Long read but very interesting. I now have far greater...

Long read but very interesting. I now have far greater appreciation of this stock after reading this well conducted and informative interview..

With growing activity in the USlithium market, Alan Kohler catches up with the CEO of Ioneer, Bernard Rowe todiscuss the company's lithium-boron project in Nevada, its talks with Tesla andother lithium buyers, and Rowe's thoughts on why we're seeing the bottom of thelithium price

Bernard, whereexactly is your lithium-boron deposit?

So it's in thestate of Nevada in the United States. It's located about halfway between Renoand Las Vegas.

That would makeit close to San Francisco as well, wouldn’t it?

Yes, it is. Theclosest ports would be San Francisco and Los Angeles and it's about a four orfive hour drive.

And how far areyou from Tesla's factories?

About a threehour drive.

Right, there youare.

Yes. I think wewould be about the closest lithium source to the Tesla Gigafactory, and we'realso the most advanced lithium project under development in the United States.

The Financial Review had a story inJune saying that you had, as they put it, tapped Goldman Sachs to help you finda funding partner for the project, and you put out a release the same day ornext day saying that that's not quite right and then we're not that faradvanced, and so on, but that was a few months ago. What is going on now withGoldman Sachs finding a funding partner for you?

Yes, so thedifference there was really a formal process versus an engagement. So it's truethat we are working with Goldman Sachs, we've engaged them to advise us onfunding solutions for the project, including bringing in of a strategicpartner. So it's not the only aspect of the funding solution that Goldman areadvising us on, but as part of it, I guess the point of difference at the timewas that we weren't doing a formal process at that time.

So, we've beenengaging with a number of parties, potential partners in the project. We seethis project as something that from an Ioneer perspective, requires a partner.It's a fairly large capital project, at $790 million and so, it was always ourintention...

And that's 785,in fact, the US right?

Correct,exactly. Yes. It's not a small company project on its own. We always envisagedbringing in a partner into the project on a minority basis, so that Ioneerwould still be the majority owner and operator, and the partner would come into assist in the funding and not just the direct sort of capital into theproject, but also through debt funding and financing. And in return, thatpartner would then likely have access to the lithium chemicals, carbonate andhydroxide that we would produce.

What doesGoldman Sachs say, in order to retain more than 50 per cent of the project, howmuch do they say you'll have to borrow?

We think thatthe project can support approximately 50 per cent debt funding. The annualrevenue generated from this project is $422 million and the annual EBITDA is$288 million. Again, it's a very large-scale project by any measure, and it caneasily support in the order of 50 per cent debt funding.

Now you said in the definitivefeasibility study, press released back in April, I'm just looking it up now,you said that it's the most attractive project for lithium carbonate, lithiumhydroxide and boric acid globally. That's a big call?

Well, it is abig call, but we stand by that. I think the justification for making such acomment, is there's several aspects to it. One is that it's at the bottomof the cost curve and at the bottom of the lithium cost curve. So in otherwords, compared to all the other peers that are out there, both projects thatare already up and running and mining and producing, and also new projects thatare coming on stream, this project is based on a very detailed feasibilitystudy that's been completed by amongst others, Fluor the American engineeringfirm, and is backed up by what we call a full simulation pilot plant. It's a $7million scaled down replica of the plant that we would use at the site.

Based on theinformation from those studies, then this project will produce lithium at alower cost than any other project in the world and the reason it can do that,is because 40 per cent of the revenue comes from the boron. And if you applythat boron revenue, which is in the order of a $100 million dollars a year to yourcosts, that makes your lithium costs incredibly low. It's got other favourablecharacteristics, obviously, it's large, it's long life, it's in the UnitedStates, and importantly, it can produce either lithium carbonate or lithiumhydroxide at the site. So there's just not many projects out there globallythat can match those sorts of favourable characteristics.

Now tell us…sorry, go on.

I was going tosay, what I mean by that last comment is that spodumene, for example, which ismined extensively in Western Australia is made into lithium. That's true, butnone of the operating mines convert and make lithium chemicals that go intobatteries. They make a spodumene concentrate like a mineral concentrate, whichis then shipped overseas and nearly all of Australian spodumene ends up inChina for processing.

Thedifferentiator here is that we do not make an intermediate product that has tobe shipped to another country for refining, this project and the uniqueness ofit, allows you to make those lithium chemicals that go to batteries at thesite.

