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4.0¢ argosy minerals limited

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krazyox

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19/02/18

15:17

Post #: 31161868
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Originally posted by MarketingMan ↑

Argosy Minerals:
Strategic Assessment.

View attachment 973072

Situation as at February 2018

STRENGTHS

Momentum
An important factor that inspires confidence is project momentum.

AGY has mapped out what it refers to as a “clear conceptual pathway” to production of battery grade lithium (first product March 2018) at its Lithium Brine operation at Rincon, located in the world renowned “Lithium Triangle” region straddling the Chilean, Bolivian and Argentinian borders. Rincon is in Argentina (Salta Province).

From first announcement of commencement of on-the-ground activities to building the lithium pumping and processing operations (ASX Announcement: “Rincon Pond Construction Works Commence” 14 February 2017), AGY has remained on track regularly meeting project milestones.

Meanwhile news of the rapid growth in demand for world lithium resources has increased considerably adding further impetus to the project.

Aggressive project schedule, commitment to meeting milestones and a rapidly growing market demand combined to create a strong project with considerable forward momentum.

Regular project updates released by the company (average every 2-3 weeks) has demonstrated an aggressive commitment to reaching milestones and maintaining credibility. Management has shown an immense capacity to plough through obstacles developing innovative solutions with an obsessive focus on their primary goal – get to market with battery grade lithium as fast as possible,

Innovative fast track development program - FASTER TO MARKET
Perhaps the most controversial aspect of AGY is their decision to adopt a so-called “Fast-Track” approach. What does this mean?

The traditional approach to a resource project is to follow a ‘tried and proven’ series of steps that build investor confidence. Typically, the site is assessed through geological surveys and drilling programs aimed at modelling a 3D picture of the below ground ore body and through taking drill samples and laboratory analysis the size of the ore body is estimated and the expected yield of the desired commodity is estimated.

The all important JORC compliant statement is produced which is the official resource estimate.

This is followed by a financial feasibility that estimates the profits that can be made based on the CAPEX required to build the mine (the extraction operations i.e. digging) and the CAPEX and OPEX for the mineral processing plant (crushing and ore separation). Multiply the numbers out, apply the estimated market rate for the commodity (always a bit rubbery) and then you have a fairly good idea of what the mine will earn over the estimated life of the resource (i.e. until it is exhausted).

Once this statement is released, the market has improved confidence to support raising capital (through a share issue) to pay for the mine construction.

AGY basically said “there isn’t time for that, we are commencing construction now and will catch-up later with the JORC compliant estimates and financial feasibility.”
There are several reasons for this approach…

Delays add costs. Funding a company pre-revenue burns cash.

Pond evaporation for brine concentration is a 12-month operation. Working through preliminaries before construction would add cost and delay income.

The most important information required to define the cost of running a lithium brine operation is chemistry. Key question, what’s it going to cost to turn concentrated brine into Lithium? This can best be answered (and proved beyond doubt) by building a small operation and testing output. The cost of building the Stage One ponds and pilot processing plant is not dissimilar to running a company for 12 months while undergoing preliminaries and would provide real data.

“Brine projects are different to other commodities because they are ‘in solution’ which is mobile as opposed to rock or sediment which is fixed. This means as you draw from a well, you are pulling solution from the surrounding area, potentially outside of the lease. What this means is that estimated resource numbers are fairly meaningless in the traditional sense.
Most people in the market don't understand this and expect a resource announced because they think that's the normal process. Defining a resource is really just to appease the uneducated. The science behind the chemical process is much more important in this case and that is where the value lies. Argosy have gone about this in exactly the right way and the proof is in their success to date” (Quote from Blacktrade, posted to HC @BytheHorns 18/2/2018)

The decision to “fast track” is therefore a strength. They will be faster to market, still deliver a JORC compliant resource estimate (to appease the market) and shortly after start producing product. Financial feasibilities will be based on real operational data not modelling.

AGY has been vindicated in this decision because they raised $17 million October 2017 to fund construction of Stage 2, from institutional and sophisticated investors without a JORC compliant estimate of the resource or final bankable financial feasibility.

The fast track approach has added considerably to project momentum.

Yes, but is this a bit reckless?
The chief technology partner in the venture Pablo Alurralde has a 30-year history working in the Lithium Triangle region. His extensive knowledge of Lithium brine and extraction processes and knowledge of the Salar and past research work and roles working for other Lithium Brine producers (particularly global leader FMC) amply demonstrated to the company adequate information and hence the decision to fast-track the project.

