This post is not intended for those who don't have a basic grasp of the JV called SYQ (that is IMO quite a few SYA posters) that PLL has with its partner SYA.
And this isn't a post about pricing, supply or demand i- it is a post about PLL/SYQ (and a little bit SYA) - but I need to reference price for the scenario later described
The forward outlook for Lithium pricing is not very positive. I like this particular chart showing the long term and short term range for CIF China Battery Grade Carbonate price
The prices are in Chinese RMB ... show x 0.14 to get to USD. ...we see the Apr 24 short term price peaking ~113,250RMB (US$15,855/t) and heading back down. The forward outlook - depending on who you choose to listen to - is bearish (as recently noted by Morgan Stanley and Citigroup ... OK both are hated US Investment banks but I'm fairly sure you wont get a much different opinion out of Macquarie or RBC or BMO ... in the end it its all due to China manipulation anyway).
I'll take Wood-Mac who write:
Alot can happen in a decade but its the first half that concerns me .... US$1,000/t SC6 out to 2028 ... and what happens with SYQ
We all should be familiar with SYQ - the JV - 75% equity ownership by Sayona Mining (SYA) and 25% by PLL. There is also IQ that holds CAD$20M of Preferred shares of SYQ - which have no voting rights. And this is also a good time to remind PLL shareholders that despite what you may read elsewhere, there is also a (separate) "Shareholders Agreement (SA)" that governs certain decision making aspects of SYQ ... something I've posted about before and I'll summarize again (and if you don't believe me, simply email the company as I did after the 2023 AGM to get further explanation of what JB said about it)
That SA governs certain items - which I'll reference as Special Shareholder & Board Matters (SS&BM)" which require a "SpecialMajority Approval (SMA)" to be approved. It doesn't really matter the exact number as long as it is a number above 75% ... I've used 80%. Given there are ONLY 2 shareholders voting 75% and 25%, this has the effect that SS&BM requires unanimous consent from both Sayonaand Piedmont for items to be approved. Just one example of this is the decision of funding and building downstream conversion capacity.
The JV - SYQ/NAL- has separate bank accounts from SYA (and don't forget that SYA is reporting a CONSOLIDATED view). When SYQ needs additional cash (above any free cash flow generated by the business ... which at this time is $0) the JV makes a cash call on its equity owners and they send proportionate cash amounts (or risk some forfeiture of their equity) to SYQ bank accounts. This is the bank account used by SYQ to pay Capex and Opex (the normal cash outgoings related to operations). In good times this would be the same bank account where "retained earnings" are kept and when SYQ makes a decision to pay a proportionate dividend/distribution (another example of a SS&BM for SMA voting) to the equity partners.
Now, this is being written BEFORE PLL's Q2 results and earnings call (and before SYA Q4 and FY results). I'm not expecting any real good news in PLL Q2 report - and hope the bad is minimal. We have already been told the focus is H2 from a shipment and revenue perspective.
I fear that at US$1,000/t SC6 ... US$900/t SC5.4 that SYQ may not make it without continued reliance on cash calls to its equity partners - and for every $1 that PLL contributes, SYA must contribute $3 ... a very big ask of SYA's stretched balance sheet. No doubt some howls from SYA centric holders ... that's OK ... compare the pair so to speak and the timing of spend. My post, my opinion says PLL is healthier (note I did not say "in good health"). Forgetting about PLL revenue & EBITDA for the moment ... just looking at SYQ and assuming FTM from Jul'24 - Jul'25, with 226Kt produced and sold, and using $1,000/t average benchmark price for the period, its roughy 113Kt x US$900/t + 113Kt x US$795/t for SYQ revenue (US$191.5M) less COGS (US$810/t) of $183M leaving just $8.5M. That math is very squirrely on the cost side of the equation, US$8.5M retained earnings for SYQ doesn't seem like its enough ... maybe it is ... to keep the wolf at bay.
Now PLL will at least earn itself some actual cashfrom its OTA outside of the JV ... having paid their US$810 less whatever allowance agreed for DAP Quebec instead of Cherryville NC (I'm calling it $15/t) ... its possible PLL might be earning a gross margin averaging around $200/t on their OTAs with TSLA and LG ... so ~US$22M ... enough I would think to cover any additional cash calls from SYQ.