Right, so you could basically deliverlithium carbonate or lithium hydroxide directly to Tesla's factory three hoursup the road.

Correct. Yes,and obviously there's a number of other battery factories that are in theplanning or even building stages throughout the United States and... Yes, butyou're correct. We could produce the battery grade lithium chemicals that wouldgo direct to a battery maker or cathode maker who makes the cathode that goesinto the batteries, and hence there would be no long supply chains, shippingaround the world for refining and processing under that circumstance.

Is thatproduction included in the US$785 million cost?

It is except forthe battery grade hydroxide, is something that we would add starting in yearthree to be producing hydroxide in year four. So we start with lithiumcarbonate a 100 per cent, and then over the first four years we transition intohydroxide. There's…

Sorry, what arethe different things used for, carbonate and hydroxide, and who are thedifferent customers?

They both getused in batteries, in lithium-ion batteries. However, there are differentchemistries used in different batteries depending on the use. For example,Tesla and the Panasonic joint venture at the Gigafactory just outside of Reno,Nevada, they primarily use these batteries that have high energy density. So itmeans that you can store a lot of energy in those batteries, and that allowsyou to drive further before having to recharge.

And most ofthose high energy batteries are using nickel and they use lithium hydroxide.Now, other uses such as in buses where distance is not such an issue, you'regoing to drive a bus a known distance every day, and weight is not as importanteither. Then some of the cheaper batteries have lower energy density butthey're cheaper and they use lithium carbonate. It just depends on the batterychemistry and who's manufacturing them.

Today, lithiumhydroxide is growing at a faster rate than lithium carbonate, but both of themare growing strongly. There's strong demand for either product. It's just thatit looks like the battery technology is heading more rapidly in the directionof the hydroxide for those reasons of driving distance primarily.

You should startmaking hydroxide straight away, shouldn't you?

That's a verygood suggestion. We're looking at the options there, that was what we put inour feasibility study that we would introduce it in year four. But obviously,in talking to these potential strategic partners who will ultimately be the endusers of our lithium, of course we're listening to them and there'sabsolutely no reason why we can't bring it in at an earlier stage, why we can'tstep it up over a period of the first three years, rather than having it allcoming at once. We're looking at all those options and obviously monitoringwhat the market's doing as well.

Are you talkingto Tesla?

Yes, I would saywe've talked to all of the American car manufacturers of electric vehicles,mainstream auto electric makers in the United States and elsewhere, yes.

Is the intentionto partner with just one of them?

No, it could bemore than one. What we've seen from Tesla to date is offtake agreements, and anofftake agreement, as I’m sure you know, is just a contract to buy either afixed volume at a fixed price or at an index price into the future. That's notthe ideal arrangement for Ioneer in terms of bringing in a strategic partnerand assisting with the overall funding of the project. Offtake agreements aregreat, but in the case of Ioneer, and I think you could say this about manylithium projects, the advantage that comes with tying offtake and financing issignificant and so, one without the other is obviously less attractive.

Has Elon Muskever talked about how they'd like to, how he'd like to own a mine?

Yes, he has. Infact, last week, he made mention of the fact that Tesla have some kind ofrights over, I think he said 10,000 acres of land in Nevada, where there islithium clay, and that they're talking about some new technology to extractthat lithium from the clay. I'm a little bit dubious about that in the sensethat I'm pretty familiar with all the lithium projects in Nevada. And I knowthat there are two that are very advanced, Ioneer’s is one, and it's the only onethat has a feasibility study finished on it, so it's the most advanced.

The otherprojects are at an earlier stage and some of them are at a very early stage. Idon't know the details. I don't know what project he was talking about, but Ithink it's at a fairly early stage. But the lithium clay deposits that occur inNevada and Rhyolite Ridge is different because it's a boron and lithiumproject, not a lithium clay, fundamentally different. Then the lithium claysstill have a lot of work to be done on them to demonstrate that they could beeconomically competitive.

Right. How much cash have you gotnow? At the end of June, you had, I think, $38 million or so, have you stillgot that?

Not exactly $38million, but not a lot less. We're obviously continuing to do a significantamount of work, so on the project engineering and permitting, et cetera, sowe've got reasonable spending commitments as we go along, but north of $30million, certainly.

And I think thelast I heard you said that you think you'd start building it in the secondquarter next year. Is that still the case?

Yes, that'scorrect. Subject to receiving the necessary permits from the US government;state and federal permits are required. It's on federal land and obviously...

