Running discussion on SP, page-23167

Morning all,

In the hope of providing some value to this forum, I've compiled an historical recount (below) to highlight the growing disconnect between AVZ’s current SP and AVZ’s strong fundamentals (IMO), keeping in mind that price is what you pay, and value is what you get.

On Thursday 4th May 2017 (almost 2.5 years ago), AVZ’s share price closed at 4.3c. The next day AVZ entered into a trading halt. A few days later on the 8th May 2017, AVZ was reinstated and the SP hit an interim high of 4.8c as news broke that the DRC Supreme Court dismissed claims for the Manono project by the former license holders.

Less than a week and a half later, AVZ went into voluntary suspension and the following day announced that it would proceed with the Manono transaction. In the 2.5 years following that landmark transaction, AVZ has been on a wild rollercoaster as 'Lithium Boom 1.0' quickly turned to bust. However, during this time AVZ shareholders have witnessed significant fundamental growth in their company, despite external and internal setbacks and delays.

To begin, the price of Lithium skyrocketed in late 2017 (helping AVZ rally ninefold from 4c to 37c in just 6 months) before the short-term and general oversupply narrative kicked in early 2018. Fast forward two years and Lithium finally looks like it may have found a bottom but, in any case, is well into its process of sorting the wheat (profitable, high quality Lithium producers) from the chaff (marginal lower quality producers). And it is likely that only the strong will survive. In other words, a typical commodities boom-bust-boom cycle but... with a twist.

What many analysts and investors fail to understand is that Lithium is as much a chemicals business as it is a commodity, and price mechanisms are still evolving to better reflect the value of various grades and types of LCE. But one thing is for certain, and that is that Tier 1 battery quality Lithium is not in abundance and is the only type of Lithium that Western EV manufacturers will accept to ensure that their 8-10 year warranties are viable - and thus all of the evidence suggests ‘exponential demand for Tier 1 quality' as tens of millions of Western EVs are likely to be built over the next decade.

Meanwhile, the DRC achieved its first peaceful democratic election in decades which resulted in a stable coalition between two former rivals and a leader who is an inspiring, well-educated and highly respected international figurehead - motivated by good ethical business, the welfare of his people and a care for the environment at large. In the short time since the new President has held office and formed a government, he has already put in place an historic MOU with the DRC’s former colonial power (Belgium) and reached agreement with the US to form a strategic battery metals alliance to counter China’s dominance in the region and sector.

And yet despite the vastly improved outlook, AVZ's SP is now less than it was on the 4th May 2017 (almost two and a half years ago), and so we can see that a massive disconnect has occurred between price and fundamental progress. Opportunities like the one we are seeing right now are rare IMO and for me when it rains gold it is time to backup the truck and not pull out the measuring cup.

My thoughts on AVZ and its share price is a bit like watching a person walking up the stairs with a yo-yo. Investors typically focus on the yo-yo (SP) going up and down while the real story is the consistent movement of the person (in this case a good company with a great product) going up the stairs.  To prove this point, I thought it'd be a good time to reflect on the growth and achievements of the company and the Lithium/EV industry compared to where we were back in early/mid 2017.

For example;

*2.5 years ago, AVZ had yet to commit to proceed with the Manono transaction
*2.5 years ago, not a single hole had been drilled (either Diamond or RC) by AVZ
*2.5 years ago, AVZ had yet to report the first of many spectacular grades and intercepts (at RD & CDL) from its multiple drilling campaigns.
*2.5 years ago, there was no Independent review that confirmed the world class potential of Manono
*2.5 years ago, there was no JORC compliant resource
*2.5 years ago, AVZ could not boast that Manono contained Lithium resources of 400mt @1.66%
*2.5 years ago, AVZ could not confirm that it had discovered the world's largest spodumene deposit
*2.5 years ago, AVZ's exploration target was 500mt @1.5% (now @1.2 billion tonnes at the same grade) *2.5 years ago, there were no MOUs in place
*2.5 years ago, there were no Chinese cornerstone investors (as there are now with Huayou and Lithium Plus)
2.5 years ago, AVZ hadn't executed a strategic relationship agreement with Huayou
2.5 years ago, AVZ officially had 0% of Manono and hadn't yet acquired a 60% stake without condition, nor had it purchased an additional 5% from Dathomir, nor entered into discussions to acquire a further 5-15% from Cominiere'.
*2.5 years ago, there was a Chairman on the board whose self-interests were clearly not aligned with the rest of AVZ's shareholder base.
*2.5 years ago, there were no preliminary Met Tests confirming the 'battery quality' mineralogy at Manono *2.5 years ago, there was no 2mtpa SS highlighting the base case economic potential of Manono
*2.5 years ago, there was no preliminary Transport Study nor an update highlighting material cost savings.
*2.5 years ago, there was no 5mtpa SS to further strengthen the Economic Potential at Manono
*2.5 years ago, an in-country management team hadn't been established
*2.5 years ago, there didn't exist a significant upgrade in Measured and Indicated resources (now the world's largest)
*2.5 years ago, the thought of the DRC holding a relatively peaceful democratic election and electing a people's democratic leader was a pipedream for most.