Have stuck to game plan and delivered on deadlines
Argosy Minerals have fully described their fast-track project plan in a series of investor presentations. Refer http://www.argosyminerals.com.au/si...-20171017-agy-presentation-oct2017-final2.pdf
So far, management has delivered on this plan and are on-track to produce first LCE product March 2018.

Key milestones will be hit over the next 3 months
For a new investor contemplating investing in AGY, NOW is an excellent entry point. The key milestones are to be delivered over the next 3-months.

Commissioning of Stage One processing plant

JORC Compliant resource estimate (to appease the market)

First production of battery grade LCE – proof to the market that AGY have nailed the chemistry.

77.5% of investment in PUNA mining (target 90% as agreed in the JV agreement based on AGY reaching key milestones).

Signing of off take agreement (likely but not definite – see later)

Potential acquisitions of further land holdings (expansion of future capacity)

Stage 3 Works commenced

90% ownership of JV with Puna Mining.

High ratio of cash spent in the field versus in the office
One thing I hate seeing in a low cap resource development project is more being spent on salaries, wages, business premises, and other corporate costs, compared with value-adding development activities.
Over the last 12 months, AGY has spent AUD$4.74 million on development compared to AUD$1.299 million on corporate costs. A ratio of 3.65 to 1.

TECHNOLOGY: Key partner with Lithium production experience in the region
The key to the success of this project is Pablo Alurralde. Pablo is a chemical engineer with 30 years process chemistry design experience and 15 years lithium brine production. He is probably one of the most experienced and accomplished lithium brine process engineers in the world and with direct experience in the Lithium Triangle. He has set-up lab scale battery grade lithium production at the current location. While working with FMC Pablo registered patents for key aspects of Lithium Brine production.

Strong and capable business leader with relevant experience and qualifications
Warren Buffet has a number of key criteria for assessing investment in equities. A key one being to look at the people in the team. Business leader (Jerko Zuvela, Managing Director) is a company builder with extensive experience in resource projects. A chartered geologist with suitable business qualifications.

See resume http://www.argosyminerals.com.au/board-and-management

Under Jerko’s stewardship AGY successfully navigated through one of its most difficult challenges. AGY had a deal on the table with a Chinese buyer of AGY Lithium Carbonate (Qingdao Qianyun High-tech New Material Co. Ltd.) which they agreed to pay in advance as well as buy into AGY at 0.085 cents a share for a 19.9% stake in the company (just short of a controlling interest).

The Chinese company asked for an extension of the due diligence period which was granted (about 2 weeks) which put the decision date into the Chinese Holiday period (clever). They dithered a bit longer and finally, AGY walked away from the deal. It was AGY's decision.

Instead, AGY decided to delay seeking an Off-Take agreement and raised $15 million through institutional and high net-worth individuals offering 18 cents per share for less than (I think) 10% of the company (a Cash Raise). The private offer was much oversubscribed - they had no trouble raising the cash.
For many of us here, this was a defining moment in the history of AGY...

We dodged a bullet, the Chinese Company demonstrated a penchant for playing games and thought they had AGY over a barrel. They were likely difficult business partners.

The final Cash Raise, raised the required development capital for far less dilution and no risk of giving away control.

About the same time (roughly October last year) it became clear that Lithium prices were skyrocketing and delaying an Off-Take Agreement was a smart move.

AGY management displayed outstanding business acumen and impressed many shareholders and the investment market.

We are in a much better place now because they walked away.

Financial resources
The Appendix 5B report (for the DEC 2018 quarter) shows adequate cash available to fund AGY – AUD$15.2 million at bank and on-call.

This should be adequate cash to fund the company through to completion of the stage 1 processing plant and constructing the Stage 2 ponds, commencing Stage 3 ponds and preliminary works on the full production processing plant, completing drilling programs and release of JORC statements and financial feasibility statements.

It is predicted that AGY will not undertake further cash raises (avoid further share dilution) and will seek to complete development from sale of product and/or strategic funding from an off-take agreement. We have no details to verify this.

Tight cost control
AGY has a reputation for tight financial control.

