DFC Finance, page-17

Over 3 months since we last heard from JW on CRUX re. financing...

Transcript: Lepidico (LPD) - Financing is the Final Hurdle for Robust Lithium Project

Joe Walsh: My name is Joe Walsh, Managing Director of Lepidico limited. We're a vertically integrated lithium development company that's right on the cusp of a development decision this year for our phase 1 project, which will be coming into production in 2025.

Matthew Gordon: Hello Joe. It's good to see you. You are here, attending various conferences: 121, Indaba, and there's another battery one as well.

Joe Walsh: Yes, there is BMI's Battery World Tour in Cape Town. It's been really good. This is probably the best 121 that we've seen for the past 5-6 years.

Matthew Gordon: Yes, I'm getting that vibe. I think people are back here, they are looking for investments and where to place their money. I'm going to talk about that with you. Can you do a little summary of exactly what happened in 2022. You got absolutely zero credit for anything you did in 2022, but you did some important stuff.

Joe Walsh: Absolutely, we did. I think that we've really progressed the project and the business. We've undertaken a significant de-risking of the project. We completed front-end engineering and design for both the upstream concentrator and the downstream chemical plant. There's 18 months of work right there. That body of work was completed in November and it gave us updated capital cost estimates and delivery schedules for both plants.

Matthew Gordon: Okay, so you now know where you stand, and that's important because, against the backdrop of COVID, supply chain issues and the change in energy pricing, it is important to be up-to-date and know where you stand because I think there are a lot of DFS's that are slightly out of date.

Joe Walsh: Just a little.

Matthew Gordon: That's problematic because in terms of commercial partners, strategic partners, industry partners: they want to know where you stand.

Joe Walsh: Absolutely, they do. In all of our studies, all of the work that we've done over the last 2 years, those new estimates, also that demonstration plant that we ran last year as well, all of the results that came out of that have been extensively due diligenced now by Beta Bear Australia, a very credible group, that is doing the technical due diligence for the US Government's International Development Finance Corporation. One of the things that I thought was really telling was that after reviewing all of our latest estimates, they opined that for a project at our stage, which is very advanced, the contingency should be between 5%-10%. We're at 9.3%-9.4%, so at the upper end of that range. I'm comfortable that there's a degree of conservatism in these numbers, and they are current.

Matthew Gordon: The other group of people that you need to influence is the financiers. We've talked in the past about the multiple ways in which you hope to finance this. The US seems to be where you were leaning the last time we spoke. Has anything changed there?

Joe Walsh: We're very consistent in our approach that the US Government's International Development Finance Corporation is mandated to be able to lend to projects in developing countries. Namibia obviously fits in that category. We've been working with DFC now for over 2 years, and it's an exhaustive comprehensive process. You've got to jump through all sorts of hoops on the environmental and social side, technical, economic. We've been through all of that. At the beginning of this year they appointed legal counsel, which puts us on the home straight.

Matthew Gordon: Why do you say that? Obviously, they are still in the race. That's good news and is comforting for your shareholders. Appointing legal counsel does what for you, what's your expectation of that?

Joe Walsh: That's doing the final review of all documents, contracts, agreements. That stage doesn't start until you've got ticks in the boxes for environmental, social, technical and economic.

Matthew Gordon: You have all of that, now you are going to actually sign the documents. What's the expectation from them, in terms of the amount of capital, if you get that far?

Joe Walsh: In Namibia, the CapEx there is about USD$63M. The indications are that DFC will be there for up to around USD$50M, and they can actually lend that amount without going to their own board for approval. That streamlines that process.

Matthew Gordon: This is such a low CapEx project. What type of money are you going for?

Joe Walsh: That's pure debt. Downstream in Abu Dhabi, the chemical plant is just over USD$200M.

Matthew Gordon: Are they in for both projects?

Joe Walsh: No, they cannot lend to the UAE. It's a developed economy.

Matthew Gordon: It is potentially up to USD$50M for a $63M CapEx project. You'll want to raise a little bit more money on top of that, OpEx, etc, and a bit of running around money. Where's that going to come from?

Joe Walsh: We've got the core debt piece sorted out. We're in discussions with a number of different strategics, so I think that there's still good opportunity for some strategic money coming in.

Matthew Gordon: What does that mean?

Joe Walsh: That would give us, I think, a group with a great alignment of interests with our business model.

Matthew Gordon: Such as?

Joe Walsh: Wanting to get involved in the lithium space and involved in the electric vehicle supply chain.

Matthew Gordon: You've already got Traxys involved in the background in terms of offtaking.

Joe Walsh: Yes, we've got a binding offtake arrangement with them for the lithium.

Matthew Gordon: For how much?

Joe Walsh: That's all of the lithium for the first 7 years.

Matthew Gordon: Okay. So, a big chunk of this. Your strategic partner would not get that, presumably? Or you would have to come to some arrangement if they wanted it.

