Aplogis for the formatting - I copied and pasted form Word.So, here we are with the share price trading at 4.4c. This is almost one month following the 13th May announcement that LMG was in production of MgO with its patented Hydrometprocess which can revolutionise the Mg extraction industry globally. We were cruising at about 5c before the announcement, spiked to over 6c and now a slow grind back to well below pre-announcement share price.
What happened?
The silence from the company is deafening.
It’s easy to blame the ATO or to say that there were unforeseen delays due to labour shortages, contractors not met their deliveries/milestones due to a variety of reasons etc. What has brought LMG to the edge of insolvency through lack of cash flow?
No fault of the ATO, it was simply doing its job. They have an obligation to the tax payer to ensure that claims are legitimate and that they have the appropriate documentation to support such claims. LMG appeared to be presumptuous in its claim and seemed to struggle to provide the right documentation – took over 6months to sort. Meanwhile, LMG was burning cash by drawing further on the loan,triggering a higher interest rate.
We saw in monthly reports that Contractors struggled with hiring labour causing delays. This is due to poor judgement by Contractors and LMG – there was plenty of info even in the media that construction labour supply was tight. I put this also down to contract failures. We don’t know for sure what was in the signed contracts however there should have been penalty provisions (delayed payments) for not meeting milestones, and despite an inevitable shortage it would have triggered some considered thought about labour supply and scheduling to highlight longer lead times at contract establishment which LMG could have factored into their Gantt chart, so that it wasn’t a surprise.
The delays toproduction plunged the Company further into debt. The Demo plant was delayed bymore than 12 months, so that’s 12 months of no income whilst staff(and Board)still had to be paid and the normal recurring company bills(rates, power, etc)were still coming in. Company started scratching together cash by sequentialcapital raises diluting existing shareholders value. Reactively, and probablyin desperation, management decided to move to MgO production rather than Mg toat least be able to say that the Hydromet process works at commercial scale andthe added benefit of some cash coming in through the door. However, that wasalso subjected to delays.
We never saw adetailed budget for the Demo plant other than it was to cost $25 - $30M and thereal cost is now near $60M so we have about a 100% blow-out on the budget. Notunususal to have budget blow-outs but 100% is rather shocking when we have aCEO who was trained as an accountant. Following the announcement forproduction, I think we all expected a capital raise of some sort but Icertainly didn’t expect an $18M raise! ……… especially when the share price isat its lowest ebb. I guess it reflects the dire financial position of theCompany. A ~10% dilution of our share value taking total on issue to near 2billion shares.
Throughout thelast 12 months with all this happening, I have been wondering what the Boardwas thinking – if at all. I have given up on expecting a response to the lettersent to the Board(posted on this forum back in March).
So, where do wego from here??
Like it or lumpit, the capital raise is happening – don’t think we have any choice. I shake my head at the share price trading below the CR price. Irrespective, it willbring us $18M into the piggy bank. We should have a residual ~$2-4 million fromthe next tax rebate(after paying of the remainder of the loan), so let’s say atbest we should have about $25M coming in if we include sales from the demoplant.
From what hasbeen said, I gather that $25M will be used to complete the Demo plant for Mgproduction, progress stage 2 (10,000tpa plant) and also progress stage 3(100,000tpa plant). It would be great to see a budget for next fiscal year.
It’s stillunclear whether the Hydromet process works at commercial scale. All we have isan announcement that they have produced some MgO(about 200kg I believe) andthat’s it. We don’t know if they have produced any more than that, we don’tknow if the plant operated for the remainder of May and we don’t know if it’soperating now. We don’t know if they have filled any one-ton bags and whetherany MgO has been delivered to Rainstorm. We have no info on Mg recovery from fly-ash,no data on extractive efficiency, no data on throughput, no info on how much weare getting for each one-ton bag delivered to Rainstorm. Given the globalimportance of this technology you would expect they would be yelling it outfrom the tree tops, but instead we get total silence after about amonth post production. If they are tweaking the operating parameters of thedemo plant for optimisation, then they should tell us that. I am perplexed thatduring the last month post production, we have total silence on demo plantoperation.
So, I guess wesit and wait for some news – sadly while we wait, expenses continue and theshare price dwindles and the market wonders what the hell is going on.
I feel rathernervous having current management and Board managing that ~$25M. Based on thepast couple of years we would have to say it will be another disaster althoughto their credit we have about half of a demo plant built.
Until the capitalraise is complete, they have no money to progress stage 2 however I hope theyhave all the paperwork and approvals in progress or completed so they can getmoving quickly.
What’s theoutlook?
I am stilloptimistic on the long-term outlook – on the assumption that the hydrometprocess “works” and that we will have a new CEO soon and preferably somepurging of the Board. If the status quo continues we will have to pray for atake-over.
The patentsexpire in 2030 so we have about 5.5 years exclusivity(from memory the patentfor India is until 2035). On current performance we will be lucky to have the10,000tpa plant operating by 2030. Peter Church seems to have gone to the samemanagements school as DP so I can’t see the 100,000tpa plant operational bythen(We were supposed to have MOU’s signed last December and 6 months later wehave nothing). A new CEO and more dynamic people on the Board will likely see faster progress – especially if they demand more accountability from the CEO and assist the CEO in Company endeavours. Performance based remuneration is just one element of that.
Make no mistake,once the patents expire, China can build a 100,000tpa plant in 12 months – Isay that as someone who has lived and worked in China. Cost of production inChina will be much lower and then LMG would be relegated to dealing withcountries who share a paranoia about China which would still be significant sonot all is lost.
Ideally, I wouldlike to see DP step down as CEO and stay on the Board as non-exec Director. Hisjob is done – credit to him for his tenacity to realise his dream. It’s timenow for a new age, more dynamic CEO to step in. We need some hard-nosedDirectors on the Board(and less of them).
The journey couldhave been and can be(into the future) much more smooth with the right peopleleading the company. If the current mob remains it will be a very rocky longerroad ahead with more capital raises to rescue the Company.
Thanks forreading. I know the LMG cheer squad will say I am Mr Negative and beat me up withtheir pom-poms, however I always call it as I see it. I may be wrong(I hope Iam!!). Mine is just one opinion and happy to be critiqued and hear otheropinions. Let's wait in hope that we get athe over-due May monthly report this coming week.
