Originally posted by Sharpey
Many points here.
Firstly, LPD isn't in low level production of anything. At most, the company have produced samples from a laboratory bench. True, they are high quality samples, and in the next 6 months there should be a pilot plant producing something. But even the pilot plant is only one step above ad hoc production, and it certainly isn't anywhere near economic production.
We're still talking about samples and proof of concept here.
So why has the price dropped?
Multiple factors, I would say.
First you have the short term carbonate price in China, which has been steadily declining since March. It has pretty much halved in that time. And while that is a stupid thing to pay attention to as far as I'm concerned, as 90% of the market is sold in longer term contracts at prices that are at record highs, it is the one that markets seem to follow. The hype around lithium stocks last year was fuelled by that price getting high, and the lows are being plumbed because has been pushed lower.
GXY's presentation yesterday has an excellent breakdown of the reasons for this, and some nice charts to show what's been happening. I'd recommend having a look at it:
https://www.asx.com.au/asxpdf/20181116/pdf/440brcpbtc8vj4.pdf
So the broader sentiment has turned away from lithium just as fast as it came rushing in last year.
Then we move onto the company specific matters. This time last year, we were told the feasibility study would have been out by September, with a final investment decision to be made before the end of the year.
Personally, I am okay with the delay as it is the result of the team working to improve the economics of the plant. They saw the potential to double the size of the plant for less than double the money, so they moved on it. They've seen the potential to produce feldspar at Alvarroes, which should reduce the cost of mining the lepidolite, so they're doing that. They saw the opportunity to max amorphous silica rather than sodium silicate as a cheaper way to get into production and one with greater possibilities for expansion in the future, and they're doing that. They have found a possible way to use all of the residue from the plant in an environmentally friendly way, which would also reduce the upfront and ongoing costs of the plant, so they're looking into that too.
But where they have fallen short is selling that message to the market and making it crystal clear to investors that they know what they're doing and they're not faffing about.
After all, each investor has to assess the company's progress as they see fit and it is not at all uncommon for companies at this end of the market to be unwilling or unable to follow through on their projects. They just end up running around, wasting shareholder's money and hoping they get lucky.
It is up to management to distinguish themselves from that group and sell the message, and that hasn't been done well enough. If I get the chance at the AGM to talk quietly with Joe, this is something I will bring up, as I think there could be some simple improvements to when they make announcements and how the quarterlies are written.
For example, there was no announcement when the vendor testwork was completed and the team settled on a 5,000tpa facility. We knew it was likely, and it had been discussed many times before, but the final confirmation came as one line at the top of the June quarterly. That's fine from an engineering perspective, but from a marketing perspective, that is a huge piece of news that is being glossed over. All it would have taken was a one-page announcement confirming the details when that was decided, and it would have been a much clearer picture for all holders.
The cumulative effect of this is that even someone such as myself, who has a hell of a lot of facts about this company at my fingertips, still have to go through each quarterly report multiple times, as there are many details that are just lumped in and not clearly spelled out.
A very simple suggestion I will make, if I get the chance, is a table showing the previous timeline and the current timeline. If there has been any shift in the timelines, they can make comments underneath about why the shift was necessary, which makes it easier for holders to see and understand what is going on.
So, simply put, the other answer is they haven't been making it easy enough for shareholders to see that they know what they're doing and when you combine that with the general turn against lithium, the share price has dropped.
Now that hasn't been too much of an issue until it came time to raise more money to build the pilot plant. It is hard to estimate how much higher the share price might have been if the story was sold better, but as an illustrative example, if the share price had still been 3.5c for the raising, it would have been a 1-for-12 raising instead of a 1-for-7, which would have dramatically reduced the burden on shareholders to support.
There's no way of knowing if a better selling of the message would have helped that much, but it is likely it would have made some difference. This is important, because when it comes time to fund P1, they're likely to be trying to raise at least twice that amount of money from the market, so will need a much higher share price to make that go smoothly.
As I said in my critique of the Edison valuation; you can't expect shareholders to stump up the full amount of cash to build P1, and especially not when that amount of money is equal to the current market cap. That would be a 1-for-1 capital raising and I imagine it would fall square on it's a.
So the major risk we're looking at is where is that money going to come from? Personally, I think if management can deliver a strong feasibility study, the share price will respond quickly to positive economics. Even if they only assume 12 years for the project life, which is the current resource size of Alvarroes, it would still be around $350m. Slap a 50% discount on that bad boy and you're still getting a share price 3x higher than it currently is.
Combine a strong FS with a healthy prepayment from a reliable customer and I don't think it would be too hard to raise money at 3.5-4c, if not higher. As long as the story is sold well.
So there's your lengthy answer; the slide is from uncertainty in my view, and the uncertainty has been created by a market fixated on one part of the market, and from management not selling the story well enough.
As I said, I will try and raise this with Joe at the AGM, and see if they might put in a bit of work refining when they give shareholders an update. I hope, for instance, that there is an announcement once they have the capex figures for P1 in December. I don't want to have to wait until the end of January to learn about that.
As for the Chinese theory, so what if they are using the process? This isn't a software company, where they IP could just be grabbed and plugged into another system to work straightaway. The value in the process is in the by-products and the team have demonstrated a lot of work is involved in maximising that. As long as LPD can secure enough feed for its plants, and do so cheaply, I don't think it really matters if anyone else is doing something similar.
Cheers
Sharpey, I don't know if you have the time but you mentioned in a prior post that you were considering offering your services to some ASX companies. The company could certainly use your superb analytical writing skills to sell their story successfully. IMO your addition to the LPD 'marketing' team to write the company announcements and reports would be a huge boon for the company and all shareholders.
(20min delay)