You just got aBureau of Land Management approval, didn't you?

The Bureau ofLand Management... It was an approval, but one approval required in a series ofapprovals in the process. We haven't finished the process yet. We're stillgoing through that process but the permitting in the United States requireswhat's called a Plan of Operation. We submitted a Plan of Operation after twoyears of baseline studies and environmental studies, we submitted that back inMay and the BLM approved it as being complete and in accordance with the rulesand regulations, so compliant. Now, it's going through the public consultationand EIS process. We're expecting an outcome towards the end of the secondquarter of next year, 2021, which would then allow us to commence construction.We're doing the engineering work to allow us to be ready to commenceconstruction once we get those environmental permits in place. And obviously,the funding in place is the other critical piece for the board to be able tomake an investment decision and allow construction to commence.

Yes, of course.Go on, sorry.

What I was goingto add was, but we are doing everything necessary in terms of engineering andpermitting and planning to be ready to start in that Q2, towards the end of Q22021.

I suppose I'mtrying to get to the question of whether you'll need to raise more money beforeyou get to a funding deal.

No, with $30million-plus in the bank and obviously we have discussions with strategicpartners in progress right now, so, no, I would say that's not the case that wewould like to have the strategic partner in place.

By when?

As soon aspossible, but we're working towards a possible outcome towards the end of thisyear.

Right. Take us through a bit of thehistory of the business. You started it, I think as Global Geoscience, andyou'd been a consulting geologist for a few companies over the years. Tell usabout why you did that and what was the intention with that business GlobalGeoscience when you started it?

GlobalGeoscience started as a private company in the early 2000s and I was one of thefounding shareholders of that company, along with some other Australian miningpeople. I became the Managing Director and listed the company in December 2007.And really, I have been the Managing Director since that time, so, that's beenmy primary focus.

Good timing, bythe way.

Exactly, that'sright. Yes, exactly and so I have run the company since that time, butsimilarly, it was a pretty dark and lean time in the following couple of yearsand so myself and the other people related within Global Geoscience didconsulting work for other companies. That's why you see that I've done thatDrake Resources and... and a few others that I was doing some consultingwork for, but Global Geoscience was a set up as an exploration company with afocus on Nevada in particular, and Peru.

And it'sactually had ongoing exploration programs sometimes very aggressive andwell-funded helped along by some really big names and partners in, OsiskoMining, the Canadian company funded all of our gold exploration, Antofagasta,the large Chilean copper company was funding us to explore for copper inArizona and Nevada. But similarly, there's been lean times when the market hasbeen tough and we've pulled the horns in and gone into survival mode and that'swhat you’ve got to do when you're a junior explorer, and the people, likemyself have got a lot of skin in the game.

We wind thingsdown and we preserve cash and we minimise spending when market conditionsdictate that. But it was that long involvement in Nevada that, back in 2016, Iwas contacted by some Nevada based geologists who asked if I would beinterested to look at a lithium project, which I did obviously, and I went outand looked at it very soon after they contacted me. I signed a 12 month optionon that project to give me time to pull together some people with expertise notonly in lithium but also in boron, which there's not many people out there thathave got experience in boron, but I did that.

Over a period ofa year, we did a lot of test work and realised that this was a really, reallyinteresting – different, but very, very interesting and a great opportunity andso we exercised the option. Then Global Geoscience then essentially focused allof its attention on Rhyolite Ridge, stopped exploring for gold and copperanywhere in the world.

Right, so you'vecome a long way since then. That’s only three years ago, so it's interestinghow far you've come in three years.

Well, that'sright. I mean, I think it's a credit to my team that within three, four years,we've taken a project that was really no-one even knew about it, to being themost advanced lithium project in the United States to having a feasibilitystudy finished and a pilot plant finished. Literally, there are no otherprojects that can say that in the United States. So yeah, we've achieved a lotin four years.

When do youthink you'll be producing lithium?

The project willtake about two years to build. On the assumption that we have everything inplace by middle of next year, then it will be a two-year build, meaning we'rein production in mid to late 2023, which we think, by the way, is an idealtime. I don't think there's any burning need to try and accelerate that from amarket perspective. We think that, 2023, '24, '25 are going to be the periodwhen we're going to see really strong demand growth in lithium globally andincluding in the United States.

Tell us about boron. Who buys that,what do they use it for?

