Where to from here - a different DCF view

This is going to be a long read for some of us. And to keep “us” focused on topic, if you disagree that PLL has binding offtake agreements then please do all of us a favor … STOP READING and move on to something else not related to this topic

What I’ve done is to “remove” PLL the integrated mine+refinery project in Gaston County N.C. from the rest of PLL’s assets – for no reason other than to get an idea of what their “value” might be. The assets are:

1. Offtake Agreement with Sayona Quebec (SYQ)

2. Offtake Agreement with Atlantic Lithium (ALL)

3. PLL Merchant Chemical Plant (MCP)

Just like the dialogue earlier wrt Total Mineral Resources if you don’t understand the JORC and/or NI 43-101 reporting you end up saying silly things. Similarly, some of the discussion being raised on offtakes seems silly. Offtake agreements are standardized contracts which cover certain key things such as:

a. Term: can be single load, short term (1-2yrs), long term (2-20yrs) or Life of Mine (LoM).
b. Volume: usually specified tonnage per year or percentage of production
c. Product: generally covering purity e.g. Iron Ore
d. Purity: mechanism to adjust product price up/down Iron Ore Fines 62%
e. Price: what Buyer pays usually to destination
f. Price Adjustment Mechanism (PAM): how price moves during the term.

Again, generally speaking, miners need to spend lots of capital (and time) to get their product to market. It is normal practice for miners to enter into long-term offtake agreements with potential buyers before the ore is dug up. A binding long-term commitment to purchase production is helpful to funding the mine especially if the buyer agrees to upfront payments. And again, generally speaking the longer the term the more valuable the agreement (for both parties).

Asset #1 seems to cause most of issues(here on HotCopper). SYQ is the miner (seller/producer) and PLL is the buyer. What we (definitely) know is:

a. Term = Life of Mine
b. Volume = 50% of annual production OR 113,000 tpy WHICHEVER IS GREATER
c. Product = Spodumene Concentrate (SC)
d. Purity = 6% i.e. SC6
e. Price = Market price CIF China (US$) for 6% SC6 dry basis DELIVERED to PLL North Carolina chemical plant
f. PAM = Minimum price US$500/ton & Maximum Price US$900/ton

It seems to me that point (e) is not well understood. It is just a pricing term and to think otherwise is (IMO) foolish. If it costs US$100/ton to send it to NC that means SYQ receives US$900 from PLL for its product and pays rail/ship companies US$100. SYQ nets $800.

Likewise with (d). NAL (and CLQ before them) had a Lithium content purity issue regularly coming it at 5.7%. That will get a discount in the same iron Iron Ore at 60.5% gets a discount to the 62% Fe price.

And if PLL wants to send its ore (that’s right – it’s ore not SYQ’s SC6 ore – because the offtaker/buyer receives title to the shipment when it makes payment) somewhere else other than N.C. it could be as simple as … Brett …Keith here … how about $840/ton and we’ll pay to take it to the port of Montreal. SYQ just made an extra 5% (~$4.5M on annual basis). And if say purity was only 5.7% maybe it gets discounted to $800/ton or whatever. But the offtake agreement is still in effect. It is the Buyers choice. Of course, your investment experiences may be different to mine. And given the final condition I can’t see any reason for the offtake agreement not to start on Jul 1, 2023 given the statement (by SYQ) of H1/2023 production start.

Rodney Hooper from RK Equity has this to say in Oct-2021



The final point I’d make is NAL requires further CapEx for upgrading and improving their process to get to SC6 or better (as opposed to 5.7%). The WAG is US$40M … so $10M PLL and $30M for SYA to contribute into SYQ. If SYA was looking at debt financing its share that offtake guarantees cash flow (say SYQ cost of goods is C$600 …~$US450) so Gross Profit $US400/ton, and if they can mine at 9,500 tpy for first 6 months that’s 9,500x6x400x75% = $17.1M that could potentially flow out of SYQ to SYA … which SYA could use to debt fund its share. Clearly SYQ would not distribute all profits to its owners as it has a future need for that cash such as paying bills and (equity) capital to secure some debt … that is if they choose to build a refinery. BTW that is simply meant as "look at the margin" selling SC6 (presently).

So back to PLL and what I am trying to “solve” – what value lies within PLL from its investments in Abitibi, Iron Ridge and a Merchant Chemical Plant. I am not including the value of its equity ownership in SYA and ALL or anything wrt to Carolina Lithium. The premise is to place a value on the ESTIMATED cash flow. As with all estimates there are assumptions being made, not the least being price, discount rate and terminal revenue multiple. Don't look at it as share price target even though it comes across that way.




Probably most sensitive is the discount rate ... this is NOT any form of WACC ... it is risk adjusted (and yes this is a risky investment). We are valuing cash flows and one thing we know FOR SURE s inflation is rising and so interest rates will rise and the present value of future cash is less.



So we can guess all we want on SC6 benchmark price ... I'm no more in the know than anyone else. I expect 6 or so mths of production from NAL in 2023 ... and offtake agmt suggests its all ours (unless maybe SYA & PLL agree on prorata for partial year). I'm working on the premise that delivery destination changes and Offtake starts Jul 1, 2023.



What I'm doing with Ewoyaa is effectively just working as if that 50% of the project flows straight to PLL. In reality it wont as it first is purchased from Altlanic Lithium Ghana OpCo and PLL pays for it and later gets its 50% of profits. Its a proxy of value




This may not be easy to follow but what I've done is assume 25% interest in the plant has been sold - hence why the tonnage is 22,500 (75% of 30,000). I'm using BFS number for COGS. The takeaway though is to look at the margin.

All of this ends up as:





So the CapEx is straightforward
2022 = ~US$25M being $10M for Abitibi and $15M Ewoyaa (which I think is already paid)
2023 = ~US$75M being Ewoyaa Phase 3 Mine + Concentrator
2024 = ~US$350M for NC MCP (75% owned) ... I figure 25% FO brings in $150M plus go for $200M Gov't Debt
no real need to raise equity capital unless other opportunities arise.


and all the above looks like



and that's what PLL cash flow "value" looks like to me WITHOUT the integrated mine-chemical plant asset.

I'm sure many have a different view, especially those not invested in PLL. That's OK. It's not the only Lithium stock I own either. IMO Portfolio mgmt should have diversification (so multi Li and multi minerals).

Only 12 - 18 mths to wait to find out the answer.