The following was written in Word and HC hates cut and paste from Word!
If the formatting goes whacko, then there will be no time to fix it. Such is life. Do your best to interpret.
As with all documents, unless you are very good at English, when a document is finished and read over 5 times, there invariably are still many errors.
Here goes anyway:
Dear Boardmembers,
Thank you foryour attention. We are writing to the Board to seek clarity on elements of the businessrisk profile for Latrobe Magnesium Limited.
As long-term LMG shareholders witnessing the progress and setbacks of LMG over the last number of years, we wish to raise some topics of concern and to respectfully seekfeedback from the Board. We find Company communication via the ASX and public mediadoes not provide adequate information to address some critical areas of concernwhich we expect would be in the realm of Board responsibility in addressing therisk profile of the Company.
Whilst pleased with overall progress and the nearing of the demonstration plant commissioning, related and other matters evoke concern and we wish to bring them to your attention, and to seek feedback for clarity. While our questions were compiled by us, they also take into consideration comments and feedback from some other shareholders with whom we have consulted.
1.Financial
1.1R&D Tax rebate:
The ATO’s ongoing review of LMG’s application for an R&D rebate claim creates some angst for shareholders. We believe, given the immense budget overruns and LMG’s current tight financial position, the reasons for LMG to arrive at its current financial position has not been adequately disclosed. The $12.6M has been budgeted for financing the demonstration plants final construction and operation, in addition RnD Funding will only provide the final $3M in project finance when the project is fully funded through to October 2024.
We believe, shareholders have a reasonable concern for the $15.6M of suspended funds and the lack of acceptable explanation to the market. In context of LMG annual budgets it isa very significant amount to have $15.6M in funds, frozen and yet to be determined if it will be received.
Question 1:
What are the reasons givenby the ATO for the delay in the R&D tax rebate (expected to be received by December 2023) and why is the market not informed of the reasons for the delayas per the disclosure requirements under ASX rules?
Question 2:
Why have recentreports not included a forecast of operational funding going forward?
1.2Budget Overrun
Latrobe Magnesium Completed a $4.2M Placement on the 24/05/23
“The surplus $3.5Mwill provide working capital to operate LMG’s demonstration plant.”
Latrobe Magnesium completed a $3.06M placement on the 21/12/23
“The surplus $3.5Mwill provide working capital to operate LMG’s demonstration plant.”
Plus:
The last capital raise on the 09/02/24 “The funds raised by this issue will be used to pay for an unforeseen cost overrun on the first stage of the demonstration plant of some $3M.”). A total of a $10MOverrun covered by cap raises since May 2023.
Question 3:
Why has LMG repeatedly reported over the last 2.5 years that the demonstration plant is fully funded for construction and operation and now not fully funded at all which hasresulted in capital raises?
Question 4:
What was the cause ofthe absorption of $7 million in surplus from Capital Raises (Specificallyassigned for operations of the demonstration plant) that now positionsLMG so precariously? (Note that the 7 million previously raised and designatedspecifically for operation of the plant, had been absorbed priortothe delay/issue of the R&D rebate).
Question 5:
Why has LMG not beentransparent in providing explanations for the ongoing significant over-budget cashburn of operational funds?
Question 6:
What were theunderlying driver(s) for the cost over-run that led to such a tight budget?
1.3Reconciliation
Greatest concern here is the $15.6M (Tax rebate and 3M) - $10M = $5.6M
There is $5.6M thatappears to be suspended within the overall $15.6M, so the GHD study, PFS, BFS,EIA, etc. cannot proceed without the Tax rebate on R&D and the $3M offinance for the demonstration plant held by R&D until the project is fullyfunded through to October 2024.
The $5.6M that was tobe used for the GHD study, PFS Stage 2, 10,000tpa BFS, EIA, etc., seems to havebeen absorbed by construction delays. If this is the case, LMG needs to reportthis to its shareholders and the market.
Question 7:
How do you propose to havephase 1 fully funded until October 2024?
Question 8:
(Note that ourcalculations indicate that the Phase 1 demo plant budget will now be ~$52Mcompared to the $41.7 million that has previously been reported). Will the DemonstrationPlant budget now be revised to circa ~ $52M and communicated to the market?
Question 9:
10M overbudget represents a blowout of over 24%. How did LMG get this so wrong?
Question 10:
Why were therenot sufficient contingencies and strategies to massively minimize the largeoverrun?
Question 11:
The Board had everyresponsibility to ensure LMG had a lead-up to production that would have drawna diversity of investment and Government support. Why is the LMG not answerablefor such a fizzle of a start?
2.0Remuneration
The financialremuneration of the seven LMG Board Directors has not yet been underpinned uponkey performance indicators. Given the consistent reporting of delay afterdelay, I respectfully say that there are no current incentives for Boardperformance through remuneration.