Joe Walsh: Don't forget that Traxys is a trading company, so we've been working very closely with Traxys for the last year to place that material into the supply chain.

Matthew Gordon: If they're trading anyway and they want to mark it up or flip it on, that makes sense. Again, I want to understand the types of companies you'd be talking to. We've spoken to a lot of battery metal companies who are talking about OEMs moving upstream, wanting to secure their supply, and we're talking hundreds of billions of dollars being pushed that way, which is new. 2 years ago that didn't happen. It is a big deal. For you, what types of conversations with what types of companies are you having?

Joe Walsh: There's a lot that's new, and being in the UAE and Abu Dhabi, we are seeing an enormous increase in interest in that part of the world. Literally in the last 3-4 months, we're seeing for the first time, battery manufacturers, cathode manufacturers that are seriously looking at joint ventures within the UAE. Our lithium is going to be the only supplier in the region at this point in time, and it's a critical component of that supply chain. I think it's an incredibly attractive place to be doing business. You can develop within an industrial free zone where there's no corporate tax, no import or export duty. It's got some of the world's most stable and affordable energy prices, and in this day and age, that's a great bonus. They're desperately trying to diversify that economy away from reliance on hydrocarbons, and developing an electric vehicle supply chain is a great hedge.

Matthew Gordon: Diversifying away from it - I think it will be a long time before that happens. They would want to add on things like hydrogen energy, and the battery supply chains are something they would want to play with for sure, plus they've got a lot of capital there. I understand the US debt component - great. In terms of a strategic partner, it sounds like you're leaning towards the Middle East, and that's great too because I think they're very keen on, not just on the hydrogen side but also nuclear as well. And they've got all the oil. Would that same strategic partner be looking to get involved with the chemical plant in Abu Dhabi as well? One would presume so given that they are based there or thereabouts.

Joe Walsh: Yes. It is the same groups, absolutely. We are also well advanced now in our discussions with more traditional commercial lenders.

Matthew Gordon: Are they local ones?

Joe Walsh: We're looking at international lenders, largely European ones, who are regular lenders into the material space, but also regional lenders in the UAE.

Matthew Gordon: One thing about debt in the UAE is that it is pretty cheap if you can get it. There are different types of structures over there. Again, depending on the strategic, you would do that at asset level for both or would they be coming into Lepidico?

Joe Walsh: Both are on the cards. There is definitely interest in direct asset investment in the chemical plant in the UAE and also investment at Lepidico.

Matthew Gordon: Okay, I guess you'll let us know. You wouldn't necessarily need to own the plant then, you can do any sort of structure you want, so you're looking at all of the above.

Joe Walsh: Yes, the important bit is that we will be the operator. We know the technologies; we are the best operator.

Matthew Gordon: That's interesting. In terms of intellectual property, that obviously sits at head co level. You would still be the 100% owner of that, which gives you options, potentially for licensing that?

Joe Walsh: We've already done one license deal.

Matthew Gordon: Yes, but you've got to do more. That's how you make money.

Joe Walsh: Well, we can do more, but the other bigger picture piece in all of this, and we've already started to discuss openly phase 2. We're now appointing a site selection agent to evaluate potential locations for a phase 2 chemical plant in the US. We have our own internal capability to evaluate in Namibia and the UAE for a phase 2. The pre-feasibility study will consider those three jurisdictions.

Matthew Gordon: I want to understand the potential revenue streams. You've got to keep telling this growth story. I know you are running things simultaneously: phase 1, you will focus on that and then move over to phase 2 - that makes total sense because all of the above needs to be financed and you want cheaper and cheaper access to capital. Can we talk about the UAE ecosystem? Is that a free port zone?

Joe Walsh: Yes, it is. The KEZAD industrial park is 50 km2, and there is a free zone within that. That's where we're building our plant.

Matthew Gordon: That must be quite appealing to strategics. I just want to go slightly macro here. You talked about re-doing your numbers and how you've got to get a better sense of the economics. It was a brutal year last year for everyone: prices went up across the board, but you know where you're at. Hopefully, some of those prices are coming down. You will be the beneficiary of that this year. What's your take in terms of the lithium pricing? It's done you a lot of favours in terms of what the economics look like for you. Is that sustainable?

Joe Walsh: We have seen, over the last couple of months, prices have plateaued and have started to pull back somewhat. Almost all commentators have prices pulling back over the course of this decade to anywhere in the low USD$20/lb to the high $20s/lb. Some of them are now into $30,000/t -$32,000/t in the long-term. Most of the projections for supply and demand show a growing deficit as we get into the latter part of this decade, and it's enormous.

Matthew Gordon: How can that be? Because you've got lots of Americans, certainly on the DLE side, talking about how they can supply the whole world's needs, so there's going to be so much coming through, isn't there?