And so for me the takeout is this: The Lithium industry continues to grow exponentially despite the short-term general oversupply narrative, industry-wide confusion and learnings re: the need for transparent price differentiation (eg. contract Tier 1 prices vs low quality spot price), the advantages of vertical integration, what is deemed acceptable quality to a Tier 1 manufacturer and the need for consistent feedstock (whether 100% high quality or blended) to efficiently convert SC into Hydroxide or Carbonate without complications - otherwise resulting in cost penalties and time blowouts.

And we know that a rising tide will eventually lift all boats, with the exception being those that inevitably sink in the meantime due to their costly and unprofitable low-quality projects which often result in acquiring an insurmountable amount of debt and/or rapid cash burn.

And just as it did in late 2017, the cream will rise to the top during 'Lithium Boom 2.0’ - commencing from 2020 IMO - and those projects with proven Tier 1 'battery quality' resources and an economically sound fundamental outlook will skyrocket in value IMO. After all, there have been so many positives for the Lithium/EV sector in the last 2.5 years, and below are just a few of the many that deserve a special mention;

*2.5 years ago EV sales were less than 800k units p.a. or < 1% of global automotive sales. Many were hybrids i.e. with minimal kWh capacity per EV battery

* 2 - 5 years ago, OPEC, Morgan Stanley & Bloomberg predicted 2018 EV sales to be 200k units, 400k units and 1 million units respectively. The actual no. for 2018 came in at 2.1 million units. Note: Despite China’s 2019 woes due to the government removal of direct EV subsidies for short range EVs, this year the world remains on track to deliver between 2.7 - 3m units or @3% of global sales (beating all analyst expectations once again) and the vast majority of these will be full BEVs with an estimated battery size average of @50kWh (up from 33kWh avg. in 2018 according to my Chinese source). Moving forward, Europe is expected to lead the charge in terms of providing massive global growth for EVs (great news for Tier 1 quality SC), closely followed by China/rest of Asia/Canada and the ROW.



*2.5 years ago, there was no mainstream EV solution to rival your typical ICE in terms of price and range (enter the Tesla Model 3 in 2018 - a complete gamechanger for the auto sector for so many reasons).

*2.5 years ago, it was predicted that EVs would achieve cost parity with ICEs by 2025-2028. That timeframe has recently been revised to 2021-2023, however if you look at the total cost of ownership of a mid-range sedan, then the Tesla Model 3 for example is already cheaper than your average mid-sized. https://cleantechnica.com/2019/04/1...per-than-toyota-camry-ark-analysis-concludes/

*2.5 years ago, none of the established major car companies had committed to an EV / Li-Ion future. Now look at recent announcements from Volkswagon, Daimler, Ford, GM, Nissan, Renault, Hyundai/Kia (even traditionally anti-EV activists Toyota and BMW) etc as they rapidly invest and scale up their EV development before they lose market share to the likes of Tesla, Rivian and Chinese EV companies BYD, BAIC, SAIC etc.


*2.5 years ago, Level 4-5 autonomous driving / robotaxis / TaaS was nothing but a futuristic pipe dream for most. Now these are fast becoming reality.


*2.5 years ago, the cost of an average Li-ion automative battery was $288 per kWh (around double the expected average cost for 2019 and a third of the expected average cost by 2020-2022. In fact, VW are already claiming an average cost of below $100 per kWh. https://www.*.com.au/vw-electric-cars-battery-costs-versus-tesla-2019-9?r=US&amp;IR=T


*2.5 years ago, the average battery cost for a medium sized vehicle represented over 50% of the retail price, now it is @30-35% of the price and dropping.


