Ok Boys and Girls. Buckle in for another Kiwisfly9 essay because I have had waaaaay to much caffeine and why the market doesn't seem to get this frankly baffles me....
Some of you might have seen the link that YellowBunny posted on the Banter page regarding PLS's recent sale of Spodumene on their BMX auction page and the increasing groaning of demand from the market versus the limited ability supply has to soak that up in the coming years as limited production is set to come online. If you haven't had a chance yet to read it, I strongly suggest you do, it's a good article and paints a pretty clear picture of the future which most of us know but the market still seems to be in as much denial of as the danger of the subprime mortgage market in 07. I found myself reading it on Saturday thinking to myself "You bloody beauty!" but also wondering how could the market be so naive to such an obvious crunch and the elephant-in-the-room opportunity it presents in the future?
Put simply, under the current circumstances, I simply cannot see a scenario with the exception of us having extremely low ceiling prices in our off-take agreements with our partners (which I think is improbable) where CXO is not earning deep into the hundred's millions a year after taxes and expense going into the future and it's left me frankly baffled that more cannot see where this is heading and why our share price hasn't already rocketed?
I things I can only put it down to are the sheer God damned laziness of the average retail investor (considering how many times the regulars around here have to answer basic questions on a regular basis I feel it's not without merit), market hesitancy until we actually FID or producing and that institutional investors are already in the know and really really quietly accumulating until FID when they can go at it hammer and tongs with real money (given the significant changes in our Top 20 holders this year, I'm inclined to believe maybe this is happening). Perhaps it's a combination of the 3 but in any case, I simply can't grasp why people can't see the future value on the wall.
In any case, having mauled it over this weekend, I remain confident that CXO will likely become a multi-billion dollar company by 2023. So right now some of you might be wondering what's your reasoning and why do you seem to have more confidence about it than Maverick from Top Gun getting laid in a lonely singles bar?
Well for starters the predictions around the price of spodumene so far from so called "intelligence sources" have for the most part been anything but intelligent. I've found most firms which were releasing reports and making predictions about where the spodumene price would be from a few years ago have made absolutely dog sheet predictions which are nowhere near the current reality and will only continue to get more wrong as time goes on and Demand continues to ramp up hard. Yet for some reason despite being so unbelievably wrong, people still cling to these like a magical amount of supply is going to come online to dampen down the market when its been repeatedly said its not coming like that and when it does, it still will simply not be able to quench expected demand.
At this point, strong in the knowledge that Spodumene is clearly going to be on a roll for the next decade and that the crunch has only just started, my mind immediately considers our off-take contracts with Yahua which might have a much more reasonable price ceiling on it given that at the time it was drafted. Few would have likely foreseen the price going as gangbusters as it already has. That being said, I'm low key confident Stephen foresaw this and would have pushed for as generous terms as he could get at the time (1000 USD and over doesn't seem unreasonable at the time given that few in the market would have been expecting this so giving it would not be such a big deal at the time). No doubt too, the deal with Ganfeng will likely have a very generous ceiling on it as well as by the time we went binding with them, as spodumene was already over a thousand bucks with no end in the price climb in sight so I'm sure our bottom line would have been looked after.
Given that PLS just sold 8 tons of Spod for 2240 USD a ton and that we have about a year before our first shipments will even be leaving for China, I am inclined to believe that the market is going to move a long way in the year and given we are just at the beginning of this Spodumene shortage, that pricing this time for contract spod will likely be in excess of 1500 a ton. Spot price sales such as the one PLS just did will probably be not super uncommon as chemical processors scramble to get whatever they can to provide for the new Gigafactories and EV manufacturing factories in Europe, the US and Asia, nevermind general demand for batteries to meet the needs of the Green revolution or growing trends around consumer tech (laptop batteries, phones, etc).
As long as we can shore up a mine life in excess of 20 years (extremely likely as we drill our new tenement we have options on to buy) and beat 25 years (very likely if simply given time) then CXO is a multi-billion dollar company waiting in the wings, no doubt about it.
And given we took an extra 10 million from the recent SPP (the EXACT amount needed to purchase the tenement we are currently drilling if it had in excess of 10MT's) I feel confident that very soon we will have a bare minimum LOM of 16 years but will already be at or near 20 year LOM by the time we start directing the drills to new targets in 2022.
Still, drilling, contract off-take price and spot market speculation aside, lets take a look at scenario.
Given the current trajectory of spodumene prices versus growing demand which is going to be unable to be satisfied, I feel pretty confident saying that we could be seeing contract off-take prices significantly north of 1500 a ton in future could become a general rule of thumb, and significantly higher for spot auctions such as the recent action that PLS had.
If we assume that 155 000 tons of our spodumene is sold for an average of 1500 USD and we use the All-in Sustaining Cost of 441 dollars from the DFS (which includes everything but tax) then that would leave us with 1059 USD a ton before tax. For 155000 tons of our production already contracted out in off-take deals that would come to 164145000 USD dollars (164 million USD). Times by 1.3 to account for the currency difference to AUD and your looking at 213388500 AUD.
They reckon the fines are worth 33 Million AUD pre-tax in the NPV8 (and I'm too lazy to take an educated guess at what the price might be in future) so chuck on another 4125000.
Lastly, we have 20 000 tons of spodumene mined per year which is uncontracted at the moment. If we assume the PLS price could be the norm in future for any available free supply and deduct our All-in Sustaining Cost then your left with 1799 USD a ton. Times it by 20 000 tons and then 1.3 for the currency difference and that leaves you with 46774000.
All up, this comes to a total of 264.28 Million dollars AUD a year before tax. Corporate tax rate in Australia is 30%, I'm sure the accountants will use every trick in the book they can to lower this but if we just assume we are stung with the full 30% then that leaves us with 185 million dollars a year in pure unadulterated profit.
If LOM hits 20 years of production then 20*185 million puts our EBITDA 20 value at 3.7 billion dollars. If we hit 25 years by the time we hit production then 25*185 000 000 makes us a 4.624 Billion dollar company. This would put the average share price (assuming no further dilution) at between 2.17 and 2.72.
None of this considers the Gold, none of this considers us doubling production, none of this considers us finally taking Barrow Creek seriously given that it's almost certainly got a lot of lithium just sitting down there waiting to be found.
And this is achievable by 2023. How does the market not see the likely trajectory here???
Would love to hear everyone's thoughts
(20min delay)