Confronting Dislocation in the Graphite Market, page-58

Jaded, I missed your previous post, but just saw it now. My thoughts on takeover are as follows (not in order of priority):

1. Certainly not improper to consider any company a takeover target, but to give it serious credence then a bit of homework needs to be done first to ponder the likelihood. Interestingly, I just had a similar conversation with someone in the last week about this.

2. You said "ponder KNL as a TakeOver Target this year?" which may be correct, but I think the key part of your timeframe misses a salient point (although you can have intended it rhetorically). KNL could be a takeover target this year, but not just because it's this year, but because KNL will have ticked a certain number of boxes. The key here is not how much time has passed, or whether the market is ready, but whether KNL has ticked off it's FA boxes. Why? Read on.

3. Any likely suitor is probably going to be one of the following:
a) Another graphite company, who wants to secure the buyer relationships to target and expand into Europe
b) A user (steel company, battery company, etc) who wants to secure their raw material production

With regards to a), there will be a number of graphite companies that will seriously consider this, when they can't get their own off-takes in place, and/or when they realise that the Chinese don't want hundred's of thousands of tonnes delivered now. The Chinese may be angling for future battery demand in a decade time, and keen to secure some supply for that, but as it stands today, there is no demand for China to import graphite, and no single Chinese company (let alone several of them to fill up 3 super-pits) will import graphite  at a higher cost than they can dig it out of the ground themselves. Boards that don't realise this or wilfully ignore this are not doing the right thing by their shareholders. So these companies, having told their shareholders they would be in production prior to 2020, will have a D-Day when they realise their existing buyer has no intention of helping them do that in the amount of volume that they believe, in the timeframe those boards want. I don't think that D-Day (or R-Day, for Realisation Day, or CCS-Day, for Come-Clean with the Shareholders Day) will occur till next year though. Regardless, none of these companies have cash, and the only way they can do a deal would be via scrip (i.e. swap KNL shares for shares in the suitor entity), and there is next to no chance of our board/management entertaining such an idea. I, for one, would look extremely unfavourably at swapping more than a percent of an extremely valuable company once production is occuring, in exchange for a pittance in a larger company with less desirable financial projections.

With regards to b), this is likely to be the only potential avenue that would meet with our boards approval, as it's the most likely option that would be a cash option, but I don't think it's very realistic. A large company (such as TK) isn't necessarily going to want to get into the mining game, and with graphite being extremely prevalent in the world (although quality graphite isn't as common) their internal risk analysis would likely say "don't buy a graphite mine to secure our supply, as there are others we can buy if we need to later".

4. There is another potential from left field, like a larger diversified miner wanting to add graphite to their mix, or a Glencore type trading house, but I also find these less likely.

5. I mentioned FA above, and in my view any potential T/O talk is wasted until more FA has been ticked. The buyer type I mentioned above are a bit like institutional buyers, in that they are not going to get in yet. Traders (especially on HC) wonder when instos and "big money" is going to get into their various shareholdings, and for the vast majority of them, the instos won't commit until the FA is seriously ticked off. An insto would prefer to pay $1 for a de-risked share, rather than 10c for the exact same share by buying earlier in the drilling timeframe. Any potential KNL buyer is going to be in the same boat. If they want to buy, then they will wait till they have surety of production, so there will need to be a mining licence approved at a minimum, and likely a few more FA boxes as well. These will be ticked off over coming months, so the time for serious thought on T/O will occur later this year, methinks. As I said though, I still think (on balance) that a T/O is unlikely to get finalised, but there will certainly be some other companies pondering our buying off-takes and security of supply into EU (bearing in mind that we would be ticking off the legal boxes for entry into EU markets for our TK off-take, so it would save another company having to reinvent the wheel).

HOWEVER, while I don't think a T/O will be on the cards yet, the point above "An insto would prefer to pay $1 for a de-risked share, rather than 10c for the exact same share by buying earlier in the drilling timeframe" is very relevant, and very likely. We will have ticked off the FA for instos in the coming 6-8 weeks (+/-). That is then going to lead to a good sp!