*2.5 years ago, there were just 4 Battery Megafactories in the pipeline, now there are 25 times that number. Those 99 known Megafactories represent >2000 Gwh. This is the equivalent of 40 million EVs with an  average battery size of 50kWh, loosely equating to 1.8 million tonnes LCE or roughly 6 times the current world production. Then add the exponential rate of megafactories being added to the pipeline in addition to the higher adoption rates of high nickel cathode chemistry (eg. NCM 811 batteries that require hydroxide) and the trend for Tier 1 quality SC is crystal clear IMO.



*2.5 years ago, the motivations for EV manufacturing weren't as critical as they are presently and increasingly becoming due to health-sapping smog in large cities and climate change inaction.



*2.5 years ago, car makers were also 3 years away from being concerned about tough new EU emissions rules that come with a US$39 billion threat. The fact is top carmakers have been dragging their feet and hence aren’t on track to meet stiffer CO2 targets. That threat becomes real in just 2.5 months from now, and thus we are becoming to see them scrambling to meet targets. Zero emission EVs are the best and only practical solution. https://www.bloomberg.com/news/arti...w-emissions-rules-come-with-39-billion-threat

*2.5 years ago, no-one dreamt that 2.5 years later - a startup western EV company would receive a 100,000 unit order (the equivalent of @16kt LCE assuming 180kWh per vehicle or 8.7% of the world's LCE total supply in 2018) for delivery trucks to be delivered between 2021-2024 from/for one of the world's largest companies by market capitalization (Amazon).

In terms of Lithium deposits and their in-situ valuations;

*2.5 years ago, Albermarle hadn't purchased 50% of Wodgina, and hadn't valued the project at US$1.15 billion (in-ground value at US$8.90 p/t).


*2.5 years ago, Lithium wasn't even a blip on Wesfarmers' radar, let alone a 50% bid for KDR at A$776m or A$7.37 p/t (a bid that both Canaccord and JP Morgan say fundamentally undervalues the miner).

*2.5 years ago, Manono wasn't the world's most undervalued Lithium resource (it wasn't even JORC compliant).

*2.5 years ago, AVZ's value of its JORC compliant Lithium in-situ resource (65% share of Manono) wasn't US$0.23p/t (A$0.34 p/t) - a record low valuation as of yesterday, nor was it trading at a massive 80-90% discount to its peers.

In summary, AVZ is now trading at an all-time low in terms of its share of Manono’s value per resource tonne, and the SP is reflecting zero value growth over the past 2.5 years. The SP also ignores the exponential growth of the sector/EV/Lithium industry, and it also ignores the recent positive political and ‘investment sentiment’ developments in the DRC.

In fact fundamental progress from all angles continues to contradict the SP and current value of AVZ. But the fact is that AVZ has grown its world class asset into the world’s largest Measured and Indicated Lithium resource, and IMO it has transcended from exploration and development mediocrity into a standout development project, and remains on course to transcend further into a potentially a highly profitable / highly feasible powerhouse of the Lithium Industry for decades to come.



The short-term outlook for the company is equally fascinating and exciting IMO. With project finance discussions at an advanced stage (+ @$5.8m cash est. as at 30th Sept), a new Chairman to be revealed in the weeks ahead, further acquisition of the project via Cominiere’ said to be probable and close, LOI’s being drawn up to provide potential transport solutions to port, Met Tests expected to be completed by the end of this month, optimal plant design and project strategy soon to be revealed, completion of the dewatering of the pit a few short weeks away, and the collection of data for next quarter’s DFS expected to be largely attained by the end of 2019, there are quite a few catalysts IMO that could trigger a significant re-rate (or two) over the next 1-24 weeks.

Thus, the short-term should provide some quality news flow from AVZ, and perhaps that was enough for an individual or entity to decide to dump @5m shares at the close yesterday. And whether this was planned or not, the SP has, as a result, hit the bottom of the weekly Donchian Channel in the process (see below) providing a significant technical event (target reached not to mention strong historical support @4 cents if one looks closely) that allows for the next leg up to commence. And any significant fundamental assistance (supportive outcomes) in the days or weeks ahead could feasibly drive the technical outcome to the top of the channel (currently 9.6c) in the relative near term, such is the massive discount of AVZ vs its peers.



GLTA and note that the above is all IMO (not advice of any kind) so please DYOR.

Cheers
Elpha