Pride myself on being the amongst the most cynical posters on HC regard management and how companies operate/communicate. I don't trust them, and it usually only takes a few minutes to disprove what they said/released vs actual results/outcome. So when I say ESS board have done the best by shareholders in accepting this 50c TO that doesn;t mean they haven't been or aren't still playing ducks and drakes.
For example, time frame between receiving first iteration results at 95% confidence level for a MRE or SS can be many months before it's finalised, 'reviewed' and released. The MRE delay by one month to end December is suspicious in itself given how simple the resource was to crunch by in-house geologist with only 21 new drill hole results to incorporate from October. This MRE delay justified pushing back the SS by another month (SS based on MRE model) although at SS level, the MRE would have been obvious back in August based on logging results with no to little spodumene in core, and implications for the SS following...
I'd love to know what the SS distilled out, but we'll probably never will so long as ESS remains under the TO scheme (no talk, no shop, no more data releases). Not suggesting management dragged it out because they
knew a TO was coming, but if the SS was really fantastic they would have pushed the MRE and SS out on time and pumped up the share price by matching/beating market expectations. Logical conclusion is the SS was disappointing compared to early expectations like the MRE, based on significant cost escalation and of course the MRE not increasing from 2020. Disappointing doesn't mean uneconomic, just that keeping the share price up and future equity CR dilution manageable would have been more difficult to impossible following a poor SS.
Over this period, management were talking ESS up as great value at 50c and above, then went to the AGM with a presentation still showing the 2020 MRE sections and explaining the sell down to low 40's as "option related selling" (which it was). Sensibly washing out option selling into a stronger market by delaying the disappointing MRE update possibly... probably. End of the day, management's self-interest through large shareholding incentivises them to play all these games to maximise share price outcome. Many shareholders will feel burnt buying the sales pitch above 50c, many will feel the SS was going to put a rocket under the share price, some think management have sold out cheap because it's too hard, or in return for some future job on the side or worse.
The simplest and most logical explanation is management is/was trying as hard as possible to get the best outcome for long term shareholders including themselves based on the results they had to work with. IMO, they delayed the MRE and SS to put themselves up for sale over the delay on the basis lithium market/stocks looked to have entered a long-term correction and they knew the SS was going to make funding without heavy dilution difficult at minimum. They would have known as we did a smaller Dome Nth project made much more sense being acquired than developed in this cost escalation environment. My read from the AGM presentation is that they asked for expressions of interest for off-take and funding (which includes possible JV partners or acquirers obviously) and provided data packages under CS agreements, if not outright access to a data room. Demonstrably they received strong interest.
In short, despite the accepting a 50c TO offer only months after telling everyone who was listening what great value they were above 50c, punters should accept there is more information than they were privy to, and management are strategically playing hard as they can for the best shareholder outcome. As things stand, the board considers accepting a TO scheme from Tianqi is the best outcome at this point in time and without evidence to the contrary we should act on this basis. Doesn;t mean the board considers 50c fair TO value or expects that 50c will get over the line. Strategically, given the options they had, recommending 50c TO now was the best course of action in their considered (and no doubt corporate expert advised) opinion...
So where is the upside? A bidding war with one or more suitors is the obvious upside, self-explanatory. Tianqi almost certainly has head room to lift their offer, I've never seen a relatively low-ball TO suitor enter such a long and expensive effort with their first price being all that's ion the tank. It beggars' belief Tianqi wouldn;t go to 60c if someone else came in at 55c for example. If no other TO player enters, the board and shareholders are protected by the requirement to vote on the TO scheme. Even if 75% of votes accept, less than 50% of shareholders might accept if the small guys (retail) hold out for a better offer...
A revised higher TO offer without any competition is the second upside potential. Having softened angry shareholders up over a long 4-6 month wait with just 50c for their LT risk and effort, Tianqi may gratuitously make a higher offer to smooth over resentment and get the TO over the line. Considering the risk of having to make a much higher offer under competitive tension of a bidding dual, throwing a few more dollars at shareholders if no other bidder turns up is still a great outcome as far as they are concerned. One of the reasons the share price mysteriously sells off just before a TO is announced is to make the offer price look more attractive, and why the first TO offer is often less than the acquirer is willing to pay (let alone what the target is worth to the acquirer). Leaves more room to sweeten the pot without actually having to overpay...
I looked up my notes I made on the 2019 SFR scheme TO of MOD Resources I made when considering the CDV TO situation (PS... my memory was wrong, Nordgold first offer for CDV was 46c not 66c, eventually ending over $1 with competitive bidding war). I had superimposed the charts of MOD and CDV at the time to demonstrate the pre-TO Lassonde Curve in action, plus the suspicious share push down just before first TO offers were made. Note both stocks traded below the first TO offer price for a long time because of risks the TO didn;t go ahead and/or punters wanted to work their money harder on other opportunities.
I'll keep this post shorter by pointing out the relevant facts to the ESS -Tianqi TO scheme. Unlike CDV, no other bidder entered a battle for MOD. Shareholders were disgruntled, time dragged on, MOD shares traded low as a chunky 20% discount to the TO offer as holders feared it would not pass a vote etc. Low and behold, SFR raised their TO price from 38 to 45c and shareholders fell over themselves to approve the deal and move on to new ventures...
ESS TO could easily drag on for 9 months or more with scheme extensions before going to a vote, especially if FIRB drag their heels. Not many have the extra cash lying around to be happy with that sort of wait time, especially at the TO price or higher. I'm not surprised shares are trading sub-50c and will continue to until/unless another bidder emerges. Personally, I'm not cash constrained and feel the board know exactly what they are doing accepting 50c subject to a better offer... upside potential with or without another bidder entering. The board and their advisers should be smart enough to know that battling Tianqi to put up their best bid at a higher price first up is both counterproductive in the scheme of things (pun intended
) and risks Tianqi walking away from putting up a critical first offer at all.
I'm very comfortable with the strategy recommending 50c under a TO scheme and letting things play out. Fingers crossed the board is vindicated and shareholders rewarded with better than 50c when it's all done and dusted. GLTAH