LMG are in a positionof accountability in their representation to shareholders and accountabilityhas not been demonstrated to date. In the many years that we have beenshareholders we cannot recall LMG ever meeting an announced event/progressmilestone (e.g., funding date, signaturing MoU’s, contracts etc.). It isperplexing that the Board has not addressed this issue which has resulted insignificant reputational damage to the Company which in turn has eroded shareprice.
Having the whole Boarddetermine remuneration is too incestuous and we therefore recommend forming aremuneration committee to determine Director’s remuneration, with at least 25%of remuneration conditional on performance milestones.
Question 12:
Why are all Board Directorsfully remunerated irrespective of Company performance when there have been verysignificant delays that have not been adequately communicated within reports?(Note that we believe that many of these delays were avoidable, or withforesight minimalized).
Question 13:
Why has the Board not establisheda remuneration committee to devise Director remuneration, contingent uponperformance, i.e. performance bonuses that are tied to well defined keyperformance indicators and forward-looking milestones?
3.0Phase 2 - The 10,000+tpa Plant
The GHD fly ash study hasbeen set back which in turn has modified the expected volume of the plant to 10,000tpauntil further notice. Despite the setbacks, there is a raft of detailsregarding the preparation for the expansion of the plant that have not beenadequately communicated.
3.1Local Government application for a change of intensityand scale. (3000tpa to 10,000tpa)
As the plant is nowtargeted for 10,000tpa, an additional application will be needed to furtherexpand.
Question 14:
Will the newapplication give scope for further expansion after the 10,000tpa has beenachieved or will that require a further application?
Question: 15:
Why has the progress on this application not been presented to shareholders in quarterly reports?
Question 16:
It appears that theupgrade of potential volume above 10,000tpa has been crippled by the tightbudget which cannot allocate the finance to progress the GHD study for now. Isthe GHD report now deferred until another capital raise?
3.2 EPA permit for plant expansion due to increased volumeand therefore a new environmental impact study.
Question 17:
Will the revisedenvironmental impact study/assessment be based upon a future volume greaterthan 10,000tpa?
3.3 Regarding the rehabilitation of fly ash dams for Yallournand Hazelwood.
There has been anoutcry of Latrobe Valley residence with several reports (e.g.: David-Chambers,Dr Steven K. Campbell, DELWP Gippsland, Bronya Lipski (lawyer) Environmental Justice Australia, Press Release - March 10, 2023“Toxic coal ash dumps leave Latrobe Valley communities at risk”, etc.)that demonstrate the wide call-out for solutions to the fly ash problem.
There is compellingenvironmental argument for the removal of the fly ash from dams and the relocationof fly ash into new pits that are prepared so that ground water systems andterrestrial flows are protected from contamination. The resounding conclusion withinreports suggest that filling the current dams with water will not preventfurther environmental pollution. (Note: “Removing toxic coal ash dumpand using solid fill, are safer, viable, and must be investigated.”(Environmental Justice Australia 2023, Environmental Justice Australiawebsite, Engie’s Hazelwood plan will release toxic pollution. (Accessed4/03/2024)
Question 18:
Why is LMG notbroadcasting through Local and State Government channels and the media, thatLMG have the capability to at least make a difference in the volume of fly ashproblem at Hazelwood?
Question 19:
If the access tofurther volume of fly ash becomes available due to the potential relocation ofHazelwood fly ash, is LMG likely to consider expanding the Latrobe Valley plantto 100,000tpa, as was once considered before?
We can see from one report that the fly ash at LoyYang only has a 2.2% content of MgO, while Yallourn is 18% and Hazelwood has18.8% (C Black1, D Brockway1, S Hodges1 AND A Milner1, 1992, AAPG Data Pages)
https://archives.datapages.com/data/petroleum-exploration-society-of-australia/conferences/006/006001/pdfs/149.htm ).
Question 20:
Earlier in the LMGproject planning, LMG had discussions with all the power plant owners in theLatrobe Valley and expected it could produce up to 100,000tpa. Hazelwood had agreedin principle, to supply 470,000tpa of fly ash per year, with Yallourn toprovide 320,000tpa of waste.
In 2015 LMG andHazelwood signed a letter of intent for the supply of fly ash.
In 2017 LMG againannounced it was in negotiations with ENGIE aiming to source fly ash fromHazelwood.
Why did theseagreements in principle fall apart?
Question 21:
Has LMG presented moreinformation to the Local community, State and Federal Government and ENGIE, togain support for access to the Hazelwood fly ash?
Question 22:
Is it a prospect thatHazelwood may be initiating a self-funded project for their own recovery ofmagnesium, using their own feedstock of fly ash? (Noting that LMG’s hydrometpatent expires in 2030)
Question 23:
the ENGIE remediationof fly ash ground water contamination will serve as a bench mark for how otherpower plants (Yallourn and Loy Yang) will address their massive problem ofstorage of fly ash within dams. What mechanisms are available to LMG viaGovernment, to assist in reaching an agreement with ENGIE?