Boron is used ina whole heap of different applications, more than 100 different applications,really diverse applications. One of the largest uses though is borosilicateglass. It's an additive to glass to make glass hard and resistant to crackingwhen it is heated and cooled. So thin glass on the screens of iPads and phonesand TFT television screens have boron in that glass and that's why they canmake them so thin and they're so strong and resistant to cracking. It's used infibreglass insulation. It's used as an additive to timber, to preserve timberfrom termites and other attacks from pests, so a wood preservative. It's usedin permanent magnets, which are used in electric motors and wind turbines. Soyou've of permanent magnets that use rare earths, well, they also use boron.Neodymium, iron and boron are the most common form of permanent magnet thatgets used in an electric motor, so boron is important there.

Boron is used asa micronutrient in agriculture. It's used as a ceramic and a metal alloy tomake metals much harder; armour plating uses boron carbide. It’s got a very,very large number of uses used throughout the world and there's very, verylittle supply of it anywhere. In fact, 73 per cent of the world's boronreserves are in Turkey. There's very little global supply current and futurethat isn't coming from anywhere else, other than Turkey.

When you talkabout an EBITDA of US$288 million, how much of that's lithium and how much isboron?

So well, if Ilook at the...

Maybe you shouldtalk about revenue rather than EBITDA, $422 million.

Yeah, correct.So on the revenue basis, it's roughly 60-65 per cent is lithium and 35-40 percent is from the boron, so, it's more than $100-120 million a year from boron.

And when you'retalking about partnering, are you only going to partner with a lithiumsupplier and have boron as offtake, is that the plan?

No, that's mostlikely, because I think it's fair to say that lithium is the attraction frommost of the potential strategic partners that we're talking to. That said somediverse chemical companies would be interested in both products. I wouldn'trule it out, but it's more likely that it would be partnering on the lithiumand then the boron is there just as off-take. But there are some parties outthere that, as I say, particularly the diversified chemical type companies,which would view the boron as a favourable business as well.

The boron is aduopoly, I didn't really mention that. I said the reserves are in Turkey, butthe only production, currently global production outside of Turkey of any significantsize is the boron mine in California, which is owned by Rio Tinto and that's avery mature, mine has been in production for about 100 years.

It is gettingtowards the end of its life. But essentially the boron market is a marketthat's held between Rio Tinto and the Turks with this one ageing mine. I thinkit's an attractive business to be in because of the duopoly, because of thestability in both demand and pricing over a very long period of time. And itactually makes a nice complement to the lithium, as I'm sure you've seen,pricing has been quite volatile and it will continue to be volatile whilst wego through this period of rapid growth and you get this from time to time, youget mismatch between supply and demand.

Have you gotenough boron to become the third producer and perhaps turn it into a cartelrather than a duopoly?

Well, I thinkwhat'll happen is that the Rio Tinto mine in California will gradually winddown and yes, Rhyolite Ridge, our initial plan is to mine it and produce 170,000tonnes of boric acid a year, which would be about half of what Rio Tinto coulddo. So to replace that properly, we would need to do it at twice the rate, butthat's, we have the reserves to do that, so that's perfectly achievable.

You could do itat what, or 340.

Yeah, correct.That's right. Yes. You could. There's no technical reason why you couldn't. Andin that case, and remembering, I said, this is a plus 50 year type project. Imean, the resources that we've got at the moment are enough for 50 years.

You're sayingthe mine life is 25 years.

But that's basedon the reserve only. So in terms of reserves, we've got 25, 26 years ofreserves. But in addition to that, we've got an extra 80 million tonnes, whichis not in the reserve, but it is in the resource, which is just a lowercategory. Hasn't had the economic study done on it to the same extent, butthere's no reason why that can't with additional work, why that can't beconverted into reserves. And the 26 years we'll go to 50 plus years and it'sstill open and we haven't finished drilling it. So I'm very confident that wewill add more to the reserve over time. So absolutely I see this project as apotential replacement of Boron California as a major global supplier of boronproduct. And the reality is there's very, very few other options outside ofTurkey to do that and the world consumes a lot more boron than it does actuallylithium.

It's a bigmarket with limited geographical supply and I think the rest of the world won'tbe willing to just simply buy all of their boron from Turkey, just like therest of the world won't be happy to have China supplying 80 plus percent oflithium ion batteries

In yourfeasibility study, you've got a net present value of US$1.2 ish billion, but that'sbased on 8 per cent discount, right? That's ridiculous, 8 per cent.

