Ann: AVZ to increase equity stake in Manono Project to 75%, page-296

@Ubique13

Your AVZ analysis is full of holes, half-truths, innuendo and tainted with the usual MLL bias IMO. I've read a few of your posts on the MLL thread where you imply that AVZ is overvalued and somehow a lesser investment, but since I don't hold MLL I have politely refrained from dissecting your analysis (in front of your faithful clan of followers) on that forum.

I also understand that there has been criticism of MLL (not to mention Mali as an investment destination, especially given the current state of affairs that makes the DRC's political landscape look enviable by comparison) by a few AVZ holders, and thus it is no surprise that seemingly every second post on AVZ of late has been authored by the MLL faithful in retaliation to those comments made (be those fact, opinion or otherwise) made on the MLL forum.

However, since you and other MLL holders have made a concerted effort to enlighten AVZ readers (on the AVZ forum), I feel obliged to politely dissect and correct your biased and factually incorrect assertions.

Firstly, you claim that you're excited to see AVZ picking up a greater proportion of the project, but then you imply that AVZ is worth 1.5c (at least that is where you expect it to be within 6 months) without explaining how you came to that valuation? 1.5c btw is a fraction of the valuation implied by AVZ's purchase of Dathomir's remaining 10% stake in the Manono project, and also a fraction of what Yibin and others paid for equity in AVZ earlier this year. 1.5c is also miles below AVZ's well documented cap raise without a floor price back in early 2019. Therefore, one could reasonably conclude that your comments are nothing more that an attempt to bait or flame AVZ shareholders IMO.

But let's move on & discuss your 'Key risks to AVZ':

'1. High valuation - I don't think the project at its current stage can justify this market cap.'

Based on what exactly? As examples, on an EV/Resource tonne basis AVZ has (by a country mile) THE LOWEST valuation of all of its peers at US$34p/t Li20, almost half that of MLL's $64p/t Li20 and around one fifth of the peer average of ~$160/t. On a (first pass) NPV basis, AVZ is also trading at a hefty discount, and even more so given that AVZ has now effectively secured 75% ownership of the project.

'2. High CAPEX - near impossible to finance over half a billion USD in this environment - I assume a spod concentrate only scenario in my analysis as I think this is realistically how it will be developed in the end if the stars fall into alignment. IMO sulphate is wishful thinking and a hail mary strategy from management as it is apparent that selling spod alone isn't economical for the project due to the combination of high CAPEX & OPEX.'

Although the current environment has indeed been tough for Lithium producers, developers and explorers to attract finance etc, your rearview mirror focus IMO prevents you from looking ahead and realising that US$550m is actually chump change for a project that is estimated to achieve payback within 2 years and likely generate US$400m-$500m in earnings per year (on average) for at least 20 years. In a recent interview, AVZ's MD suggested that they were around halfway mark in terms of securing the $550m finance that's required, and the remaining 50% will likely be an easier task IMO given that AVZ's 75% ownership allows the company to generate a greater share of the total project revenue, and hence be in a stronger position to pay back any debt obligations that it acquires.

Furthermore, your 'hail mary' view of management's sulfate strategy is typical of uneducated or ignorant non-holders and investors that simply don't understand the benefits of vertical integration & capturing at least part of Lithium's chemical value downstream. Battery Grade Sulfate for example (an intermediary Li chemical /step used to produce BG Hydroxide) is more than 10x the market value of SC6, and the margins on a per tonne basis are far more attractive. Having said that, if AVZ sold only SC6 to begin with (reducing the required CAPEX to ~US$367m) as well as delivering Tin credits at today's prices (over US$18000 p/t), then at US$473/t (my base case est. and a whopping $200 below AVZ and Roskill's 20 year forecasted average) the project would still be profitable. And that's not including the added value of any Tantalum & Niobium credits.

In terms of OPEX, you're assuming that that AVZ's transport costs (the bulk of it's current OPEX estimate) will remain at US$252p/t. But all astute AVZ holders know that this estimate has been derived from standard rate cards & is pre-negotiation, and therefore a significant reduction in transport rates (potentially a halving of costs as indicated by management in a recent presentation) means that AVZ's OPEX will be slashed to under US$300p/t SC6. And due to AVZ's exceptional strip ratio at 0.48:1 (currently 7x better than MLL), AVZ's mining costs are less than $50p/t and due to the DMS only operation, processing costs are estimated at ~US$22 p/t. Compare that to MLL's (US$109p/t for mining and $US72p/t for processing), and you can see that this another area where AVZ really shines versus virtually all hard rock competitors including MLL.

And then there's AVZ's industry leading / transparent metallurgical testwork results (refer to the the below table courtesy of @SaneGeist on Twitter) and note that Producer One is Greenbushes. Perhaps you could ask MLL's management team to include this table in their forthcoming DFS, adding a column and comparing Goulamina's mineralogical characteristics?



Also, your response to 'MLL’s lithium quality is so poor that it has to be pulverised to such a powdery form it can almost be aerosolised' with; 'This is pure rhetoric. There are other projects that are float only, i.e. Wodgina. If PLS & AJM went with float only, maybe they wouldn't have the recovery problems they currently face. MLL's imminent DFS should demonstrate some further CAPEX & OPEX ($281/t) reductions without the DMS circuit in there.'

But is it pure rhetoric? 150-212 microns grind size is what MLL management are proposing are they not? Since when has pulverising ore into a powdery form become the industry standard or indeed an efficient way of achieving SC6? And will full met testwork results be disclosed in MLL's upcoming DFS, or will they instead omit certain and sensitive particulars in a similar fashion to perhaps one or two Lithium producers who to this day refuse to provide full transparency IMO.

