move into high grade west African ores to reduce reliance on Oz/Brazil..
-There appears to be little to no desire by management to grow the company, they are serving the debt holders and therefore will unlikely make any decision to grow until the debt levels reduce to a point where they are comfortable.
-Operating costs will be higher than expected in my opinion. This is because of 3 key reasons – 1. Less volume – one operation only means higher $/t relating to fixed costs/overheads.. 2. It is >250km away and there appears to alternate to trucking – this is about $16/t+ on its own. 3. There will be double handling to crush ores at Mt Dove as Webber doesn’t have the crushing capacity for 9mtpa+.
-DSO lithium will be short-lived and there will be no further deals in this space (the contract/off-take appears locked however). It is just not economical to crush, haul and ship 98.5% waste all the way to China – and with China cutting down on taking other countries waste I don’t think it will be long until the govt steps in. There are 3 new lithium mines opening up in the next few months which, along with debottlenecking and expansions at existing operations will fill the near term lithium supply gap... also PLS is the only potential customer in the Pilbara (MIN/Wodgina have their own DSO supply chain and AJM don’t have the mine life or grade to support DSO)
-Mt Francisco will not produce a thing for over 10 years. PLS who operate this JV have much more economical options to increase supply by expanding their existing mine (130mt+ resource), what incentive do they have of commercialising Cisco any times soon (vs expand Pilgangoora)?
-Atlas are only entitled to a royalty from AJM from the lease M45/1231. Whilst I don’t know the mine plan I know that the ore in the 100% AJM lease M45/1230 is a lot closer to processing infrastructure than M45/1231. Why would you mine the ore furthest away from processing infrastructure first (assuming consistent grades) and why – if you’re getting charged $50/t extra to mine the Atlas lease would you mine that first – doesn’t make a lot of economic sense to me.. I could see Atlas receiving close to no royalty for first 2 years of mine plan.
-The only way to monetise the port capacity is iron ore imo – there is nothing else being produced in the Pilbara that can fill that 6mpta gap. They have no desire to develop CD any time soon (debt holders want more of a cash buffer before executing these projects) and giving the capacity away to the likes of Fortescue will just hurt their margins.
I don’t think it will drop very far as it will be supported by the IO price – but it is fully reliant on the IO price and until I see the debt holders reduce their equity stakes and the board/mgmt team either restructured or change their tune on growth I will be on the sidelines... hopefully a strong IO price will enable this. Good luck.
AGO Price at posting:
2.6¢ Sentiment: Buy Disclosure: Held