Strength of all brine lithium producers - lower production costs compared to hard rock
Currently there are two main sources of Lithium suitable for commercial resource development and production. Hard Rock and Lithium brines.

Hard Rock is a conventional mining operation: After ore extraction, above ground processing starts with ore crushing, followed by froth floatation concentration, hydro-metallurgy and precipitation from an aqueous solution. A purpose-built processing plant needs to be designed and constructed on site. Often a pilot plant is built first as a proof of concept and to identify and iron out the bugs before raising capital (issuing more shares) to build the final full production plant. Typically, hard rock plants produce low grade Lithium that is then sent for further processing to extract the Lithium Hydroxide or Lithium Carbonate at a level of purity required for battery production.

Lithium brine operations are more chemical processing plants than conventional mining operations. Lithium brines are pumped out of ground water (usually under salt pans) into evaporation ponds where the brine is concentrated before being processed to separate the lithium from other impurities. The result (Lithium Carbonate, Lithium Hydroxide, or Lithium Chloride) usually requires minimal further processing and is supplied direct to the battery maker.
Lithium brine operations are comparatively simpler than hard rock mining operations.

Lithium brine operations produce a higher-grade product with less cost (Lower CAPEX, lower OPEX, and the operation is years faster to get from exploration to production).

Location
Argosy Minerals’ operation is in the Lithium Triangle region in Argentina, the world’s most dominant source of lithium production. 49% of global lithium production and roughly 70% of the world’s extractable lithium reserves.

The land holding was selected by Chief Technology partner, Pablo Alurralde who has extensive knowledge of the region and hand-picked the site based on his past academic and industry work on the Salar.

The site has the right combination of lithium concentration, accessibility, resource size and he is confident (through experience) that he can make the chemical purification process work.

The site was also selected for its suitability to set-up staged cascading evaporation ponds in rising tiers to facilitate gravity feeding (less pumping costs).

The location has good accessibility to their nearby processing plant operations (Pocitos industrial site) with road, rail and port access, water supply and electricity.

A key advantage for the location is the very high evaporation rates driven by high altitudes (boiling point of water roughly 80 degrees Celsius), favourable weather (dry, sunny 90% cloud free), and very high UV.

Argentina "Open for Business"
A key consideration for ASX listed companies operating in foreign countries is political uncertainty, unstable local populations (potential for civil war) corrupt or unfriendly governments etc.
Argentina has introduced a comprehensive raft of programs for example made changes to export restrictions, restructured its treasury policies and participation in bond markets, cleaned up its local stock exchange, created a workable legal framework and started touting to global corporations “Argentina is open for business”.

The new attitude toward encouraging foreign investment and removing barriers is creating new opportunities and creating employment.
The government is stable, business friendly and sovereign risk is assessed as low.
Crucially, compared to Chile (which also controls its part of the Lithium triangle) the cost of running a lithium operation in Argentina is much lower with less royalty impost, faster approvals and lower export tariffs.

Exemplary shareholder communication
AGY has demonstrated consistent clear and timely updates keeping shareholders fully informed. Members of Hotcopper report that business leader Jerko Zuvela is very accessible and contactable by telephone to answer questions.
AGY maintain continuous commentary and updates through Twitter.

Clean share register
Examining the significant holders list on the company’s register reveals nothing untoward. Key company executives have considerable ‘skin in the game’. To date, no directors or company personnel have sold out.

WEAKNESSES

High Market CAP
AGY has a high number of shares on issue. Roughly 918 million.
Compared to (for example) Lithium Brine producer Orocobre (ORE) has only 161 million (roughly half as many) and is trading at $6.72.
When finally in full production, AGY will have to perform twice as hard to deliver the same Earnings Per Share.

No JORC compliant resource estimate
While expected to be delivered soon, AGY currently has yet to release its JORC resource estimate. This means potentially the volume end of the investment market (Instos and sophistos) are not (yet) investing in AGY.
There is some risk in releasing the JORC because we don’t know what it will say. Given that we have already said that it will be somewhat meaningless (JORC estimates are well understood for hard rock mineral assets, its difficult to know how the market might interpret AGY’s JORC assessment).

The worst outcome would be a JORC Estimate with a lot of explanatory notes trying to guide toward a favourable interpretation.

Fast track approach has increased risk
Despite the many benefits described under “Strengths” for the fast-track approach, the big risk is that AGY’s assumptions are wrong. Should they find that they are in the wrong end of the Salar (for reasons unknown), pulling-up stumps and moving to a new pitch will be costly (and/or kill the project).

