Morning all,
Hope everyone had a great Valentines Day / weekend regardless of your marital / relationship status.
Unashamedly, I decided to dedicate
some of my
love lust this year to;
a) the current Tin price, like WOW!
b) an unstoppable new era for the Lithium/EV/renewables sector (finally backed by the US) and
c) what looks to be the beginnings of a broader commodities upswing (if not a supercycle) - see below.
If a 'supercycle' isn't an appropriate term to describe the current outlook for ALL commodities (after all, each commodity has its own supply & demand dynamics), then a supercycle is most certainly the term I would use to describe the outlook for ALL new technology metals eg. Tin, Lithium, Cobalt, etc. whose markets will absolutely need to grow exponentially this decade in order to meet future demand.
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PRESENTS
A Broader Commodity Supercycle?
'Liquidity is sloshing around and looking for a home' according to Bloomberg analyst Mohomed El-Erian
Liquidity Is Sloshing Around and Looking for a Home: El-Erian - YouTube
The world is awash with cash & all this liquidity is ultimately due to to both unprecedented monetary and fiscal stimulus IMO.
Marko Kolanovic, a highly regarded quantitative analyst at
JP Morgan suggests that the
fifth commodity supercycle has started. He opines that the post -pandemic recovery and "roaring 20s" will be accompanied by ultraloose monetary and fiscal policies a weak DXY, stronger inflation, as well as the impact of environmental policies on demand and supply. 'This will be the fifth so-called supercycle of the last 100 years' he said.
The 'roaring 20s' will spark a multi-year commodity supercycle as economic growth rebounds, JPMorgan says | Markets Insider (*.com)
The fifth commodity supercycle has started, says highly regarded JPMorgan strategist - MarketWatch
Goldman Sachs agrees
Goldman proclaims the dawn of a new commodity supercycle: Andy Home | Reuters
In fact, a slew of banks have begun using the term "commodity supercycle" to describe the current dynamics. Some economists aren't as convinced however, although most seem to acknowledge that a 2-year bull market (at least) for commodities in general (with the possible exception of gold and iron-ore) is looking likely.
Commodity prices are surging — just don't call it a supercycle | Financial Post
Takeout: Whether we are in a broader commodities supercycle or not, two things are for certain IMO.
Firstly, trillions of investment dollars (savings and stimulus - both caused by the pandemic) are currently (or will soon be) looking for an investment home.
Secondly, a systemic shortage of a commodity's inventory always leads to higher prices for potential investment (in that commodity) to be incentivised in order to create additional supply. However, automatic investment & supply cannot be assumed 'par for the course' until higher prices are actually achieved and are more than likely to remain buoyant. And depending on what commodity one is referring to, new production then usually takes considerable time to come online, especially where under investment has been the dominant theme in recent years - as is the case with both Lithium and Tin.
Please note that the above commentary / opinion refers to commodities in general, not specific projects. Suffice to say that the very best world class (Tier 1) projects will always have the highest chance of attracting investment dollars, regardless of the stage of the cycle that their principle commodity happens to be in. Typically, astute corporate investment partners / financiers have a list of 'wants' when looking for a suitable project to finance; They include;
1) Low-cost of production
2) Guaranteed / high demand for the proposed product (hence why OTs are usually a pre-requisite for finance)
3) High quality and proven product at scale (further increasing the probability that the product can and will be consistently sold into the supply chain, and potentially at a premium)
4) Free Cash Flow (FCF) i.e. the cash left over after a company pays for its OPEX and CAPEX
5) Marginal Efficiency of Capital (MEC) being deployed. i.e. the expected rate of return on investment at a particular time.
6) Lower rate of taxes (a higher rate of taxes will discourage investment. Sometimes governments offer tax breaks to encourage investment)
7) Low jurisdiction risk. Examples of jurisdiction risk include geopolitical, terrorism, corruption or money laundering, poor infrastructure, military led coups etc.
8) Environmental, Social and Governance (ESG) friendly / sustainable projects.
JP Morgan alluded to the last point in the article above, and not only is ESG / sustainable now expected to be an additional requirement for financiers, but also a major incentive for the majority of them moving forward.
https://www.wsj.com/articles/commod...nks-for-loweringcarbon-production-11611657000
Thus, all the above points should be taken into consideration when evaluating a project's potential IMO. As investors, being able to think like a financier has its advantages IMO, as astute retail investors can 'front-run' incredible returns if they can spot those projects that are likely to be financed before they are actually financed, and assuming the finance includes favourable terms to the borrower.
In the case of Manono, AVZ's potential to more than satisfy each of the above requirements continues to grow IMO, hence why I am not in the least bit surprised that finance is reportedly
'80% of the way there' (according to NF). The biggest risks for these Pan-African financiers bankrolling DRC projects like Manono would already be well known to them IMO. Geopolitical risk is the first - of which these DFIs would understand the landscape better than most, simply by being present, close to or engaged in the region.
IMO they would have to be pleased with the current progress that Tshisikedi and his political allies have been making in recent weeks i.e. forming a new government majority (only this time without the FCC) and overhauling the judicial system to enable and protect real social progress, and to clamp down on destructive past and present practices including tax evasion & corruption etc.