Why, do youthink it's too high or too low?

Too high,surely? The bond rate is less than one.

Yeah, I thinkit's just the number that gets used in our industry. To be honest, I get criticisedfor not using 10 sometimes. It's just an industry number that people getcomfortable with and I guess it allows you to compare apples with apples.

8-10 per cent isa common number. I mean, people would say that everyone should use the samenumber so you can compare them but then there's a big difference betweenfinancing a project that's in Nevada versus in an African country, as anexample, and what's the cost of the capital difference? We think you're right,there's a very good strong possibility of getting money at a low cost,particularly the debt aspect if you can tie the debt to your OFT or to thepartner, and then leverage off their balance sheet. Look, some of thesecompanies that we're talking to have the ability to also have government involvementin the debt funding and I would point to a really great example of beingOrocobre, the Australian listed lithium producer active in Argentina.

And I'll alsomention that the chairman of Orocobre retired and became the chairman of Ioneera couple of years ago, James Callaway, so he's very intimately familiar. But inthe case of Orocobre, they were able to get the debt funding via their partner,which was Toyota Tsusho and it was backed by the Japanese government and it wasdone at a discount to the long term bank rate here in Australia, so really lowcost of capital when obviously you have a government-guaranteed debt and I'mnot saying we'll do exactly that, but that's the sort of thing we are lookingat.

Yeah. Well, Isuppose I'm just pointing out the NPV could be anything really, depending onwhat discount you use?

Well, that'sright. Yes, exactly. That's right so and...

I suppose themain thing is you've got a $288 million EBITDA. When you say that's life ofmine, that's US$288 million per year for 25 years, is that what you're saying?

Correct. Yes.

Which is morethan $400 million Australian.

Yes, yes. Whichis why I say that the 785 million to build this project is very achievable fora project that generates that sort of EBITDA.

Well, very good, we'll look forwardto staying in touch with you, Bernard. Thanks very much for your time today.

Oh, pleasure,Alan, pleasure. If I could just add one other thing perhaps and that is just asa comment that the interest in lithium in the United States is finally startingto, I think, be recognised. And the United States as of today produces 4,000tonnes of lithium chemicals a year. That's it, 4,000. Now, if you electrifiedthe entire US car industry, it would need just under a million tonnes a year oflithium to make all new cars each year electric. Now that's going to take awhile obviously to get to that point in the United States, but that'sultimately where we're heading, and that the US will at some time in the futureneed of that order a million tonnes and today it's 4,000.

But even if youlook at, with what Tesla have already committed to plus some other companieshave already committed to, they're talking about somewhere between 100,000 and300,000 tonnes of lithium demand just within the US by 2025 from a base of4,000, so it's an incredible growth in demand for this material and evenRhyolite Ridge at 20,000 tonnes a year, you need 20 of them, if they were goingto have all of that as domestic production. Now I'm not saying that that'llhappen. There's not 20 projects out there, to be honest, there's three or fourthat have advanced enough to be in production by sort of 2025, and ours is themost advanced. But you can sort of get at a feeling for the quantum of lithiumdemand that's coming in in the United States. And they will have a balance ofexternal, overseas supply but they will also have to develop, and they willdevelop, their own domestic supply as a portion of that overall demand.

Right.

And I think thatthat's why you're seeing such interest, particularly in the wake of Elon Musk'scomments of last week. That's why you're seeing such strong interest in lithiumstocks, lithium projects with direct US exposure, like Ioneer. Our stock hasdone incredibly well in the last 10 days, because of that.

It has indeed,it’s gone from 10 cents to 17.

Yes, yes. That'sright so I think that's what's driving that. There's green shoots generally inlithium. We're seeing the signs of higher prices. We've been on a downwardprice trajectory in lithium prices since early 2018 so it's gone on for quite awhile but now we're starting to see what looks like to be the bottom. We'restarting to see some small increasing in pricing, and we've started to see thestockpiles of oversupplied material, diminishing and we're starting to seedeals being done and some corporate activity also. So I think it's a great timeto be in the lithium business and I think we've been fortunate that we've beenwell-funded over the last couple of years so despite that falling price in the lithiumpricing regime, we've been able to continue doing the work that we needed todo. We were well-funded and we raised significant money at the right times toposition ourselves really well for what's about to unfold.

Excellent. Well,good to talk to you, Bernard. Thanks.

Very good.Thanks, Alan.

That was BernardRowe, the CEO of Ioneer.