Michael outlined in his Q&A responses at the EGM that to maximise shareholder returns, the resource should be exploited as aggressively as possible. You will note that in DCF analyses, depending on the discount rate, the earnings beyond 12 or so years do not add much value to a project. Therefore, the highest rate of production that provides the maximum amount of value to stakeholders should be studied. Obviously, other factors should be investigated i.e. feasibility of logistics, if the market can absorb the product, how CAPEX varies according to different production rates to optimise returns whilst minimising initial CAPEX to ensure financing can be secured.
To maximise shareholder returns, dilution needs to be minimised i.e. equity raisings to fund capital expenditure need to be conducted at the highest possible price and for the minimal amount of capital. As CAPEX will inevitably be quite high for a large lithium hydroxide (LiOH) processing facility, the feasibility of CAPEX staging should be investigated, and the debt funded portion if required must be on favourable terms i.e. low interest rate, and no dodgey scrip deals in the background. If we are proceeding to mine, then ideally BGS will retain majority control of the project. As the Government of Mali will buy into 10 – 20% of the project, worst case we have % of the project to sell to de-risk and raise capital if we desire. In addition to this, we have perhaps of even more value, our off-take guarantee. We are in the driving seat for negotiations, and our MOU partners are capped in the billions.
I don’t think the importance of having Michael on board has sunk in yet. We have overnight become the second most likely lithium developer on the ASX to produce (second to AJM). Connections, relationships and execution in China is what is needed to get the right partners to guarantee off-take, finance and develop this asset. We now have one of the most ideal candidates in the world to undertake this huge task for us. It will certainly not be easy but he will be able to discern the most desirable partners who can provide the best deals that result in the greatest value for shareholders.
The large transportation and handling costs due to the location of the deposit can be mitigated by integrating a lithium hydroxide (LiOH) plant onsite. This will reduce the product by volume and weight by a factor of 8, whilst substantially increasing value as the product sells for a higher price and margin than spodumene concentrate (this lowers the % of CoGS attributable to transport costs from >50% to a fraction – no brainer). The spodumene market is limited to lithium producers who are equipped to handle spodumene concentrate (China), whereas lithium hydroxide and other lithium salts can be sold to any downstream consumer (primarily Chinese battery manufacturers) but potentially any customer in the world.
In the early years, with the deposit outcropping from surface, and the highest grades (>2% averages) concentrated within shallow mineralisation, the number of tonnes of product that can be produced per tonne of ore will be increased and the processing and mining costs per tonne are likely to be less than half the average LOM cash cost of production estimate reported in the SS. This will provide a huge value increase in itself, plus due to the way a NPV model works, the earlier years are obviously discounted less so this will result in a considerable boost in NPV. The ease of mining from surface and simple processing flow sheet for our high grade, coarse grained ore means that BGS could get the Stage 1 concentrator up and running very quickly and economically as soon as the mining license is granted, commence production and selling spodumene concentrate until the LiOH plant is commissioned, decreasing the payback period. Any spodumene concentrate produced above the LiOH plant’s annual demand could also be sold to provide further cashflow.
A 40Mt resource would likely justify a highly economical reserve in the ballpark of ~32Mt @ >1.6% Li2O capable of feeding a 3Mtpa plant with a 10 year LOM. A resource of 40Mt is within close grasp and the deposit remains open at all 3 major zones in all directions. We haven’t even searched the remainder of the 250km2 tenement for other prospective areas. A few holes punched to the east and west of the 3 defined zones will likely turn up another zone that could outperform the already discovered zones as the West and Sangar have done. The potential for resource expansion here is huge. The overdue results for metallurgical test work should be outstanding and confirm the resource as world class.
With huge lithium supply shortages looming for battery production, and the lithium in a battery only making up 3% of the total cost of the battery, the macroeconomic factors for lithium pricing are looking very strong for producers. Michael is confident that US$35,000/t is the price point for lithium carbonate where supply and demand will balance long term. This is because at this price, lithium becomes the primary income stream from lithium brine plays which in reality are currently potash plays as they produce far more potash than lithium. This price point allows them to operate profitably with a falling potash price, enabling them to scale up and soak up more of the gaping demand caused by battery manufacturers.
Adding our scoping study inputs to LiOH production inputs from other companies, it appears that BGS may be able to produce a tonne of LiOH for less than US$3,000:
Placing BGS on the lowest end of the cost curve:
Just for fun, I ran a DCF on a 3Mtpa spodumene concentrator which could feed a ~100ktpa LiOH plant with 10 year LOM producing at $3,500/t and selling at $35,000/t. Initial CAPEX was estimated at A$900M with a pre-tax NPV10 of A$26.3B and IRR of 572%. This resulted in an indicative share price of $89.83 assuming that CAPEX was raised 100% by equity @ $12.07/share. Insane, right.
Getting a little more conservative now, I ran a DCF that stages CAPEX by modular expansions from an initial 1Mtpa concentrator + 25ktpa LiOH plant to a 3Mtpa concentrator + 75ktpa LiOH plant by year 3 funded by cashflow. LOM extends for 12 years with a $4,000/t cost of production and $12,000/t sale price. After factoring 25% Mali corporate tax, 6% royalty, additional $3M in annual capital expenditures, and assuming 80% ownership of the project, I get a NPV10 of A$2.5B and IRR of 95% with an initial CAPEX requirement of A$230M. Assuming CAPEX was raised 100% by equity @ $1.17/share, implied fully diluted share price = $6.18.
This is base case for me however, as we still have huge exploration upside, we could scale up production throughput faster, production costs are likely to be lower, and lithium hydroxide pricing is looking very strong and currently sells at around US$20,000/t. If I used higher pricing for the initial years to reflect the current market pricing, the NPV would be much higher. Debt funding and off-take pre-payments could also form part of the funding for the project which would significantly increase the value above what I have estimated as a low-end conservative price target. I have played around with a couple different scenarios but this one yielded the highest share price. Much more information is needed to determine the highest value proposition for shareholders i.e. what % JV split, the buy in price, financing terms and interest rate, and actual CAPEX for a LiOH plant. This is what Kev, Michael and James will be able to discuss leading up to our PFS which I am hoping will investigate a base case of a staged 2Mtpa spodumene concentrator with a 50ktpa LiOH plant.
(20min delay)