Ann: Olaroz production update, page-72

richard was blunt and honest in the conference call and was rightly disappointed to be delivering bad news.

we are all learning that brine lithium mining is an additional incredibly complex and delicate process with innumerable weather and pond and plant factors that can negatively impact production.

i find it hard to blame ore for the lower than expected evaporation rates due to cloud cover and higher rainfall diluting harvest and feed pond concentrations. their mistake has been two fold:
1) promising/ forecast output for h2 based on everything going perfectly including uncontrollable weather factors and thus leaving little room for an upside surprise but more importantly leaving no room for unexpected problems.
2) failing to warn the market sooner which has allowed shorters/ certain people with privy knowledge of the weather situation to perhaps sell ore down and the lack of timely communication erodes trust and confidence in management after an already chequered history in thsi respect.

management needs to under promise and over deliver, plus they need to be diligent in alterting the market to price sensitive operational issues, and they have let us down here.

richard said in the conference call that they thought the lower feb evaporation would be offset by higher march evaporation but in retrospect that was more hope than a strategy and so we should have been told by mid march when it was clear march evaporation was lower than expected.

richard says there has now been a change in strategy - from accepting that the production will range from 13,000 to 22,000 depending on weather - to now actively investing in engineering solutions in order to reduce the downside risk from rain/ cloud/ cold weather.

the silver lining:
1) this is a transient issue from external factors
2) this creates a longer term buying opportunity although the best time to buy and where ore will bottom is anyones guess
3) the crystaliser will be included in the phase 2 plant and will allow ore to “engineer the problem away” to a large extent by allowing them to input lower concentration brine from the harvest ponds into the plant then warm the brine to increase water evaporation as needed within the plant processing stage thus offsetting the issue of lower brine concentrations in the harvest ponds. it was not completely clear, but i got the impression that a crystaliser will not be added to the phase 1 plant at this stage so this will not fix the problem short term if it happened again over the next 12months.
4) the phase 2 ponds are on track for completion of build by end of 2018. this means they can then contribute brine to the harvest ponds for the phase 1 plant in order to optimise brine inputs and protect against downside weather risk for the ohase 1 production, while the phase 2 plant is being built.
5) the cost of the crystaliser is 10-12mill but this is within the 25mill contingency budget of the 271mill capex for phase 2. the actual running costs of the crystaliser are low and will not have a significant effect on op costs/ margins (small energy cost to heat the brine and small mexhanical cost to pump the extra brine volume if its a lower starting concentration entering the plant so extra volume would be needed
6) the FID for phase 2 is on track for mid 2018
7) there is still 900 t excess inventory that can be sold down over the next 1-2 quarters to buffer against decreased sales volumes if production is lower than demand
8) the proportion of high grade pure product will be higher in q4.

im not in any rush to see richard sacked unless someone with a strong brine pedigree came along, because he has amassed a huge amount of corporate knowledge about olaroz and brine production over the past decade and that would be lost if he were let go and his shareholding interests align with us.

perhaps ilonger term a new ceo could be headhunted who could work together with richard for a period and if richard could remain heavily involved as a board member/ advisor only then this could work in favour of shareholders.

lets hope the run of crap weather turns in ore’s favour and we have a good 2018, but i think management should temper the market’s expectations in their formal guidance. i sold a little at 5.00 to take profits on the news as i needed some cash but im happy holding most of my parcel long term and would be happy to buy some back if it drifts below 4.50.