Shout-out to the dram of Glenfarclas 25yo that made this post possible. Lovely relaxing tipple to be able to get stuck into this.
What a lot of news to drop in one go!
First: https://www.asx.com.au/asxpdf/20190507/pdf/444xj3rlzb8xb8.pdf
This answers the question about the alternative location that is being considered for P1; Abu Dhabi.
I don’t think anybody saw that coming.
The reasons for considering it appear to be:
Lower capital cost of building the plant
Lower operating costs for the plant. In particular, gas, labour and certain consumables, most likely sulphuric acid, are cheaper
Local markets for by-products
Cheaper shipping from Portugal
Faster approvals
As part of this consideration, LPD have signed a supply and marketing alliance with Gulf Fluor, who operate a chemical plant in Abu Dhabi, which produces plenty of sulphuric acid and some other chemicals. As part of the deal, the two have agreed on the first step (a Memorandum of Understanding (MoU)) for Gulf Fluor to supply sulphuric acid, land for P1 to be built on and support in marketing the by-products (potash, amorphous silica and probably the gypsum-heavy residue).
The latest quarterly mentioned they were looking at industrial applications for the residue. I’m guessing that’s because the plan for landfill remediation is likely to disappear as I can’t see how Sudbury can compete with Abu Dhabi. The only point I could see is possibly cheaper freight for the lithium chemical production. We won’t know until the second half of the year, when the trade-off study is due to be complete. Last week that was expected in June quarter, but obviously it has been pushed back.
Buried near the bottom of the announcement is that the engineering review for incorporating LOH-Max into P1 won’t be finished until December. In the quarterly (released a week ago) that was supposed to be starting in June taking 4 months, so that’s had a big revision.
Now we move onto the second announcement: https://www.asx.com.au/asxpdf/20190507/pdf/444xj5m6g8gkzh.pdf
Lepdidico is buying another company! It says they’re merging, but when the shareholders of the target all get paid in shares from the bidder, and the bidder’s board doesn’t change at all, it’s a takeover. Considerably quicker one than would happen on the ASX as well, as it is all meant to be wrapped up by the end of July.
This is something that was hinted at in the AGM last year. From my notes:
Joe seems to suggest they were looking for other deposits right now, especially while everything is cheap, and that by next year's AGM, they hoped to have a much bigger global footprint to show.
The company they’re buying (Desert Lion) owns a lepidolite mine in Namibia that is roughly the same size as Alvarroes, which will double the size of LPD’s available resources. More than 30 years of supply for P1 will be locked in, which is a big step up from where we were only a few months ago (at about 7 years).
Desert Lion’s latest investor presentation is here: https://www.desertlionenergy.com/_resources/presentations/presentation.pdf
The shareholders of Desert Lion are receiving 633m LPD shares. At 3.8c, that values them at roughly AU$24m, which is pretty cheap. The reason Desert Lion is so cheap is that the economics of roasting mica material doesn’t stack up, and their assets have been somewhat stranded since prices in China dropped over the past 12 months.
The reason they’re so dependent on China is that roasting lepidolite releases HF into the air. HF is nasty, and will corrode your roasting equipment, staff, entire plant, nearby villages and any unfortunate goats that were wandering past. As such, you have to have China’s unique approach to industrial regulation for it to be okay, but it still isn’t cheap.
Hence why LPD clearly state they will ditch that step in integrating Namibia into the P1 Feasibility Study, and why they were able to get the asset cheap.
At the same time as acquiring Desert Lion, they’re doing an entitlement offer of 1-for-9 at 2.9c. You will also receive one option for every two shares bought in the offer, with an exercise price of 5c and an expiration in three years, so May 2022.
These options are considerably more valuable than the current ones that are due to expire in September next year, as they have considerably more time for the shares to be above 5c. I can’t imagine they are going to be going anywhere near as cheaply as the first set of options were going late last year.
The offer intends to raise $10.8m, which will be split like this:
$3m for integrating Desert Lion
$2m for LOH-Max engineering (called it!) and location trade-off for P1
$1m for further product development and pilot plant operations (assumedly LOH-Max)
$1m each for mineral resource development in Namibia and Portugal (further drilling and delivery of an ore reserve)
$1m for exploration
Remaining $1.8m for working capital and the expenses of the offer
This cash injection should keep them going easily, assuming the timeline is stuck to (a big assumption based on history). There won't be any need to raise cash for P1 development until early next year.
The timing of the offer seems to be coinciding well with the pilot plant operating, which I’m guessing they are hoping will support take-up. Given the discount that is on offer, I am expecting the share price to take a belting tomorrow and will head back down to 2.9c. I suspect there will need to be big news from the pilot plant to hold the share price up, and that is weeks away from happening.
The question is whether the short-term cost is worth it in the long-run, which is a much harder question to answer.
When combined with the Abu Dhabi deal, there is quite a shift in strategy on demonstration here. The announcement states that they are simultaneously developing a mine plan for both Alvarroes and Namibia, and will have engineered designs for P1 at both Sudbury and Abu Dhabi. This will provide “optionality for the selection of a low permitting risk development scenario, coupled with considerable expansion potential.”
I read this as “Sudbury, and potentially Portugal, are going to take too long to develop, and we can move faster with Namibia and Abu Dhabi.”
But I’m also curious about “considerable expansion potential.” I’m not sure I see the logic in building two P1s simultaneously, but maybe they’re saying most of the work would have been done on each site that they could use it for P2 without too much effort? Perhaps they will build P1 with a modular approach? Build a 5,000t production module, then add another once you have the first bedded down. Don’t know.
Of course, these developments come with further delays, with the DFS for P1 now back to the March 2020 quarter (yaaaaaay) and first production of lithium hydroxide won’t be until 2021.
There are also other questions about how Namibia will be incorporated. The mine there produces tantalite and petalite as by-products. L-Max is also capable of producing tantalite as a by-product, but this hasn’t been explored in the DFS so far as Alvarroes doesn’t have it in any significant quantities. I believe more R&D will be required here.
The amenability testwork shows that Namibia works with L-Max, with 94% recoveries from concentrate producing lithium carbonate grading 99.8%, so that box is ticked. It’s just a question of what they’re going to do about the other parts.
Regardless, they have the support of GXY and Bacchus (corporate adviser) who are both shareholders and will be taking up their full entitlement in the capital raising. That’s $1.25m and $130k respectively. The directors are also participating, though not likely to be to the full extent they are eligible for.
I think I will be taking up my full entitlement, but I suspect we will see a short-term dip in the share price until the capital raising is completed and the pilot plant is producing results. I suspect there will be plenty of news developments to come, particularly in offtake negotiations.
We know that the pilot plant was developed to facilitate these discussions. Additionally, Desert Lion has a non-binding MoU with BASF to produce lithium hydroxide for them. A non-binding MoU is only an agreement to agree, so it doesn’t mean anything yet, but if LPD can hang onto that and work out a deal from it, that would be a worthy piece of news. It was set to be finalised by December, so let’s see what the team can do.
Lastly, the last financial statements say Desert Lion have $5m of a prepayment liability from Jinhui Lithium, who stumped up the cash to help develop the mine. The deposit isn’t refundable, but is supposed to be reduced by Desert Lion making shipments to them. It isn’t clear from the notes what is happening in this contract, and I don’t know how the liability is going to be handled going forward. I assume the team have a plan, but it is something to keep an eye on.
That's about all I can manage now. I need sleep. There's a lot of parts here and I doubt we will be fully across it for a few days yet.
Cheers
(20min delay)