Almost spat out my morning coffee when another LRS investor sent me the ANN. Definitely did not see this coming (at least not an offer from PLS). The news unfortunately came on what is one of the busiest days of the year for my 9-5, so I'm still taking in all of the various detail (ASX ANNs, 9:30am webcast, investor commentary from HC, DC, Twitter and Reddit).
What I'm noticing is that most people's initial reactions were quite negative (my own reaction included) but have become more circumspect as the day goes on and more information is being absorbed. I expect this to continue into tomorrow and then early next week.
For the record, I don't yet have a particular view on what to do with my own holding just yet. I think the best way to make sense of this news is to keep it simple with pros and cons and then step back and assess (see my pros and cons further below and I'm interested if people feel I've missed any)
There's obviously a lot of emotion and commentary around 'CG selling holders out' etc. TBH I don't find this helpful because regardless of any opinions on personalities, there are decisions to be made around each of our investments (and the emotional reactions won't help this cause).
Finally (before we come to my analysis below), please keep in mind the idiotic mistakes made by other lithium take over targets, including the completely irrational posts on HC declaring the take over target was worth multiples of the takeover offer. This forum has mostly always been great because it is open to competing arguments (both negative and positive of LRS), and it would be good to keep it this way (for as long as LRS continues to exist).
So far what I've made of the transaction is in this following paragraph (and this is not intended as a negative or positive comment - it's just intended to be factual):
"Under the deal (assuming it is approved), LRS holders are taken from holders of 11 cent LRS shares with potential capex and working capital funding issues, to holders of PLS shares with a relative value potentially as high as 20 cents (reference price) (or lower if PLS falls), with funding guaranteed, production effectively guaranteed (notwithstanding outstanding permits) as well as acquiring part ownership of Pilgangoora. Effectively, LRS holders under an approved deal become part owners of Colina as well as Pilgangoora".LRS
Pros: LRS holders become a part owner of Pilgangoora and also retain exposure to Colina + Immediate increase for LRS SP (as we saw today) + values LRS @ 20c (at the transaction reference price) or higher (if PLS miraculously finds buying, although I accept this seems unlikely for now) + Capex & working capital funding secured + access to top tier balance sheet.
Cons: Ability to see potential exponential capital appreciation significantly limited as we are diluted amongst the PLS register + perception that we have sold well below 'fair value' + LRS shareholders take risk on the PLS share price falling until the deal is approved (noting there is also potential upside, however this seems unlikely to any significant degree).
PLSPros: Buying what will end up being (with hindsight) an incredibly cheap tier 1 asset with completely unencumbered product (no offtakes signed yet) the best metallurgical work of any hard rock deposit I've seen results for (including LTR, PLS and Sigma) with the ability to produce at least 750ktpa in a jurisdiction which literally has government and regulators bending over backwards to help miners get into production + Exposure to sell spod into North America and Europe (shipping costs incredibly cheap from Brazil) + Incredibly cheap utility costs with power ~4 cents kw/h from hydro source + preserving the balance sheet by giving up scrip rather than cash.
Cons: Purchasing an undeveloped, unpermitted deposit (although the permitting appears to be essentially a sure thing) + Capex to spent (although the $253m marked for phase 1 is incredibly cheap to bring on 270ktpa) + diluting existing holders
I was personally willing to ride out this bottom of the lithium market with my belief that we would have been sitting pretty coming out of the other side. The offtake process as far as I'd been able to research was looking very promising (although I'm not sure about the debt funding and/or equity raise potential etc) and based on today's deal it looks like at least some components of the funding equation must have started looking pretty dicey.
Then again - it sounds like PLS were talking to us as far back as 6 months ago, and we weren't 'struggling' back then, so go figure?
Questions: Is this offer from PLS 'best and final'? No mention in the ANN. Were previous offers rejected (we will likely never know), will there be a counter-offer from anybody? Tax implications? (everyone needs to assess this for themselves and seek advice if necessary)
Potential counter-offers
- When ALB tried to take out LTR last year, once ALB had their bid endorsed by the LTR board, it only took 2-3 days for Gina to go ballistic and buy $176m of shares in a single day (taking her above the 5% sub holder threshold). So if there is to be any other interested parties, I expect these to become clear any time from tomorrow until roughly the end of next week.
- A counter-offer is probably a low probability scenario (and no one should forget how foolish a certain companies investors look now with a SP of 78 cents, after an offer of $3), however we know that:
- RIO has been publicly saying they want to increase their exposure, we also know they own a huge land-holding just north of Colina and we know there Serbia strategy seems very unpopular (and presents huge time delays with permitting). With PLS now stating publicly that they've done 6 months of DD and out of countless potential projects they've chosen Colina - this may peak RIO's interest and the cost of acquisition would be a walk in the park for them.
-
BYD has been reported as shopping for lithium assets in Brazil:
China’s BYD scouts to buy Brazilian lithium assets (mining-technology.com) -
CATL - I think a few have mentioned them but I haven't seen much that would make them a potential suitor
For transparency. I am still holding all of my shares and the following thoughts are in my mind (and I am uncertain whether I will sell some on market, all on market or simply hold and wait for a counter offer or for the deal to be approved and accept PLS shares)
Potential upside (above 20 cents) - some possibility of counter-offer from RIO or BYD (maybe?), but hard to imagine the purchase price increasing much more than to ~25 cents in this market. Also there is a possibility (small) of some sort of sudden turn-around in spot/futures prices
Potential downside (to holding LRS throughout the transaction and waiting for PLS shares) - downside if PLS share price keeps falling, monumental short position in PLS looks horrific, the next PLS quarterly will make for some sombre reading with realised prices likely to be somewhere in the 700's.
Sentiment changed from Buy to None.