4.0Phase 3 – The 100,000tpa Plant in Malaysia
4.1Project Feasibility Study B
Understanding that the100,000tpa plant progress is dependent upon the progress of the Bechtel PFS B,there will now be further delays caused by the need to defer the study untilfinances allow.
Question 24:
What is the newforecast date for the completion of the PFS B?
4.2Announcement: LMG & SLN signed binding MoU forsupply of ferro nickel slag (Release Date: 12/09/22)
·Signing of a binding MoU with Société Le Nickel (SLN),for 450,000 tons per annum of ferro-nickel slag for 20 years.
·LMG need in the order 600,000tpa of ferro nickel perannum to produce 100,000tpa Mg.
·SLN port can handle the loading of 450,000 tpa now.
·If port expansion is undertaken, SLN may cater for anadditional 150,000 tpa
·If port facilities are not expanded, LMG will sourceadditional supply in the areas of Indonesia or Philippines.”
Noting recent publicreporting “New Caledonia’s nickelcrisis prompts call for ‘economic, social state of emergency (29 February 2024)” and Société LeNickel – SLN – plant, a subsidiary of French giant Eramet recently had tobe bailed out by a French government loan to avoid an ominous bankruptcy.
Question 25:
How precarious is theLMG binding MoU agreement with SLN (Société Le Nickel)given their parent company “Eramet recently had to be bailed out by a Frenchgovernment loan to avoid an ominous bankruptcy?
Question 26:
If Eramet does go intobankruptcy, what alternative strategies for sourcing Ni slag from Indonesia orPhilippines have been explored as possible alternatives to SLN?
Question 27:
Has there been anydiscussion held with other companies that have ferro nickel slag resources?
Question 28:
Does the crisis in NewCaledonia potentially aid to improve the volume of ferro nickel slag available forLMG to achieve the 600,000tpa?
Question 29:
Due to the “socialstate of emergency”, is there a favorable impact on the New Caledonian port wherebythe capacity to export slag may be increased?
Question 30:
Will a revised PFS (Part A) be needed given these recent events?
Question 31:
Did LMG seek a DueDiligence report for the Eramet owned SLN at the time of developing a bindingMOU with SLN?
5.0Communication
Media releases,Interviews with Small Caps and Proactive Investors, Investment Presentations,conference presentations, etc. have been non-existent for a very long time. Thelast conference presentation was on the 13/07/23 and the last InvestmentPresentation was on the 09/12/2021.
Communication is evenmore so critical, given LMG’s poor history in not meeting milestone dateswithout explanation. It is imperative that the Company is up-front and honestwith shareholders and the market to minimize reputational damage which erodesshare value. As a prime example, looking at the past 6 months quarterlies andmonthly reports, there has been a material change in the forecast date for MgOproduction.
Extract Q2 Quarterly issued 31st January
Magnesium Oxide (MgO) production strategy is on track, allowing LMG toinitially prove its patented process and to generate early revenue. Focus willthen target completion of remaining works with Magnesium metalproduction starting H2.
Our target for the first MgO production after March 2024 remainsunchanged.
Communicating to themarket that production date remains unchanged is grossly incorrect. There is amaterial change in the forecast date form “in March” as reported previously to“after March”. Yet, LMG glossed over this material change stating that MgOproduction date was “on-track”, implying no change. In addition, “after March”is an open-ended timeline without clarity of whether it’s weeks, months oryears. There has been some ridicule and sarcasm expressed in public forumsdirected at LMG re this “rubbery” production date questioning the Boardsprofessionalism.
Question 32:
Do the Board reviewquarterly reports before release and if so, why did the Board not attempt to correctthis reporting conflict of MgO production date in the last quarterly?
Question 33:
It is reasonable toexpect that Japan, New Caledonia, Americas, Malaysia, China, Europe, Logisticscompanies, competitors, etc. would all be watching LMG with intrigue. Now morethan ever is the time to be building foundations of factual progressdemonstrating that LMG does what it says it will do and minimize delays. Now isthe time to build momentum and excitement for the first Mg. Now is the time forshareholders and the market (including the international market) to be informedmore than ever.
With potential JVpartners, Government, industry, future offtakes for larger plant and potentialnew shareholders waiting in the wings, every opportunity for media coverageshould be sort.
Does LMG have a Mediacampaign that will be rolled out to broadcast LMG’s first MgO and then followedby a buildup of momentum towards the first Mg production?
We thank youfor your time in considering this letter and its questions. We would be happyto provide further clarity on any of our questions if required.
Kind Regards
Etc...
Kengaroo and Tropic
(20min delay)