We will know soon enough (end-of-March).

No firm commitment to an off-take agreement
The market most likely views the lack of an off-take agreement as a definite weakness. It will certainly help the share price when an OT is signed.
However, an OT agreement doesn’t necessarily de-risk the project. The existence of an agreement doesn’t guarantee that AGY have proven their capability to produce BG LCE as any agreement will be subject to actual delivery of the final product (no matter how “binding”).

Personally, I feel that an OT agreement will come later (possibly even 3^rd QTR 2018). AGY will have no trouble selling early product on the spot market and at good money. The forecast increased demand for product is still forecast and not reality. A better time to start "talking turkey" on any agreement is when the buyers are getting twitchy.

High magnesium to lithium ratio
The big unknown is just how well Pablo Alurralde’s expertise will deal with the high magnesium levels in the brine.
Recent drill results reported the Magnesium to Lithium ratio as ranging from (4.3 to 1) to (7.6 to 1) [Tables 2 & 3 – “Rincon Project Drilling Update 13 February 2018].
Many in the industry would classify these magnesium ratios as high.

The leap of faith here is Pablo already knew of these high ratios (since he chose the site) and has a magical way of dealing with them at low cost.

Key man dependence on Pablo Alurralde
Another leap of faith is the project’s dependence on Pablo. If he is listed as a project strength, then the sudden catastrophic loss of Pablo would, by definition, be a potentially devastating blow.
One hopes that AGY have Pablo wrapped-up in cotton wool.

The key to success in a Lithium Brine project is making the chemistry work. This has been observed many times in articles that discuss the finer points of lithium brine projects.

Skinny management team
It has also been noted that the management team at AGY is “thin”. The team must be experiencing “role overload”. It has been observed before, Jerko is tight fisted with the cash. Is the team under-resourced?

OPPORTUNITIES

Rapidly growing demand for Lithium for vehicle and power grid battery technologies
This has been clearly established in hundreds of articles.

Motor vehicles
Around the globe, automakers and governments are betting big on electric cars. The numbers being projected are huge; by 2040, Bloomberg New Energy Finance estimates there will be 530 million electric vehicles in use. However, despite the hype, electric cars aren’t yet ‘popular’. In 2017, they made up about 1 percent of global sales.

Electric vehicles are rapidly getting cheaper and range between charging is improving. And in some countries, government incentives are being used to encourage purchase.
Thing is, electric vehicles are being embraced to help fix the climate change problem. No longer just for tree huggers; electric is going mainstream.

Recently, major car manufacturers have started jumping on the electric wagon; even traditional European luxury brands are all well into development and are starting to release electric vehicles.
A production version of the 2015 Porsche Mission E electric concept is scheduled to go on sale at the end of 2019.

Mercedes’ new SLS AMG Coupé Electric Drive, the fastest electrically-powered series production car in the world caused a sensation at its premiere at the Paris Motor Show.
BMW has debuted its all-electric BMW i3 and BMW i8 hybrid.

Volkswagen, which has gone from being famous for that funny little car to the world’s largest vehicle maker (having bought Lamborghini, Porsche, Bentley, Bugatti, Scania, Audi. Seat, Ducati, Skoda, and MAN) is planning a range of 23 VW-brand electric cars by 2025, and 50 EVs across its 12 brands. To be able to meet these targets, VW is building four battery giga-factories, in partnership with local and international partners.

Bosch, another German company and the world’s largest supply chain partner to the global automotive industry, could be one of these partners as the company is looking to invest in battery cell production.

Power Grids
Lithium is also the battery material of choice for constructing large batteries (for example the recently installed 100-Megawatt battery at James Town South Australia).
As countries all over the world start shifting from coal to renewables (particularly wind), battery technology will be called upon to fill the gaps on calm days and add frequency stability to power grids.

Standard Off-Take Agreement
Any day AGY could announce a standard off-take agreement. A simple binding agreement committing to purchase AGY’s Stage 1, 2 & 3 product.
Such an agreement is inevitable. It’s not a matter of “if” only “when”

Mega off take agreement
There is also the potential for AGY to enter into a far more ambitious agreement with a battery manufacture or auto-maker keen to achieve more than just locking-in supply at a favourable price but is looking to back a producer who has the required skills and proven capability to grow and meet their future needs.
Such an agreement would include…

Standard off-take

Expansion funding

For AGY this would fast-track developments of Stage 4 and beyond.