Joe Walsh: I think a few of these new companies do need to get past the pre-feasibility study stage, and the key is to be getting these projects past DFS, through front-end engineering and design. There's an enormous amount of de-risking that needs to be done here. If you remember, our project is around 5,000t. We've scaled it there to manage risk for our first project. We've already seen all of these larger projects take a considerable amount of time to commission a ramp up. When you look at the demand trajectory, it's like this: if you get a delay of 6-12 months on the supply side, a gap appears very quickly. I really do think that we are going to see that projects are tending to get bigger and bigger, and that puts you further up that risk scale curve.

Matthew Gordon: There are two things about lithium: it's the kind of external component, and then the risk profile in that not all developers will get into production, whatever they say, whatever they put in front of you, so that kind of bodes well. Does it then become, not quite a first mover advantage, but if you were in the leading pack to get into production, is that what you're aiming for? Do you time it differently? How do you time this market?

Joe Walsh: I think you just have to run as hard as you can and push as hard as you can, and we're exactly doing that. I don't think we hope for the best. I firmly believe in the fundamentals here. We are seeing this very dramatic growth in demand. I think we all know how difficult the minerals industry is, and the chemicals industry, to bring new projects on, and it invariably takes longer. We're fully permitted. How many projects are still trying to get over that hurdle? I think that there's now an awful lot of impetus to get over those hurdles, particularly in the US, but those are still hurdles to be got over.

Matthew Gordon: How do you move from being valued with multiples that miners attract, to being valued with the multiples that chemical engineering companies get? It's very different. Tell us where you think you are now in that journey and when you think you could get to a point where perhaps you are viewed differently.

Joe Walsh: It's a very good question. I think we are still being valued as a developer, and the last piece of the puzzle for us, because we've got most of those pieces already in place now, is to get visibility on the financing. There are plenty of references out there that would suggest that once there's some granularity around that piece, as long as there aren't other obstacles like permitting, etc, which we've already addressed, then there should be a re-rate.

Matthew Gordon: The US option, they have appointed legal counsel, so it's significantly advanced. The timing on hearing something from them - I know it's government, so, who knows? But can you give us a sense of that? Is it this year?

Joe Walsh: Absolutely.

Matthew Gordon: Is it this half?

Joe Walsh: We are pushing on that.

Matthew Gordon: Okay, I know it's difficult. There's that bit of it and then there's the Abu Dhabi bit, which is a bigger ticket size, but given the sorts of monies that are available there and given the intent that they have to get into this space and possibly even be thought leaders or world leaders in that space, are those conversations going to conclude this year?

Joe Walsh: Absolutely. These things are tracking in parallel. I see the DFC piece, the commercial lender piece and the strategic piece really coming together.

Matthew Gordon: They are very different projects, and if they are building businesses, they've got to get into production, they've got to produce product, the hydroxide or whatever it is that you want to sell and you've got to generate cash. Where are we looking to at this point? Where is this point in time that we're looking to?

Joe Walsh: 2025. It's not too far away. We've now got the control schedule from completion of front-end engineering and design last year, so we've got, I think, a very good handle on what the schedule looks like for this implementation phase for the project. We're looking at mid-2025 for that.

Matthew Gordon: That's interesting, and I know you've got a seasoned by-product, etc, but will people stop talking to you about the technical challenges, people are talking to you about revenue generation and about money - that's quite nice.

Joe Walsh: It is, and these days, invariably woven into that is a discussion on the environmental and social aspects.

Matthew Gordon: In terms of incorporating that into your flow sheet or the process?

Joe Walsh: It has to be part of the business model. A part of any discussion with lenders, strategic investors, is what do those environmental and social credentials look like? What are those exposures? I think our business can demonstrate that we've got exceptional credentials in that regard. Also, the jurisdictions in which we're operating support that. The UAE, particularly Abu Dhabi, is very aggressive in developing commercial green hydrogen for example. That will take our greenhouse gas emissions from maybe 25% lower than the typical integrated spodumene project down to probably best in industry, down to around 3t/t.

Matthew Gordon: I think ESG had a good run for 2 years. Funds were rebranding themselves as ESG compliant, and I think that shine has come off a bit. In terms of how investors look at the company, you are saying, this is essential, you don't go ahead without this stuff. You don't get an investment without this stuff. I appreciate that it's about making money, but if we don't deliver on all these factors, that's a massive barrier to delivery. I know you say it is important but I'm also cognizant of the fact that most fund managers are, show me the money. Get on with that side of stuff now and stop talking about ESG. How do you feel about that?

Joe Walsh: I'm happy to be talking about the money, Matt, I really am, and cashflow. That has always been the business strategy - to get to free cashflow generation as rapidly as possible. We've been on quite a journey and now that is actually on the horizon.

Matthew Gordon: I look forward to hearing more from you this year. It feels close, right?

Joe Walsh: It does feel close. Thanks a lot, Matt.