I think it’s worth noting that the risk isn’t that Glencore pull out of the funding deal. The risk is that JP & co feel
forced to go ahead on a funding deal with a potentially punitive interest rate/term. The tell will be whether they announce what the IR on any deal is. I’ve previously estimated the cost of debt for an Argentine project to be somewhere in the realm of 12.5% to 15% (towards the upper end more likely) given I’ve seen recent mining debt deals in Australia going for +10%. Using a US$28K LCE price (72.3% realization for an LiCL price of US$20.2K), Galan were forecasting average annual EBITDA of US$83M. After tax (35%) and sustaining capex (US$1.5M p/a), that would produce Free Cash Flow of approximately US$54M per year – brilliant. I created a rough model of this and it matched their DFS figures, so I could then change some parameters. What you then need to add into that is the cost of servicing the debt (i.e. just paying the interest – pretend for now the principal is a bullet repayment in 5 years). US$70M, the low end of the proposed financing, at 12.5% is US$8.75M p/a. Plenty of FCF to cover this at their assumed prices in the DFS.
Where the picture changes is once you start adjusting that price. At today’s LCE spot price of US$15,622, assuming the same interest rate as above, the Free Cash Flow drops to US$14.1M p/a. At spot, if you increase the debt to say US$90M, and the interest rate to 15%, the Free Cash Flow drops to US$9.4M p/a. Still making money – but not much. In the Phase 2 DFS (page 35) they had suggested that
“the Company could self-fund the Phase 2 incremental Capex from Phase 1 cashflows, although this would involve Phase 2 development occurring over a longer timeframe”. The incremental capex for Phase 2, including contingency, is US$310.4M – there’s no way they can pay back the US$90M principal at those levels and fund their further ambitions. This to me is why getting debt at any cost could be a significant risk for Galan.
If you think the LCE price recovers a further say +25% by the time Galan start producing (US$19.5k/t, or LiCL of US$14.1k/t) all else being equal (US$90M debt at 15%), Galan are doing Free Cash Flow of US$18.9M p/a. At that rate it would take them 4.7 years to pay back a US$90M loan (at current spot it would take them 9.5 years). But you have to remember that we don’t actually know what price Galan will be getting for their LiCL from Glencore – because under the terms of the offtake, the price is
“referenced to a mutually agreed lithium carbonate price index over a quotation period, less a marketing fee, discount and penalties (if any)”. How big is the marketing fee? How big is the discount? What are the penalties for? This is why some time ago when the offtake deal was getting no love from the market, I mused that it might be because Glencore take all of the upside for the first five years. Happy to share my calculations if anyone wants to see them. cc:
@daando37 who has also done this sort of work. (reposted as I had a small error in my formula).
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