Pass Me The Hopium Bong

I'll answer my own question first, "where is the price going and where is support?"

Weekly chart of closing prices excludes weekly ranges of course but does provide a smoother long term picture. Bottomed out at 35c during that stomach churning 2016 stock market and commodity capitulation bottom, then formed an uptrend to the native title court loss low of 44c, then finally a bounce off 54c early March before breaking down late April.

With stock markets crashing, oil around US$25, IO around US30 etc, everything went to hell in a hand basket early 2016 on genuine fears China demand was falling over for good. SFX still hadn't got the native title issues sorted, no mining lease and no DFS at that stage, min sand prices were low, so one has to think 35c represents a pretty good floor. Only if the trade war drags the world down into a recession, and/or SFX comes up completely empty handed from the sale process, would one think 35c is tested again. Fun fact, at 35c SFX has a market cap of $91M but has already spent $97M on developing Thunderbird over 8 years. Pretty sad to think that after all the good work and success finding, proving up and permitting a much trumpeted "world's best undeveloped Zr min sands deposit" the company would be worth less than 8 years of the funding it took! 40c showed some support around 2016 and one would expect (hope) it shows a stronger psychological support preventing prices heading into a 3 handle then 50c showed recently.



On the daily (a sickening reminder of the ride down since Oct highs) the latest downtrend started early April with the 'thou shall not pass' sell bot and is trending down at the rate of 2.66c per week. At this rate it will hit 44 cents by the end of next week, but judging by the utter lack of any buying conviction, Bruce's lack of timing conviction, and the gaining conviction this trade war will drag out and get ugly before it gets better, I have doubts 44c will hold. 40c looks a more psychological and fundamentally cheap price to garner enough buying support to stop the rot imo. Buying will beget more buying at some stage, then bottom feeders will want to jump the defensive wall to get a piece of the action. I like to think at this stage of the sale process and with central banks for ever at the world economy's back that the 30's makes compelling buying (ie it won;t get there)



With SFX looking more and more a TO target as the price falls, shorters wouldn't want to get involved. Any day the trading halt could hit the screens and there goes 100-200% losses. Sure, would be acquirers may be playing their games and some funds selling down bits to buy back cheaper for pips but genuine shorting just looks crazy. Volume since mid April has been low, in all honesty looks more like short term buyers that turn around and sell as the knife keeps falling then anyone seriously trying to reduce exposure. I'm going to call 41c the low at worst by early June.

Another question debated is "how long should this process take". I did some research on the recent Mineral Resources structured sale process which gives us some idea of a time line. MIN announced that MacQuarie Bank was the lead adviser for the sale process of 49% of the Wodgina project on May 1st 2018. SFX has been adamant that that cannot say anything about the sale process whatsoever, that UBS has gagged them and such is standard practice, however MIN shows that is not always the case.

MIN offically started a structured sale process after being approached by numerous parties interested in being part of the Wodgina expansion, not unlike SFX who claims that numerous, credible parties have shown an interest since the mining lease was awarded back in 2018. On the 15th June MIN announced to the market that "the first stage of this process, which involves a five week period of due diligence by prospective biddersprior to lodging non-binding indicative bids, is expected to commence later this month." So May 1st to end of June is two months before the first period of due diligence for interested parties. IMO that is the longest possible wait for due diligence, driven in the case of MIN by the fact they still hadn't finished the PFS on the lithium hydroxide plant by the 1st May, hadn't finished a DFS on the mine expansion, hadn't had a financier or independent reviewer go through their feasibility etc. MIN needed to get ducks lined up for the due diligence, whereas SFX had the DFS complete in 2017, then Taurus and an independent reviewer pick apart the DFS, and GR Engineering go through the project like a dose of salts. Simply put, SFX was ready for a due diligence data room before Xmas.

SFX would have to put the word out for a 4 to 6 weeks tops before opening the data room ready for DD. The clock was ticking on the 2019 dry season for work and SFX doesn't have enough cash to even make it to next wet season. Say we then run with a similar 5 weeks data room DD as MIN offered their potential partners. On 24th July MIN announces that "Non-binding indicative offers are expected in mid to late August and the Company is targeting anannouncement of a transaction by the end of calendar year 2018." So the DD room was opened towards the end of June and indicative bids were due mid to end of August. Seems about right, one month to chew over the project and make your first formal offer.

In SFX case that equates to 4-6 weeks from UBS appointment until DD opened, 4 weeks DD, then another 4 weeks for indicative offers to be in (12-14 weeks all up). In real time that is mid Jan UBS appointed, near end Feb DD open, and near end of April that all indicative bids are due in (Blue Ocean's MacIntyre's guess back in early March to). However, even after the non-binding indicative bids were in by late August, it wasn't until Nov 22nd that MIN announced they had signed a "Exclusivity Agreement (Agreement) with Albemarle Corporation (NYSE: ALB, Albemarle) in relation to thepotential sale of a 50% interest in the Wodgina Lithium Project (Sale Interest) and formation of a 50:50joint venture". So it still took 3 months to haggle with the best bidders and shake out the best bid (which was an absolute cracker) and lock it in.

The 3 month MIN 'haggle' delay wasn't because of a lack of interest obviously, apparently every man and his dog made a bid including WES who subsequently came back for KDR as we know. Less bidders to haggle with might shorten this time frame, but more unsatisfactory bids might lengthen it. It is clearly reasonable though to expect at least two months of haggling and working with bidders after initial offers are lodged, which would take SFX out to end of June to make a decision (assuming bids are acceptable and bidders aren't Chinese game players). Money runs out by the end of July at the current burn rate so that time frame would work well for SFX, and maybe even provide enough funds with a non-refundable initial deposit to actually get some work done before wet season.

The point of this research is to prove to myself that although initial offers are in, and maybe disappointing judging by the share price, the process is still very much alive and better deals can still be negotiated out over the next month or so. Would-be takeover suitors probably feel that time is on their side and happy to sit back and watch the share price fall and their buying position get stronger. In short, the sale process is still on track, the 42 year long-term fundamental value of TB hasn't changed yet the price it costs to get exposure to the project via SFX shares keeps dropping. Importantly, in AUD terms, which is the currency a partner will have to pay in return for USD commodity exposure and profits, the price is also dropping with the AUD looking like it has finally broken in the 60's for good and further drops to come with two RBA cuts predicted later this year. Price is what you pay, value is what you get.

And so finally I have come to the end of my research and analysis, from outside the tent, I can go no further. The probability that someone will deal on TB or TO SFX at some value over $1 still seems an odds on bet, while the chance of the board blowing up it's shareholders with a large CR from these prices seems remote. However, with the cognitive dissonance in my head reaching an unbearable cacophony between fundamental value telling me buy and the share price screaming sell, I have chosen to pack me a tight cone of Hopium and blow thick clouds of she'll be right. There's be no more pain, fear is receding, and all I can do is smile and dream of how to spend my profits. Highly recommended for SFX longs.

Good Luck


PS... Chart shows MIN share price dropping all the way down for 6 months into the fantastic A$1.6M Abermayle JV deal announcement Nov 22, then a nice 30% bounce in share price on the news. Who said the share price always reflects insider selling haha. See, this Hopium is working already.