What might happen if this "lower for longer" price scenario turns out to be "lower for a lot longer" ... like through to 2028??? Clearly no one is going to be completing a Carbonate plant with the JV in its current state - and keep in mind SYA used US$25,585/t as ASP Carbonate
My opinion at this stage is, that SYQ will split the assets of the JV into "Mining & Concentrating (M&R)" and "Downstream Refining", with
SYA likely to sell down its ownership stake in the M&R portion - my guess it might be as much as 50%. What that is worth at this time is anyones guess, but these assets are going to be primarily valued at some FCF yield. If I use what PLL got ... and use a 10% yield that comes out as US$220M (for 50% of M&C). Lots of capital for SYA to reinvest in their 60% of Moblan.
And my guess for buyer is ... TSLA ... the only real consumer for SC in the USA (presently) ... and they have growth planned for that.
If I run with TSLA buying a 50%, some immediate challenges come to mind:
1. The SA ... now it would require 3 shareholders to get any SS&BM approved (at the 80% threshold) ... lets assume at worse case TSLA (and PLL) accept it as lowered to 75% ... meaning they need either SYA or PLL to agree (so TSLA cannot bully its own way over PLL/SYA) and PLL/SYA can't get anything passed that TSLA doesn't agree with. Assuming they all agree ...
2. TSLA's reason for buying into SYQ is to get more SC to send to its Texas Hydroxide Refinery .... not Carbonate in Quebec -- so sorry IQ its just business. Of course in this scenario TSLA is not involved in the refining operation ... but there is a lot of spodumene in Quebec that can be "toll treated" ... like what Lithium Universe proposes ... so Quebec doesn't have to miss out per se.
3. TSLA now owns 50% of M&C ... they will no doubt want to enforce "transfer pricing" for their "share" and then export to TSLA TX Hydroxide Refinery. Well now aint that just peachy - guess that depends on just what that transfer price is (Cost + what owners margin?). Keep in mind that SYA used C$1,557/t (US$1,168/t) SC6 equivalent basis in the PTS. TSLA is not known for its generosity and I could imagine them sitting down and saying their offer is conditional on that will pay US$900/t SC6 equivalent basis (a randomly plucked out of the air figure it is not) for their "owner's tonnes".
4. If (3) above were to happen then TSLA is paying SYQ $900/t SC6 for 50% and PLL is paying SYQ $900/t SC6 for the other 50% ... and effectively SYA has sold its 25% of the tonnes produced at US$900/t ... so SYA has no leverage at all to rising SC pricing (I'm sure that will get under the skin of few). Overall it means SYQ sells 226,000 at US$900/t SC6 or US$810 SC5.4 and if AISC is at C$987/t (per DFS'23) or US$740/t then the business venture known as SYQ earns ~$70/t for the JV partners ~ US$16M ... so a "annual dividend" of about US$4M for each 25% of the partnership.
So TSLA would have "secured" 50% of SYQ/NAL SC annual production (for LoM) for say US$220M and paying effectively $900/t for Opex into the future. For the next ~3 years PLL sells SC to LG and TSLA. I would guess that when times up on LG that TSLA might get 100% of the production (up from 75%). The interesting thing is that SYA effectively only gets ~$4M p.a. (its 25% share of the annual SYQ profit) ... but don't forget it also got $220M as proceeds for selling a 50% interest in the JV. I wonder if SYA would sell the remaining 25% interest since the value for them is the remaining asset value. PLL certainly wouldn't want TSLA to have it (as they would then have 75% and remember that SA Majority Approval level was reduced to 75%). And at this point one would assume there are only 2 interested buyers (TSLA or PLL) due to committed OTAs.. Now if SYA were to convince PLL to either sell out to them or they together sell to another party making it either TSLA/PLL 50/50 or TSLA/3PB (e.g LG) 50/50.
And that's the real problem with the "lower for even longer" scenario - the original asset developers (those who provided the capital) get squeezed out. If there eventuates a regional price index (and I believe thet will happen ,,,, just like it did for oil with Brent/WTI/Dubai), that will likely happen around the end of this decade ... so too late IMO for this scenario.
Going to be quite the ride ... don't want to be "bucked off".
(20min delay)