Ann: Becoming a substantial holder, page-47

Sorry to be the poster presenting poor news, but if the takeover gets voted down IMO there is a distinct chance of a large share price retreat and based on HC posters sentiments, failing to achieve the scheme of arrangement thresholds is a distinct possibility taking this beyond a "very low risk" possibility.

If the takeover fails, it could be challenging for ESS to raise the circa A$350m needed to develop the project proposed in the scoping study and also cover working capital needs until ramped up to nameplate. If any of the scoping study prices were old, inflation issues may mean a DFS price is even higher. IMO ESS management/directors have looked at how challenging raising this capital may be given the existing market cap and what capital may have been put on the table in their recent work to solicit off-take bids. From this they determined 50c now looked a pretty good option. If the market doubts whether a project will be implemented, an ESS share price substantially lower than 50c is possible.

For example E25 put out a scoping study for HPMSM last year that had a NPV (8% post-tax) of US$801m on a 100ktpa plant. The estimated capital cost was US$236m (AUD337m @ 0.7). This is a similar capital cost to what ESS is looking at. The NPV is around 3x that of ESS. Both are small companies looking to implement expensive projects with multi-hundred dollar NPV's. The market has significant doubt around whether E25 can raise the capital to make this project happen (and also stop existing operational losses). If you take the existing E25 market cap less cash, its 1/10th of the NPV of this potential project noting E25 is also looking at a smaller size option. Now I'm not saying a discount as steep as 1/10th of NPV would happen to ESS, but if ESS shareholders were to vote down the takeover and the market were to go into a sulky pricing mode, the Market cap can be seriously different to NPV estimates.

ESS's released a NPV of $367m and with 267m shares on issue, a 1/10th valuation would be 13.7c. I wouldn't expect the market to value a lithium stock this harshly, but if it was 1/5th of NPV then the price would be 27c. The most likely source of the takeover failing is shareholders voting no, and a significant number of HC posters have expressed an opinion that they will do exactly that - vote no. If ESS's share price were to collapse to the 20-30c range, you would probably need to go down into the teen's to get a $350m capital raise away. If $368m were raised at 18c then after 5% capital raising costs, ESS would have the $350m needed to implement the project. There would be the existing 268m shares and another 2,044 million new shares issued. With 2,312m shares on issue existing shareholders, would own about 12% of the company. Relative to Core, the higher projected operating cost, time to complete the build and complete commissioning may mean some time before a $1b+ market cap is ascribed. Even at $1b, the market cap would only be 43c due to 2.3b shares on issue. All of a sudden, 50c now doesn't look so bad.

What the scoping study has clarified is two fundamental differences between ESS and an early Core. The first is Core had A$89m as their DFS capital cost and ESS is just over 3x that at A$293m. The second is that ESS expects to have a life of mine cash operating cost of US$721/t. This is broadly double Core's US$372/t (or ASIC US$454/t). While ESS's ore starts near surface, everything else makes it expensive.

It remains unclear whether DSO is a potential pathway that can short-cut the difficulties of raising a massive amount of capital. It might be, but it does require finding a buyer who can process ore expected to require DMS, Flotation and magnetic separation. This may lower the DSO price received below what Core received for its DSO relative to ore which can be processed with DMS alone. If a DSO scoping study has any potential, ESS management / directors owe it to shareholders to present what they have established around its potential in the context of ESS.

Now I do hope ESS gets a higher price than 50c because that will increase the price of other broadly similar stage companies including RDT and GL1 but I'm not as hopeful as others that this will occur. I think there is a distinct chance of a really strong run in lithium stocks in the near future, but unless an increased offer occurs, ESS shareholders will miss out on that gain. This was a key factor in deciding to exit and reinvest elseware. If ESS does get another higher bid, it will tend to lift other explorer lithium stocks. If you have transferred capital to another lithium stock, you may not get the gain with ESS but you may well get a secondary effect in an alternative similar stock - another factor in why I bailed out.

Also, If written today, the independent report may well have a fair market value range extending too, if not below 50c which would reduce the likelihood of revised higher offer. GL1 has a market cap of A$551m (per ASX website) and had $76m cash @ Dec22 and with a JORC of 50.7m @ 1.0%. You could argue that the market is valuing them at cash plus A$9.4m for every million ton's at 1.0%. $76m + $9.4m*50.7=$553m. ESS has 11.2Mt @ 1.16% (broadly similar to 13.0Mt @ 1.0%). This $9.4m price point would be an ESS value of A$122m. It's pretty easy making other adjustments for relative sizes, cash, other assets and ongoing corporate costs that arrives at something very close to 50c as a fair market price.