2ic woke up before 7am for the first time in 2 weeks, because monday two weeks after Xmas is always first day back a work for the market every new year. Stumbling through empty beer bottles, dislodging tongue from roof of mouth to swallow enough neurofen and quiet that familiar festive season wake up greeting I resolved to get back to work myself.
First order of the day was to burley up the ESS thread with some teasers about where I was going last post
"In fact, although it reads all over the shop and negative re-DSO, it contains all the elements that go into the final solution imo... and not by accident. It's too early for spoon feeding and besides, I'm trying to accumulate more cheaply."
referencing the previous post that finished with "Lot's going on behind the scenes we are not privy to I'm sure. The slow rate of deposit drilling and study slippage looks poor but there may be explanations other than lifestylers struggling to get things done in a timely fashion. I'm willing to give management benefit of the doubt. This looks a very simple mine proposition so the PFS, DFS could follow SS very quickly if they really wanted to. Do they really want to is the relevant question imo..." (bold my new emphasis).
I put a fair bit it of work into building my own scoping study spreadsheet and considering Dome North as both a standalone and DSO operation. I converted the spod-con into a gold-equivalent grade and LOM Oz production for comparison with other small but 'high-grade' deposits found in the Yilgarn over the years. The numbers look great even on sub US$1000/t 6% spod-con prices... which is why ESS initially attracted me as a value play despite killing upside at depth and in plan. But the real value for shareholders screamed TAKEOVER given the limited mine life and cost inflation to build new mines in WA. Like so many small gold deposits taken over by the likes of NST etc over the years, why waste $125M and duplicate plant when a large, low-cost hungry plant is just up the road chewing through their own good ore too fast?
That initial MIN TO approach made so much sense before ESS killed LOM upside, so much more afterwards. Building out a new mine for 10 years plus open-at-depth upside is one thing (eg Core) but on 7 years LOM not so much. The talk of DSO was sensible, but transport over very long distances can become a critical cost if prices fall. However, DSO doesn;t have to mean shipping to Asia, gold miners being shipping DSO ore around WA from satellite mines to major production centres for years. DSO to Mt Marion was the most obvious and efficient way to maximise profits from Nth Dome, and with so much capex and opex savings plus potentially earlier product sales, there is plenty of margin for ESS shareholders and a takeover suitor at even conservative lithium prices.
In short, I expected MIN to make another move after the scoping study but before off-take negotiations risked locking up product with a third party. I was going to keep accumulating during sell-offs, and spend some time posting positively on a buy-stock for a change (as some have rightly chipped me for). So I'm spewing this morning for multiple reasons now this TO offer has dropped so soon. All that work on finding a high prob TO candidate in the Lassonde sweet spot, all my potential strutting it out on HC with compelling analysis, all that bargain stock I yet to buy and reach my max holding... gawn!
Anywhoo, life goes on. This Tianqi TO offer accepted by ESS at 50c reminds me so much of how CDV played their Namdini deposit a couple of years back. CDV had little chance of raising the capex to develop Namdini (gold mine in Ghana) but the deposit was very attractive to major's with balance sheet strength. Managment needed competitive tension to get the best price, which only happens after one party is willing to step up with an offer. The first offer is always cheap and accompanied with 'no-shop' and other clauses deigned to tie down the target's hands against finding a competing offer. Doesn;t matter, once the project is in play market forces will flush out any other suitors who will bid to the price they think makes sense. With CDV, it started with Norgold offering 66c being a 65% premium, before Shandong same in and the bidding war started. Final price when the shooting stopped was about $1.05 to Shandong, being a bit more than 50% over Norgold's initial bid. Took some time and lots of drama but the end result was worth the wait.
This morning's move by Tianqi, the contract details, the price and ESS board's willingness to accept 50c all looks like the first move in hopefully a CDV style auction. Minres is still the natural buyer for Nth Dome with just ~90km on mostly sealed highway to their recently expanded hungry hippo Mt Marion mill. Mt Marion has a large resource base but at their new 4.6Mtpa plant will chew through their 17Mt mining reserves in 4-5 years. Some of those reserves are low-grade and best stockpiled for later, and all of their reserves to my knowledge are getting deeper and deeper under more expensive open-pit cut-backs. I worked out Cade could extract ~90% of their Indicated high grade resource with about a 7 strip ratio which is very good. Thanks to previous mining at Sinclaire caesium pegmatite, all final approvals for a DSO operation should be available by mid-year. Minres could be into this and adding cheap high grade tonnes to Mt Marion plant quickly and low risk... making a motsa at current high lithium prices.
There may be others, but the value proposition to MIN remains compelling and higher than Tianqi, who is either looking at trucking DSO to Greenbushes or building a full plant and shipping 5.6% spod-con the Kwinana. ESS gambled and lost on exploration upside, which is a negative since MIN first approached them early last year, but at least simplifies the value to haggle over. Nth Dome is worth a lot more to MIN than 50c imo, enough that it's worth the cost of them seeing how serious Tianqi is and how high they are willing to go.
MIN's problably haven't built a position to my knowledge so are starting naked. If they are going to play, I expect they do a deal with some large holders to lock up stock in conjunction with a higher counter-offer. In keeping with the CDV analogy, a bidding war to 50% over today's 50c offer is 75c which looks about right to me. After costs and options etc, say A$200M to acquire ESS at 75c and gain control of at least 7-8Mt of 1.25% Li2O minable ore in two simple and quickly permitted open pits. I get a NPV8% = A$200M at $1000/t 6% spod-con after $125M capex and AISC of ~$550/t. Of course, MIN would need only ~$25M capex to truck to Mt Marion (saving $100M) and then process ore through a giant lower-cost 4.6Mtpa plant already up and running. Even if MIN only received $1000/t for product LOM, they could earn approx $200M NPV8% after taking out ESS for $200M first. At higher spod-con prices they earn a lot more obviously...
No guarantee a bidding war will ensue, and with a Chinese partner in Tianqi FIRB will consider the blue fluff in their naval for 3-6 months before giving the deal a green light (because IGO owns half of Tianqi, will likely process ore through Australian owned operations, and we are now friends with China again apparently). At 47.5c there is 5% on offer for a 6 month wait, annualised to 10% isn't bad given the asymmetrical payoff outcomes imo. Upside if MIN deals themselves in is ~50%, downside if FIRB knocks back Tianqi is probably not much given the Tianqi has now confirmed the project's value proposition with a TO offer. The chance of FIRB knocking back a 50% Aussie owned TO for a project to be processed in Oz looks very low to me. FIRB approved the Yansteel 50:50 JV with SFX for a min sand deposit in WA 18 months ago during the height of our cold trade war with China.
Congrats to all LT holders already in the money. To those who bought >50c I suggest holding on to see how this plays out because a higher price look likely to me. I bought a fair amount more at 47.5c this morning and will be riding this to the end just in case. Have only skimmed the details so far, will update anything of concern if I find it.
GLTAH
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