Slowly but surely, the DRC is becoming a more attractive country for investment IMO.
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Current infrastructure in the DRC is probably the other main risk for the DFIs at this point in time IMO. Having said that, one of the goals of the AVZ/DRC PPP is to improve infrastructure in the region, and thus the Manono project is every bit as much about improving infrastructure and increasing social welfare & development, as it is about being a revenue generating machine / potential cash cow.
Also, there are past & present examples of Pan-African DFIs investing in DRC projects and the remember the aim of these development banks is just that - to aid sustainable development by providing finance at low rates. A Sovereign Guarantee would be of further interest to them (no doubt) and would most certainly benefit AVZ in terms of access to even lower rates & reduced fees etc. However, a SG is not a mandatory requirement for attaining finance through DFIs.
Option to acquire an additional 15% of the project.
I note that some of the AVZ dissenters that seek to enlighten us with regards to AVZ's valuation against current NPV, are still sprouting '60% of NPV' as opposed to '75% of NPV'. A couple of points I'd like to add with this in mind.
Firstly,
only AVZ has the right to refuse the option to acquire an additional 15% of the project. i.e. the deal is already done subject to AVZ paying Dathomir US$15 million by the end of September (or earlier if US$50m in finance is attained beforehand), with a further US$5 million due by July 2022.
Secondly, the current market value of Dathcom/Manono has appreciated considerably since the 5% +10% option to acquire Dathomir's share was completed. i.e. the US$21m total cost to AVZ for an
additional 15% of the project is
currently worth ~US$90m (15% of US$598m), so the option to acquire from Dathomir has, in itself, already become a very lucrative deal for AVZ IMO.
However, the bigger benefits to AVZ and its shareholders will become more apparent once;
a) AVZ upgrades its DFS and increases its NPV via the various known likely improvements that we are already aware of, and
b) AVZ enters production and reaps the obvious financial benefits that come from holding an additional 15% (at least) in project ownership.
So just to be clear, AVZ is currently trading at a
41% discount to its current (pre DFS upgrade & current 75% share of US$1.028 billion)
post-tax NPV, and an
86% discount to its development peers (avg.) on an
EV/t Li20 basis.
The current Tin price!
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Tin Futures are currently trading at an 8 year high and the price is being fueled by high demand and record-low inventories. The below recent charts & data give you an idea of where Tin is going (am struggling to keep up with the current price action sorry - a quality problem I guess
).
1. Tin multi-year daily chart as at Feb 12, 2021
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2. LME Inventories are at record low levels
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3. Tin use in EVs is going to help drive the price of Tin to $30,000/t + IMO, as part of a grand supercycle over the next few years (again IMO)
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However, even the latest (as I type) Tin futures price of
~US$24,500/t implies a staggering US$14,545/t net improvement to the April 2020 DFS price assumptions. $14,545 * 75,358t =
US$1.1 billion improvement to the bottom line over a 20 year LOM - soon to be upgraded btw to ~28 years i.e. post pit optimisation (assuming all goes to plan).
[sidenote: To the non-holding naysayers with their already hugely inaccurate and misleading 'SC6 only' peer comparison tables, let me repeat this for you:
Tin credits at the current price of ~US$24,500 /t provides in excess of US$1 billion in additional Gross Profit i.e. over and above AVZ's April 2020 DFS assumptions.
Let that number sink in for a moment and then PLEASE STOP with the misleading comparison tables that you have been mindlessly circulating on other stock threads. Also, please don't be envious, jealous or afraid of AVZ's GIANT Lithium & Tin project, as the way things are trending unprecedented Lithium DEMAND will go a long way to ensure that MOST current Lithium projects under development will likely enter production by the end of this decade IMO, provided the understanding of each deposit / salar is proven beyond doubt, and also the chosen method of processing is realistic, proven, scalable and cost effective i.e. doesn't end up derailing the economic viability of the project as soon as it gets off the ground
.]
To put it another way, I updated my previous calculation based on forecasted SC6 production for LOM and below we can see that Tin (as a $24,500/t credit) reduces Manono's MAIDEN DFS cost of SC6 from US$371/t to
US$248/t, confirming AVZ's potential to be THE WORLD's N0.1 LOWEST COST SC6 producer, and an impressive
$43 p/t below Greenbushes' US $291/t.
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Here are the
US$248/t calculations (figures as per AVZ's DFS or where not available, my cost assumptions as indicated):
Tin production and revenue
Roche Dure Tin production over 20-year LOM: 62,699 t
Artisanal Tin production over 20-year LOM: 12,659 t
Total Tin production: 75,358 t x US$24,500 /t =
US$1.846 billion in revenue (Tin credits)
Artisanal Tin processing costs =
US$76 million over 20-year LOM (refer to table 3, Page 6 of 20 of DFS Summary). $76 million / 12,659 t = US$6000 /t
Roche Dure Tin processing cost est. (assuming same cost/t as Artisanal Tin cost/t here as Tin processing costs at RD are integrated into overall OPEX & therefore not available as a standalone OPEX estimate)
= US$6000 /t x 62,699 t = US$ 376.19 million over 20-year LOM.
