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ILLUSTRATION: DAVID ROWE

Liontown saga reveals minerals truths

ANTHONY MACDONALD

If the critical minerals sector is going to fill a giant, fossil-fuel-sized hole in Australia’s budget and economy for generations to come, it is going to have to do it without too much reliance on the country’s big four banks.

The harsh reality of where the ASX’s two biggest sectors – banking and mining – cross over has played out before our eyes at Liontown Resources, Australia’s pin-up critical minerals story.

Liontown, an ambitious lithium developer due to be in production at its vast Kathleen Valley project 680 kilometres north-east of Perth, was too risky and dangerous for the banks.

Each of our big four banks had a nibble, piling into Liontown when Australia’s government was pushing its critical minerals strategy. Months later, we can see the lithium developer is everything the banks are not.

Our major banks are good at low-priced, low-risk debt. Liontown is a nascent player in a nascent market, with one asset that’s still not quite in production and whose valuation whipsaws with the lithium price. It needed backers with stronger stomachs or strategic goals.

While that story is as old as Australia’s mining and banking sectors, it feels like we had to learn it again for ourselves in the past nine months. And true to form, it was the pioneering Liontown that took us on the outrageous roller-coaster ride.

When push comes to shove, equity investors, strategic investors and the government need to fund and promote the next wave of critical minerals companies, not the banks.

Liontown’s story is worth picking over, given the way the government is trying to rebirth a critical minerals sector, including via a $7 billion production tax incentive, to shore up Australia’s mining sector, supply chains, tax revenue and economy.

Liontown is at the forefront of it: developing Kathleen Valley, one of the world’s largest hard-rock lithium deposits, good enough to attract Australia’s richest person, Gina Rinehart, as a 19.9 per cent shareholder.

Late last year, Liontown, having failed to agree on a $4.3 billion takeover by Albemarle, needed funding to get to the production finish line. Australia’s big four banks signed up to its wider $760 million debt package, which also included government-sponsored export funding, in October, only to squib at the first covenant test three months later.

What was a good news story for Liontown (securing final funding for Kathleen Valley) and the banks (backing Australia’s critical minerals future) blew up as the lithium price tanked and the banks lost their conviction. It was just too risky.

Sandwiched in the middle – and still holding the bag – were Liontown’s shareholders. They tipped in $376 million of equity at $1.80 a share to put the cream on the banks’ $760 million funding package, only to see that funding shrink and the value of their shares halve. Shareholders don’t get to change their minds when the lithium price tanks, unlike lenders.

To its credit, Liontown salvaged a debt deal in March. The $760 million funding package dropped to $550 million and some of the banks, including Australia’s Westpac and ANZ Bank, dropped out altogether. It was a wild ride.

Fast-forward another few months, and having tested all pockets of capital, Liontown is done with the banks.

Managing director Tony Ottaviano says he ‘‘really values the [banks’] support’’, while simultaneously subbing them out for offshore strategic money. He’s replacing short-term debt with longer-form, more patient and more flexible capital. It’s a win-win.

The money is coming from Korean battery-maker LG Energy Solution, a strategic investor already signed up to buy some of Kathleen Valley’s production.

While it took LG some time to do due diligence, it is stepping up with much surer and cheaper capital than a CBA or NAB could provide.

LG is tipping in $US250 million ($380 million) via five-year convertible notes. Liontown will pay it interest twice a year at SOFR – the secured overnight financing rate in the US, currently about 4.5 per cent – in either cash or shares.

The notes are convertible at $1.80 a share, aligning LG with Liontown’s under-water shareholders who tipped into the October raising. LG also extended its offtake agreement by one decade to 15 years.

As for the covenants, ‘‘all I will say is it is very, very flexible’’, Ottaviano told analysts on yesterday’s call. He was clearly happy, like the cat that got the Korean cream.

LG’s funding also allows Liontown to continue to shoot for 4 million tonnes a year at Kathleen Valley – a target Ottaviano and his crew are obviously still keen on but had to wind back to 3 million tonnes to secure the banks’ support a few months ago. It also allows it to retain cheap pre-existing funding from another strategic investor and offtaker, Ford. Liontown and LG also entered a downstream collaboration agreement.

Liontown will use LG’s money plus the Ford facility to repay the banks. Ottaviano obviously prefers dealing with what he called ‘‘deep and long-term’’ partners, on a call with investors and analysts yesterday. It also has a further $120 million to pile into Kathleen Valley to get to first production.

When Liontown starts producing, it will become a miner funded by equity, two strategic investors (LG and Ford) and three offtakers (LG, Ford and Tesla), similar to the way Japanese trading houses and steel mills flooded Australia’s iron ore and coal mines.

To be fair to Ottaviano, he didn’t have a bad word to say about the banks.

‘‘It’s the normal cut and thrust of project finance and negotiation,’’ he told Chanticleer yesterday.

‘‘I don’t think the market really understands the inherent nature of project finance.

‘‘It had its place in gold and copper; this was its first entree into lithium.’’

But surely, both lender (the soon-to-be-replaced banking group) and borrower are relieved.

That they came together when they did in October, and under the circumstances where Liontown was plugging a short-term funding hole, was soon seen for what it was: a shotgun marriage.

Ottaviano said the banks could’ve been there longer term, but the price and terms would’ve been nowhere near as good as a strategic party like LG’s.

What’s the takeaway? Critical minerals hopefuls – from tiddlers to heavyweights like Liontown – will be funded by customers or strategic investors and equity holders, and propped up by government incentive programs.

The banks, no matter how much they talk about investing in the energy transition or backing Australia’s future-facing industries, are just not a natural fit for a one-asset developer (soon to be miner) with a product that is sold into volatile markets. They just aren’t.

Is the Liontown experience a lesson for COB ?