A lot of noise on our PLS threads atm and it's beginning to...

A lot of noise on our PLS threads atm and it's beginning to lower the quality of the conversations...

I'll try to contribute something that I perhaps provides you with something useful (I hope!), so hear goes:

Quite a bit of discussion recently has centered around the deferred consideration component for the purchases of the former Altura Lithium Operations.

As short history lesson, the cost to PLS for purchase of the Altura asset was announced on 20 Jan 21 comprising:

The deferred consideration comprised of the issue of 69m @ $0.4072 to Altura Noteholders being the "deemed issue price" at the time of their negotiations.

Fast-forward to August 2021 and the recent announcement on the acquisition provides that the parties (PLS and Altura Noteholders) have since negotiated a reduction in the number of shares to be issued as deferred consideration less 5% to 65.3m shares.

Importantly 32.7m of these shares was issued today and the remaining 32.7mneeds to be approved by shareholders in a Extraordinary General Meeting to beheld in Sept 2021 where if approved will be issued t+5 days following.

By way of background, Altura Noteholders debt value was $244m as was announced in the ALO announcement on 6/3/2020 comprising of fund managers Castle Lake, Carval, Nomura and Clearwater Capital.

So what is the relevance of all this?

My view is as follows:

The way the acquisition was originally structured, it was not in the agreement to accommodate (or perhaps foreseen that) a substantial rise in PLS share price comprising of the Deferred Component would arise in the time period to settlement. Based on today’s value (making the simple assumption that the approval for the issue of shares as deferred consideration in Sept21 is secured and assuming todays VWAP share price of approx. $2.20for the Sept issue too) the return in present day values from the Noteholders POV is:




Suddenly going from their Jan position of trying to recover the return of their initial principal of $244m, they have now/in Sept covered that (i.e. their $244m secured debt position) plus a $108.8m windfall gain (plus their interest coupons from Altura). I'd hazard a guess that from a debtholders perspective, this 33.4%p.a. (annualised gain from 18 months holding) is not a shabby return given the state of global interest rate at near zero (even PLS Nordic Bond is only c5%p.a.?) and what they were facing in Jan (and perhaps why they agreed to the 5% reduction in issued shares to recover at least a portion of their funds now given recent SP surge).

I'll pause here to caveat that I have not done my DD on the background on the Noteholders (so I could be wide of the mark) but I make my assumption that debt holders are debt holders. They are interested in cutting debt deals and have no interest in having equity holdings in PLS or other ventures otherwise. That is not their interest or their expertise.

So where does this leave us?

I don't have a crystal ball but I do have the benefit of holding PLS during the period of the placement to Resource Capital Fund VII LP/Resource Capital Opportunities Fund LP (RCP) in January. Who are RCP do you ask? Well they, along with AusSuper were the cornerstone investors who's funding were the conditions precedent to provide the finance for PLS to purchase of the former Altura Lithium Operations (along with our c.60mretail component ~ remember the SPP shares we got at 36c). In return, RCP were issued 183,954,633 shares @ 36c? for their investment. Let me repeat that-

They held 183,954,633 or 7.19%of PLS shares in their hands as at 20/1/2021

Why is this relevant (and for some of you I am sure this is starting to ring bells)? Well sitting on 183,954,633 @36c do you think they were good long term "Cornerstone Investors” happy to wait it out for the imminent boom of lithium prices? I'll put you out of your misery - No, a big emphatic NO. So how much could they possibly sell as “Cornerstone Investors” do you ask?

Well between 21/1/21 to 8/2/21 or 12 trading days they proceeded to offload 121,086,321 shares (See change in substantial holdings notices at the time) including 50,000,000 sold in a single day on4/2/2021. Perhaps some Escrow in future anyone?

Prior to this the PLS SP had been travelling well. In fact, the PLS SP had just climbed to an all time intra-day high the day before at $1.37 on 20/1/21. What happened over the next 12 trading days saw the SP fall from that all time high of $1.37 back down 47.5c to 89.5c.

How was this experience for me personally as a little retail shareholder? Honestly it was SH!T. Without the benefit of hindsight (and of change insubstantial holdings form which are after the fact) there was little to explain the sudden and dramatic drop in SP. Day after day of red, -5%, -15% white knuckling intraday swings, consistent downward trend for 12 long days. Losses piling up day after day, week after week, thoughts of did I miss something so obvious to justify a 35% correction from the peak? Did I screw up my fundamental analysis of the company? Was the technical analysis from our learned chartists (h00ts, dfs1, GARETH78 and others) plotting numerous levels of resistance gone AWOL? Imagine going through that and not ‘knowing’ other than having an educated guess (and educated guesses from Thesi, SF@HC, nevchev, Aljen888 and other old hands) as to the reasons for the decimation. Frankly speaking that knocked us into a 3 month consolidation period when the SP did nothing other than stick tight to $1 (GXY and ORE outperformed).

Looking back now, the reason is abundantly clear. I mean what does a fund like RCP who’s bread and butter is to provide opportunistic funding and recycling those funds to improve their return on capital want to do with 183m shares in our budding lithium company? Does it care that it has great future prospects – record future shipments, rising spod price forecasts, JV ambitions, synergy from 2 producing assets, additional future spod supply from previously sterilised shared boundary etc… that it looked forward to in Jan? Well you guess it, the answer was and is a big fat NO. They wanted to exit ASAP and grab their hands on that hard 270% – 300% return after all they are making these bets across all sorts of projects and who’s to say they couldn’t replicate that return in another financing deal around the corner.

So (if you’re still with me) back to present day. Why does this all that matter? All this discussion about the current issuance from the Deferred Consideration Component makes it appear that we are looking down another unknown precipice. Another total 65.3m shares being issued to Noteholders - 32.7m issued today and potentially another 32.7m in September.

Do I expect the Noteholders to have any intention of being long term holders of these shares? Well frankly, just like RCP in Jan 21, I do not. What I do expect them to recoup their returns ASAP too, as they are in the business of funding deals, not being long term equity holders.

So what’s the worse that could happen? Even if all 4 fund managers decide they all want to sell everything all in one day that is 32.7m shares on a single day. Have I seen worse days, well yes, on 4/2/2021 when RCP on its own decided to sell 50m shares in one sitting. At least this time I will be better prepared for understanding it.

Yes it is SH!T but what happened after RCP sold 121,086,321 shares in 12 trading days. Did it change the fundamental outlook of the Li industry? Did PLS growth potential change? Did our management give up and all resign? No – none of it changed. What has happened to the SP since then? Well I think I don’t need to add anything further on this point except to say we survived and then some.

The story hasn’t ended, and I’m not complacent to assume this is a full proof 100% guaranteed fairy tale, but long term we retail investors are here because we have done what research we can and believe things do kinda point up.

For me personally, during the month leading up to the RCP Jan/Feb sell down, I was caught up in the upswing. I bought in more, and again at again at increments around $1, $1.10, $1.25 and $1.35. Then to see it all collapse back to 89.5c made me question and re-evaluate everything. My pillar of strength throughout has been my analysis, and from that a belief that if I didn’t buy in, even at those upswing prices, I may miss out altogether when the PLS SP would hit $2. I guess no one hear regretted now if they did the same. So here we are today down 5.58% at $2.20.

I hope if you made it this far, that this post provides some useful context and helps you with your own processing given the bish bash boshing of recent days.

Good luck to all.