Total Tin processing cost est. over LOM: US$452.19 million
SC6 only costs over LOM: US$4.208 billion (refer below table)
US$4.208 billion / 11,354,174 t (SC6 production over 20-year LOM) =
US$371/t (also below)
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SC6 costs per tonne after Tin credits:
US$4.208 billion (total SC6 only costs over LOM as per the above DFS table)
+
US$452.19 million (total Tin processing cost est. over LOM based on US6000/t):
-
US$1.846 billion (total Tin credits over LOM based on US$24,500/t Tin price)
= US$2.814 billion
US$2.814 billion / 11,354,174 t (total SC6 production over 20-year LOM) =
US$248/t =
World's lowest cost SC6 producer.
That's right folks, AVZ's
Tin credits at US$23,872/t or more (over LOM)
theoretically covers all SC6 cost inputs at Manono, excluding transport.
But at US$24,000/t +, it actually begins to cover some of the transport costs as well!
Thus, what more could a serious Lithium investor (i.e. looking for the ultimate leverage play) desire?
Well as it turns out, Lithium's jewel in the crown (Manono) has potentially much more to give. Importantly, the
US$248/t theoretical cost (of SC6 production less tin credits) DOES NOT INCLUDE FOUR other likely key improvements (IMO) to AVZ's final cost per tonne estimate prior to construction, commissioning and production. These potentially very significant cost per tonne savings are IMO likely to come from;
1. Pit optimisation (including conversion of wedge resources into reserves and lowering the overall strip ratio from 0.4:1 to 0.3:1 - following completion of current drill campaign and assay results due Q1)
2. Transport - significant discount / savings to the standard transport rate cards - currently US$252/t avg.
3. Throughput - an increase via targeting a higher grade feed into into HPGR provides potential for a 10-15% increase in throughput, further lowering the cost of SC6 production on a per tonne basis.
4. Tantalum / Niobium credits - not included in AVZ's April 2020 DFS calculations
So, as you can see from the above initiatives and potential outcomes, AVZ is on track to
easily become
THE NO.1 LOWEST COST SPODUMENE PRODUCER ON THE PLANET (IMO)
- potentially producing SC6 in the US$130 - $200p/t cost range - while producing one of the most consistent, cleanest, purest, & lowest-carbon footprint products on the market.
However, the
increase in profitability opportunities for AVZ go well beyond the lowering of the overall cost per tonne of SC6.
Additional profitability opportunities include a planned
PLS Train 2 (an additional 20ktpa to produced on site), a possible 25ktpa (expandable to 100ktpa)
Lithium Hydroxide plant / JV (i.e. potential for 'in-house' LiOH production - results of study expected within 1-3 weeks), electrification of mining equipment, renewable energy onsite and significant SEZ tax breaks and incentives via a Public Private Partnership (PPP) with the DRC government.
Therefore, if Greenbushes is currently valued at
~US$7 billion (~US$5.3 billion valuation excluding the Hydroxide plant) taking into account both IGO and Albermarles's average SP appreciation of ~16% since IGO's purchase, then what should AVZ (on track to becoming the lowest cost SC6 producer and owning 75% of Manono) be valued at by the time Manono enters production in 2023 with a Sulfate plant in tow?
IMO, certainly a whole lot more than 75% of
Manono's current ~US$600 million valuation - which btw is STILL
less than 12% of Greenbushes 'mine only' valuation (i.e. excluding the additional US$1.7b in value that I've generously attributed to the Hydroxide plant) despite AVZ's recent SP appreciation - in line with the rest of the industry.
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Manono - price and cost senstitivities - a dozen cases / possibilities and their impact on NPAT and EPS over current 20 year LOM.
Recently updated to include;
1) current and more realistic Tin price assumptions moving forward &
2) possible equity component scenario (as an example only): the impact that up to US$150m in equity finance at 20c per share may have on potential EPS and future P/E scenarios.
Note: current table does not include any improved scenarios derived from an upgraded DFS with pit optimisation data applied (due Q2, 2021).
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What the latest charts are suggesting (all IMO)
1. Global X LIT ETF, AVZ and Lithium (eg. battery grade chemical)
monthly HA charts to continue their trends and follow the
S&P500, Tin and
All Ordinaries Index to new monthly highs?
View attachment 2917522
2. If so, refer to the
Global X LIT ETF vs AVZ performance chart below - and note the concurrent bullish flag formations (IMO) as well as AVZ's possible short term SP target IMO i.e. just to maintain the previous record performance gap (red vertical lines) set in July 2020.
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3. Closer analysis of possible concurrent bull flags for
Global X LIT ETF and AVZ (daily candlestick charts). Note: MACDs about to turn positive after declining volumes. Slow stochs have already turned positive (likely pre-empting a breakout of the bull flags and the next leg up IMO).
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GLTA and please DYOR
Cheers
Elpha
(20min delay)