This is a very real possibility. If the many supply projects that are racing toward production fail or delay, and AGY emerges as one of the few that can actually deliver the product, then a “Mega Deal” will be cut.
This is one of the reasons why AGY elected their risky fast-track approach.

Not yet on main stream investment funds list
After AGY clears through their announcements list (JORC, Stage One production etc.) AGY will overcome some of the reasons why large funds aren’t yet investing. For retail investors the increasing participation of large funds, more instos and sophisticated investors will create more demand, lift the share price and create more volume. More liquidity should improve share price stability.

Potential technology transfer partnerships
It is anticipated that AGY will become the shining example of the next emergent Lithium producer who cracked the magic formula for how to make Lithium brine projects work. It also expected that many others will struggle (as has been demonstrated in the past).
This will create the opportunity for AGY to enter technology transfer partnerships, effectively earning toll revenue (i.e. royalties) for assisting them to get their chemistry to work.
There are many models for how the technology transfer could be applied (toll processing etc.).

Further increasing land holdings in Argentina
AGY have already taken an option over an adjoining lease at Rincon. Further expansion is clearly an option. For long term shareholders (2 years and over) this is precisely the reason why valuing AGY “As-Is” doesn’t make sense (and why the high market CAP is of less concern). Should the market demand continue to increase as expected, there is no reason why AGY will not continue to expand increasing production capacity to 10 to 20 times current plans.

Acquisition
AGY may go on the acquisition trail and start taking over Lithium Brine operations that drop back to low share price due to technology problems. AGY could buy these “fixer-uppers”, move in their technology and reap the rewards.

Takeover
Conversely, and perhaps not to far away (before AGY’s share price jumps) AGY could become a takeover target.

THREATS

Volatility in global equity markets
With rising 10-year bond yields, interest rates and inflation increasing faster than the market has factored (not to mention what that cut-snake Trump might do next), expect global equity market volatility. This may have all types of impacts on AGY including ripping the carpet out from underlying Lithium demand (slower transition to electric cars for example).

Process chemistry uncommercial or unviable
There is the real possibility (however slim) that Pablo Alurralde can’t make it work. That would be a stunning finding.

Unknown performance of the brine resource over time
The brine resource may change its characteristics as brine is pumped out. Magnesium levels may rise, flow rates become problematic requiring frequent re-drilling of productions wells, Lithium concentration might decline.

"Force Majeure" damage to the pond system
Pond walls might collapse, failure in pond linings requiring relining, earthquakes, adverse weather, sabotage, meteor strike etc.

Industry supply catches-up with industry demand
With so many lithium producers (and they all claim they will be successful) working hard to bring their projects to market it is not inconceivable that a glut situation could develop.

Particularly if…

Forecast demand drivers are slow to transition from rhetoric to reality
The huge demand forecasts at this stage are mostly hype. Car manufacturers are always keen to maintain a public image of being at the forefront of new trends.
This doesn’t necessarily translate into actual lithium sales and the transition might proceed at a more relaxed pace.
In any case, developing a new car model takes typically 2 to 3 years from inception to first cars rolling-off the production line.

Medium to Long term possibility of emerging non-lithium battery technology
Lithium is the clear winner for battery technology being light (half the weight of water for example), and electrically highly suitable for achieving the required energy density. At this stage, technology development is mostly aimed at getting more out of lithium rather than developing an alternative battery technology.

But, that doesn’t mean others aren’t trying. Everyday, somewhere in the press is announced “new battery technology will replace lithium.”

Unlikely, but it could happen; it’s a definite risk.

Change in Argentinian business conditions
Governments change. Policies change.

The most likely risk is that after 5 to 10 years encouraging a resource boom, Argentina gets greedy and ups export or royalty tariffs.
Happens in Australia.

IIMO
DYOR

Expand

I must have missed the announcement by AGY that PA's process is commercial viable and produces battery grade lithium. For me, that is the biggest weakness and a hurdle to still be jumped. It all comes crashing if the company falls short of battery grade and/or cannot be scaled to our production forecasts.
AGY Price at posting: 32.0¢ Sentiment: Hold Disclosure: Held
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