For me, there are a couple of very interesting pages in the...

For me, there are a couple of very interesting pages in the presentation – p8 (Use of Funds) and p20 (the lithium Project Pipeline)

Uses of Funds… Bear in mind that all these numbers are through to the end of 2016…

Loan to SDJ - 14.3m USD (need to read the note about stress testing – if ramp up is stretched out a further 6 months (to March next year)a further 6m USD would be required. There is more than enough in their cash buffer. So we have a mix of loans and SBLCs now – worth remembering when we look at “restricted cash” which only reflect the SBLCs.

Repayment of TTC advance to SDJ - 6.9m USD…
The finance comments in the quarterly note that in December TTC provided 9m USD to SDJ of which USD 6.75m was paid on behalf of ORE. That really speaks to the strength of the relationship between ORE and TTC. In a situation which TTC could have exploited to great advantage, they have been supportive.  I think it is fair to say that without that loan, ORE would have been raising in the low 1s. Instead TTC provided ORE with some breathing space (until Feb 29) whilst the plant output lifted further, the China lithium price took off, the ORE price took off, and the Xmas holiday dead zone passed. Very, very good partners…

Debt service reserve account – 9.8m USD. TTC, helpful as they were, would no doubt have been saying, “but don’t ever put us in this position again”. And so 9.8m USD is provisioned away to be sure that the next P&I payment is always covered. This is cash by another name – it may be restricted (whether by agreement or by good management practice) but it is cash nevertheless.

Corporate costs - 3m USD - unremarkble – I have seen much worse from companies doing absolutely nothing.

Bateman Lithium hydroxide study – 1.5m USD. This is a very modest number considering that they would have a pilot plant and be well in to DFS by year end. This low cost is possibly a reflection on the development work that Bateman have done with Western Lithium and Pure Energy Minerals.

Cash buffer – 27.7m USD – a very healthy buffer that provides comfort until positive cash flow is confirmed from Olaroz (bear in mind that stress test note), In the short term it provides contingency for any further issues that come to light, and beyond that provides a lot of options.

So far so good, but then in the sources and uses of funds at SDJ, it gets interesting and harder to work out – what is happening at SDJ?

SDJ operating cash flow and drawdown of HSBC overdraft – 16.2m USD.
How much is cash flow and how much is drawdown? It is very hard to say. Under the ORE source of funds, we see 3.4m USD coming from reduction of SDJ overdrafts. My inclination is to read it as short term draw down on the overdraft but positive operating cash flow of 16.2m USD by year end. Logically, if funds are returning to ORE from the SBLCs, it is because the overdraft is being paid down. At Jan1 they had 7.4m USD (at 11.6 ARS/1 USD) overdraft facility remaining. They will no doubt want to keep a healthy overdraft facility, so we shouldn’t expect to see it all flow straight through to the ORE books.  

Their newly restated ramp up target of nameplate by September – if this is linear from 650 t in January, then they will have something in the order of 6,000 t in excess of operating breakeven by year end. It would be nice to check their 2,500 USD/t figure but there are just too many unknowns in the way the numbers are presented – for one, are these figures the full SDJ numbers or the ORE equity share?

Interesting that sustaining capital, debottlenecking payments, and redundancy/optimisation is in there at 6m USD. How much of this is provision for work this year and how much of it is payment for last year’s work (much of which has happened in the last 2 or 3 months). I suspect the bulk of it is extended terms on recent works. Did the extended terms affect the speed of execution?

Pay down of creditors – 4.5m USD. That thought was sitting in the back of my mind when I read about the CO2 supply chain difficulty in November - always hard to operate and get things done when you cannot or will not pay the bills…

The overall picture between the TTC  loan and the creditors and debottlenecking payments is that everything was stretched as far as it could be.
I wish I could get more out of the SDJ numbers but too much guesswork involved...

Lithium Project Pieline
On P20, they talk about Olaroz phase 2 –
We are given dates - studies to get underway in Q2 for potential construction start in 2017
We have a size – another 17,500 tpa
They are still talking a 40% lower capital intensity due to site infrastructure development being covered in phase 1. That would make for the better part of 150m USD. The ARS devaluation should have an impact here as well.
This has always been my preferred growth step – a simple rinse and repeat once the bugs are worked out of phase 1
Although they have previously talked about approaches from potential funding partners, it was difficult to see this proceeding outside the current SDJ ownership structure. Now we see on p8 that the funding for the studies is being advanced from SDJ.  Presumably similar funding arrangements could be put in place as were done for phase 1.

But then we also have talk of the LiOH studies – 15 to 25 ktpa. At the original announcement, it was indicated a location had not been decided. On p8 we see that the funding for this study is coming directly from ORE. So it is a go-it-alone project at this time. I expect a funding partner will be brought in if it is proven to be a feasible development. At this stage go-it-alone is the best route to the most favourable negotiating position. When Pure Energy Minerals costed this process they came up with 120m USD for 22,700 tpa. PEM are still progressing with this. The interesting part though, is that the ORE/BAT MOU has a June30, 2017 date for committing to building a plant.

With both projects being mentioned with 2017 dates, is this an either/or situation, or could they conceivably try to do both? Dangerously ambitious I think…