In any case, your reply to this important point IMO is no different to the classic head in sand / she'll be right response that has cost many naive Lithium producer investors big time. And then referring to Wodgina as a good flotation only example made me laugh, given that the project is still on Care & Maintenance, and for good reason. The fact is, most hard rock Lithium projects either contain high levels of impurities, have orebodies that are unpredictable (i.e. mineralogical characteristics that differ throughout) and are of a lower grade / quality / consistency than the pegmatite ore found at at both Manono and Greenbushes. Ultimately, these realities for most incumbents have a negative impact on their profitability and viability.

For AVZ, the primary advantages of having a DMS only plant (at least to begin with) include having a much simpler flow sheet resulting in less technical and compatibility issues, reduced capital outlay and of course lower operating costs. The ability to more easily iron out issues during the commissioning and ramp-up stages cannot be overstated. But unfortunately for most wannabe Lithium producers including MLL, DMS only simply isn't a viable option for them in terms of adequate lithia recovery. So for MLL to suggest that DMS was removed from the flow sheet to 'simplify the process' is in my opinion, dodging the real reason for it's omission.

But regardless of the reasons they may provide, Goulamina has IMO yet to prove itself as either a conventional or unconventional Tier 1 Lithium asset, and for me the jury is out until the project can prove how pulverising ore into 150-212 microns (0.15- 0.2mm) can be an efficient / cost effective method of achieving full scale SC6 production.

3. High OPEX - $371/t is on the high end and this is already at 4.5Mtpa scale. Doubt it can be reduced much more with further scale. Even if this is scaled to say 10Mtpa - who will purchase all of that spod while the market is currently in oversupply?

Sincerely doubt you have any idea of what you are saying at this point, as there are indeed numerous options to lower AVZ's OPEX, including the potential halving of transport costs as described above, optimisation of the pit floor (with drilling soon to commence), potential high grade feed from CDL, Tantalum & Niobium credits (not yet factored in), SEZ expectations (see DFS page below on Taxes & Duties) and also one may want to consider how Comminiere will likely cover their 25% share of the project costs etc. etc.




And who will purchase all that spod you say? Apart from AVZ recently being accepted as a member of the European battery Alliance (hint, hint ) you may want to look ahead to 2022 when AVZ is scheduled to enter production. By that time there will likely have been a surge in demand for for Battery Grade Hydroxide. Refer to some of my previous 2020 posts or @lithiumanalysis tweets for demand forecasts etc.

'See comparison to AVZ's closest African peer below which quite clearly demonstrates the disadvantages to AVZ's project and the lack of upside at current prices: *This is an old screenshot, need to add an additional $20M to the above for AVZ's CAPEX to acquire the total 75% of the project.

The problems noted above can be condensed down to the following question: why would someone pay $4 for AVZ's lithium when they could buy it for $1 elsewhere? And this ignores the multitude of additional risks that come with this project that have been discussed to death. As I say, there is value here but not at these prices. I will wait on the sidelines accordingly.'

Lol, you've mentioned the need to add $20m to AVZ's 75% CAPEX share, but failed to highlight the improved NPV ($771 m vs MLL $392m), average annual EBITDA ($285m vs MLL $102m) and other obvious benefits of increased ownership, by showing a screenshot of an outdated table that compares MLL to AVZ at 60% ownership.

As mentioned earlier, you've conveniently omitted the Sulfate component as you refuse to believe that it will happen, even though it is part of the current construction schedule and AVZ management have indicated that they are about halfway to achieving the full $550m in finance to ensure that a Sulfate plant becomes an integrated reality. And what's with the BS 'MLL Ultimate' column i.e. is this to further skew your make believe figures in the direction of full-on fantasy land vs AVZ lol?

Your comment 'why would someone pay $4 for AVZ's Lithium when they could buy it for $1 elsewhere' is equally perplexing. As already mentioned above, AVZ's Lithium on an EV/Resource Tonne basis is THE LOWEST of all hard rock Lithium deposits, almost half the price of MLL, and a fifth of the price (on average) of AVZ's 'in development' peers.


And as for the "change in focus to gold tailings" where you state;
'MLL has actually acquired the Morila Gold Mine and a 1.3Moz gold JORC resource and will soon ramp to a 150koz producer. Plenty of cash will be coming in to finance the lithium which should only require ~$190M - approx half of what AVZ will need to raise (dilution & debt).'

Morila's ability to provide early cashflow from tailings is a positive (assuming the military don't confiscate the gold) but how profitable will the project be? i.e. What are the AISC costs for a low grade Gold project (currently 1.26g/t inferred) and how can one be sure that it will be value accretive to shareholders over the long run given that;

a) no. of SOI is rising by ~140% due to the transaction
b) there are no proven Gold reserves
c) there has been no independent assessment of the Gold plant. Why?
d) MLL management are striving to be a jack of all trades (trying to juggle Lithium and gold projects) but potentially may end up as a master of none IMO.

Personally, I prefer pureplay companies with a focused approach, solid board and a monster Tier 1 asset that is highly leveraged to (what will be IMO) one of the hottest sectors this decade.

Comparison of JORC Lithium resources and reserves aside (of which Roche Dure is the clear winner over Goulamina), MLL's new 1.3m oz Gold resource has an in-situ value of ~US$2.5b (at US$1900/oz) which is a reasonable number. But again, the resources are inferred and there are no proven reserves and obviously a lot of $ will need to be spent on building up the resources & reserves categories to sustain targeted production.

Conversely, AVZ's CRIRSCO compliant Tin resource of 288,000 tonnes (inc. 92 thousand tonnes of reserves) with an in-situ value of ~US$5.2b is pretty much ready to go, and then if we add in a cool CDL (another monster Lithium deposit with potentially 400-800mt grading 1.5 - 2%) then I know which stock I would prefer to have in my portfolio.

GLTA

Cheers
Elpha