I am often motivated to share my humble thoughts on these down...

I am often motivated to share my humble thoughts on these down days, mostly to lift my own spirits.

Ken has said the partnering process is in the “final leg of the process” and its “starting to get to the pointy end”.

Rightly or wrongly, I choose to believe there will be a successful outcome, even in the current environment of spodumene over supply. Why? Because the opportunity to secure an interest in a large scale, well located and high quality mine is a rare opportunity, and the strategic advantages of vertical integration will be sufficiently compelling to the large players in the supply chain.

Obviously there aren’t many large players with current or planned chemical conversion capacity that aren’t already set in Australia, aside from POSCO and Great Wall. So there is a risk the partnering process does not result in a successful outcome, at least initially. Whilst Ken has said he is happy with the counter parties involved in the final leg of the process, he has also said there are no guarantees of a deal, and a deal will only be done if it is in the best interests of shareholders. Rightly so.

In the case of No Deal, what will PLS do? Remember that PLS has no shortage of customer demand – Ganfeng and General Lithium are ramping up production and POSCO and Great Wall have well developed expansion plans that rely upon our Stage 2 product. I expect that irrespective of whether a partnering deal is done or not, PLS will proceed with “Stage 2 Lite” as soon as possible. We don’t yet know the scale of Stage 2 Lite, although Ken has said the capital cost could be about $50m, taking advantage of latent capacity in the existing plant.  It’s good to know that Primero are involved in this process.  I expect an outcome where 20-25% of the Stage 2 cost ($50m) delivers 35-40% of the Stage 2 output (~200ktpa). That would be enough to deliver upon our base case Stage 2 offtake commitments, which are 75kt for GW, 80kt for POSCO and 25% for Ganfeng. Funding $50m shouldn’t be too difficult, even if it requires a small cap raise.

A casualty of No Deal might be our immediate participation in the POSCO JV. Without the full Stage 2 offtake together with capital to invest in the JV (over and above the $80m convertible note to be provided by POSCO), our option to participate in the JV falls away, at least for now. Although I suspect POSCO may want to find a way to keep us in the JV, possibly in a deferred or reduced form.

Whilst I expect a deal will be done, a No Deal outcome where we retain 100% of the asset, increase production by 65% at minimal capital cost and retain the option to participate in the POSCO JV in the future, would not be a bad outcome in the current circumstances, IMO.

I suspect the market is already expecting No Deal given the current market conditions and is more concerned about operating cashflow and the resultant risk of a capital raise. In this respect, increasing recoveries and lowering operating costs is more important right now than finding a partner, IMO. Ken has set some aggressive near-term targets (75% recoveries by December, USD350/t op costs by June). Again, the involvement of Primero in optimizing the plant is comforting. The current SP suggests the market doesn’t believe Ken will deliver on these targets.

The next few months are going to be very interesting.

AIMO