Hi all,
There has been a bit of consternation about shareholder communications in the last few months, and it was something I promised I'd bring up with Joe after the AGM. It took me a bit to get to writing it, and I'm sure no one is surprised to learn that it ended up being a lengthy piece.
Here is what I wrote, which I hope aligns with what many others are thinking.
At the bottom is Joe's response. I hope this is of use to other shareholders.
Dear Joe,
It was a pleasure to meet you at the AGM, and thank you for the informative presentation you gave on the day.
I have spoken with quite a few other shareholders in recent weeks, and I have collated some feedback that I hope is helpful for you, in terms of the company’s communication strategy with shareholders.
This is a lengthy piece of correspondence, for which I apologise, but I think it is important to share with you.
Simply put, it seems to me that the improvements and results of the team’s work over the past 12 months have not been clearly and concisely put forward to the market in a simplified manner. Certainly, the information has been presented to the market, but it is dispersed throughout announcements.
For example, one point that has consistently been of concern amongst the shareholders I have spoken with is the timeline of the feasibility study. Following the quarterly reports through; the December 2017 quarterly said “on track for completion in the September 2018 quarter”, March 2018 quarterly said “second half of 2018”, June 2018 quarterly said “scheduled to be completed during the March 2019” and the September 2018 quarterly said “first half of 2019”.
If my understanding is correct, these delays have been incurred because the team has had to explore opportunities along the way; doubling the nominal plant size, developing S-Max and switching from sodium silicate to amorphous silica, considering the sale of feldspar concentrate and caesium, and dealing with the plant residue.
The issue is that the information is presented in two separate parts. “The feasibility study has been delayed” on one hand and “we’re exploring these opportunities to improve the economics of the project” on the other. It is up to shareholders to infer that the two are related, as it is not explicitly stated “the feasibility study has been delayed while we consider these opportunities to improve the project economics”.
There has been a lack of direct selling of the message that the delays are conscious choices to make the most of the project’s opportunities.
When this is combined with three consecutive quarters of the feasibility study being delayed, I believe it has contributed to significant doubts in the minds of investors about whether the project will ever be brought to fruition. This, in turn, has been one of the downward pressures on the share price.
Obviously the lithium market has had a downturn, as has been highlighted by the company and demonstrated across the sector, but I don’t believe that explains the whole story. Take, for example, Argosy Resources (ASX: AGY). I would consider Argosy to be the closest ASX-listed comparable to Lepidico in terms of its project scale and progress. As a brief summary they have:
- A 500tpa lithium carbonate pilot plant currently operating
- A 1500-2000tpa lithium carbonate commercial plant set to start construction this year
- A 10,000tpa lithium carbonate commercial plant for which they have just published a PEA.
Obviously these aren’t the same operations, but they do bear similarities in terms of size, timing and position on the cost curve to that which Lepidico are working on. With the turmoil in the lithium market, Argosy’s share price has ranged between $0.16 to $0.48 in the past 12 months, but even near the low right now at $0.18, that is still a market cap of approximately $180m.
Given the similarities between the two companies, it seems to me that Lepidico has experienced more selling pressure than is reasonable when compared to Argosy, as evidenced by a market cap of less than 1/3. Perhaps there are other factors in play, but I do wonder if it can at least partially be explained by the lack of a concise message being delivered to shareholders about the economics of the project improving.
The biggest example of that would be the debottlenecked capacity of 5,000tpa. This was something mentioned in various announcements by the company from December 2017 through to June 2018, and seemed to be a major piece of work and important decision to be concluded. The market was repeatedly advised that a potential range of 5,000-6,000tpa was being considered. Yet the only notification that the market received of the decision was in the July quarterly, as one point amongst many. Would it not have made sense to have an announcement to the market when that was decided, to confirm that the lithium output (and assumedly all by-products in similar ratios) had doubled?
This was, after all, a large shift in the potential economics of the plant, both from a capital expenditure and theoretical overall profitability perspective, but there has been no announcement to the market that clearly spells out what it means in terms of the parameters of the feasibility study. Obviously, you can’t publish definitive numbers, but assumedly there were updated ranges of output being considered, which may have been appropriate to release to the market?
That appears to have been a missed opportunity.
