Its an interesting question
@MasterPingIt might be possible to entirely fund P1 with offtake prepayments, but I'm not sure you would want to do it.
Its hard to estimate how much P1 will cost, given all of the changes that have come about (doubling plant size, then adding sodium sulphate, then dropping it and switching to LOH-Max).
But let's say US$35M would be needed, which is the best estimate I've been able to make.
Prepayments are repaid at a percentage of the value of each shipment. Obviously the higher the percentage the faster you will repay the loan, but at the same time you also still need to be bringing in enough money to keep everything going.
The absolute most I could see the repayments at would be 30%. If we assume a $12,000/t lithium price to be conservative, remembering that new producers often have to offer some form of discounted price to entice big prepayments, and you would be paying back the loan at $4,000/t.
That means 8,750t need to be shipped to pay back the loan.
If we're lucky year 1 production will be 2,500t. Probably more likely to be 1,750t given chemical plants are complex beasts to ramp up. Then debottlenecking starts and year 2 maybe gets to 4,000t, so 5,750t all up.
Year 3 gets to 5,000t of annual production, and finishes paying off the prepayment.
So yes, you could fund the whole project that way, in theory, but there are a few issues to consider.
Firstly, negotiations with a potential partner are going to be difficult if they know they're completely funding the development of the project without getting a share in the profit. Sure, they need to secure supply, but P1's 5,000tpa isn't exactly huge in the context of the market. So you're unlikely to find a partner who is that desperate to sign on. More likely that they will want a stake in the company as well, and fair enough.
I would prefer a long-term partner that is going to grow as well and be there to take some supply from P2 as well, and I would guess that this is why the board's preferred method is to bring in an offtake partner who also takes an equity stake, plus government grants, which was stated in the AGM presentation last year:
https://www.asx.com.au/asx/statistics/displayAnnouncement.do?display=pdf&idsId=02050828In high level terms, it is better to dilute the project rather than the company, as that way you preserve the ownership of the IP, but it doesn't sound like they're shopping around the JV option. I know it has been mentioned as a possibility with Groupo Mota, but I would be immensely surprised if that involved a stake in P1.
As long as they offer another rights issue on the same terms as they did when GXY bought in, the dilution is negligible. I'm okay with that and I hope it happens.
The next consideration is cashflow risk. If you go too hard with the prepayment rate the company can get into cashflow difficulty, particularly if there was a sustained drop in the lithium price and/or a blowout in costs. The first is always a risk with commodities and the second is common with new operations, especially complex ones.
They do have the listed options that expire next year which would give the company a handy $10m just as they are getting to the pointy end of construction, which is good and was well planned I think. But I'm not sure that would be enough to make up the shortfall if they found themselves in a tricky spot. Hopefully that money is just used for working capital.
Lastly, it's a trade-off for how fast you want to grow. If they're paying a significant amount of their margin to this debt, it reduces the funding available for P2, which means it takes longer to get there. If you accept a new strategic investor onto the register and a smaller offtake prepayment, you will have more cash flow to fund growth when P1 is kicking along comfortably.
So, if it's a US$35m capex, my ideal structure would be:
$5m government grants
$10m offtake prepayment
$10m stake from a new investor
$10m rights issues from existing shareholders
$10m prepayment could be repaid within 2 years at only 15% of each shipment, which would be pretty reasonable I think.
I have no idea if that is how it will go down, but I do know the board have been mindful of not diluting their existing holders when they need to raise money, and I don't expect that behaviour to change. Not when they have significant holdings themselves!
Anyway, this has become a much longer response than I intended, I hope it is what you were looking for!
Interesting move today. Big bounce for an announcement saying the pilot plant is on track. Surprised me, that's for sure. Hope it jumps again tomorrow! Hope we get another presentation pack for Joe being at 121.
Cheers
(20min delay)