On a less drastic note, another example is some consternation amongst shareholders about Alvarroes. In particular, the June 2018 quarterly stated that a further drill program had been designed, but wouldn’t commence until commercial terms were finalised with Grupo Mota, including the possibility of a JV. Then the October 2018 quarterly, and the announcement on the 21st November 2018, advised that drilling had begun, but with no mention of commercial terms having been reached. This has raised doubts about where the relationship is at, and if there is further work and/or risk involved in those negotiations. It may be useful to see if this relationship can be clarified in a later announcement, to assuage those concerns.
None of these points are questioning the strategy the company has put in place or its ability to execute on that strategy, which I firmly believe in, but simply for the company to be able convince the market that it can deliver. It is critical that at every turn, Lepidico is able to distinguish itself from other market participants who have neither the appropriate strategy nor skills to ever reach production. Part of that is making it as easy as possible for shareholders to see and understand what is taking place.
This will be particularly critical next year, as I’m sure there is a high likelihood of another capital raising to fund P1’s development.
Some suggestions that you may find useful:
- Quarterly reports could include a simple table of the timeframe that was being worked to at the last report, and the timeframe that is currently being worked to. Ideally, these would be the same, but if there has been any slippage, it can clearly be identified and an explanation provided. I believe this would be an excellent step in providing a simple and transparent view to shareholders about what is happening, and an opportunity to highlight when delays have been incurred because improvements need to be investigated.
- An update (when it can be made) of finalisation of the terms with Grupo Mota
- Perhaps an update to the parameters of the feasibility study, could be provided, as discussed above.
- This could discuss the updated (potential) production figures for:
- Lithium
- Amorphous silica
- Potash
- Caesium
- Feldspar concentrate
- If possible, it would provide a loose update on the economics involved, but that may not be possible given the complexity involved.
- It could also possibly be tied into the announcement of the capex of the plant once final engineering has been completed.
- Perhaps a discussion of the byproduct scenarios being considered regarding amorphous silica initially and sodium silicate/other higher value products later?
- Updates on the pilot plant as it starts to come together. We already had one on the 15th October 2018, which was a good start. A few updates in a similar vein, probably with photos as assembly occurs, would be well received, I think.
Obviously, we can appreciate that the Lepidico team is quite small, and that handling investor relations is something you take on yourself (which I appreciate immensely). As such, there will be a trade-off in cost of writing more announcements vs other tasks that need to be completed, but I felt it worth providing this feedback nonetheless.
I hope it has been useful and informative, and I apologise again for the length.
I have a great deal of belief in what Lepidico is trying to do (as well as financial investment), and if there is anyway I can help, I am more than happy to do so.
Regards
I sent that last Thursday and received a response last night, which is below.
Dear Sharpey (edited),
Great to meet you at the AGM and thanks for all your feedback. Proactive shareholders really do assist management in crafting public messaging.
As you are aware, the Phase 1 L-Max® Plant will be the first of its kind and as such it has been challenging to develop a project schedule that has a high degree of certainty associated with each individual milestone. Inputs for the feasibility study are secured from a large number of third party equipment and service providers, and an unforeseen material delay in just one of these can have knock-on effects with other workstreams – it’s not like trying to design and build a CIL gold plant where there is forty years of industry experience.
Now the final design for the Phase 1 Plant is complete, as announced in the last quarterly the timing for delivery of the engineering has a high degree of certainty, which in turn will allow the Feasibility Study for the plant to be finalised. Permits, approvals, finance and offtake remain the critical path items for the project and management continues to make advances in all these areas.
As far as Portugal is concerned it is inappropriate for me to say more than what is in the public domain. We’re involved in a commercially sensitive negotiation and have made considerable headway, which has provided the confidence to commence the next stages of feasibility study activities. It is important that Lepidico gets the best outcome for its shareholders and management isn’t going to capitulate on important terms for the sake of satisfying a desire for short term news flow.
Currently I am travelling necessitating this brief response. Rest assured that your queries and observations have been taken onboard and we’ll make every effort to address these in future communications with shareholders.
Thanks again for your support.
Kind regards,
Joe
Joe Walsh
Managing Director
Lepidico Ltd
(20min delay)