Evening folks
This is a re-run of a post earlier on the question of LKAB/Mitsui involvement and funding possibilities.
AsI understand it, negotiations with LKAB/Mitsui are not about taking an equitystake in Talga but their involvement in the anode project.
The original LOI covered stage 1 the Vittangi19k project, the extension provided an opportunity to finalise a deal for stage1 AND extend LKAB and Mitsui's involvement into the stage 2 100k project.
All speculation of course but from a managementperspective and to minimise loose ends, it would make sense for the agreedproject to be run by a separate company and given Talga owns all the elements(mine, refinery, anode plant...) a wholly owned Talga subsidiary would makesense, the point being some equity in that subsidiary could be up for grabs tothe partners for stage 1, maybe also stage 2 in return for their involvement.
To state the obvious Talga will want to give upas little equity as possible while they will want the lion's share to make itall happen fast.
As a guess Mark would want to limit theirinvolvement to stage 1 or at worst stages 1 & 2 since after that withUSD600m in free cash flow annually he can finance all future expansion fromthere in-house.
One thing they will all want is crystal clearagreement on what the roles will be, it won't be good enough to leave it atLKAB to do the mining, Talga the refining and Mitsui the sales and MS thefunding package. There will probably be a framework agreement that says whowill do what so there's no overlap, how the parts go together and so on and thehardest part of all the fine grain detail.
While there's been a lot of talk around Mitsuihelping out with finance they function basically as commission agents, signingup customers and placing orders in return for a percentage of the sale...howmuch...don't know but given the size of the deals maybe 5%. Unless Mitsui hasaccess to huge amounts of borrowings at close to zero interest why would hewant them on board at all, he has customers knocking on the door now so whyhire a middleman, a good reason would be to put up the finance to fund stage 1at minimum cost see below..
The relationship with LKAB is a lot trickier. Ina sense they hold the keys to the kingdom because without their involvementgetting the Stage 2 operation up and running would be way more difficult. LKABis an experienced Swedish underground iron ore miner operating in almostidentical conditions to what will be needed when underground operations startat Vittangi and Nunasvaara. An open pit is one thing, a deep underground miningoperation when you are reverse mining is quite another. So, LKAB's involvementis probably not mission critical for stage 1 but it undoubtedly is for stage 2.
Sure, Talga could theoretically go it alone andhire an experienced underground mining manager and contract team for stages 1& 2 but that would mean further deals and would also delay the project andadd a big unknown risk factor, with no Plan B so if all that is true he can'tpush ahead without LKAB's involvement, the question is on what terms.
So, what to do, the answer probably is to signoff on LKAB as the mining contractor for both stages 1 & 2 and to sacrificesome equity in the anode project maybe 20% to make it happen.
Another option is to gift the iron ore andcopper cobalt deposits to LKAB in return for ZERO equity in the project so theywould simply work on a contract basis to deliver ore to the refinery but on afat margin meaning if they can get iron ore to the surface at their mine forsay $20 a tonne we offer them $50 or $100 a tonne in the early stage whenquantities are low on the understanding that figure can be wound back as wemove to 100k tonnes and beyond annually.
I'm not expecting a signed agreement betweenTalga and LKAB/Mitsui on 30 November but I am expecting an announcement sayingthey have signed a Heads of Agreement or similar meaning they've collectivelyreached in-principle agreement on the key terms of engagement and on theunderstanding the contract will be finalised in the coming weeks meaningsometime in December.
If a deal is done with LKAB for stages 1 & 2it would make sense for the funding package(s) to cover the CAPEX for thatdevelopment to be well advanced by November as well given the application forstage 2 has been lodged and approval could well follow quickly on the heelsof approval for stage 1 expected in Q1 2022.
Funding wise MS's job will be to put options onthe table for the board to consider and could include separate funding packagesfor stages 1 & 2. The company will be in very different shape as an anodemanufacturer in a few years time compared to now when it is still going throughqualification processes.
My take is that Mitsui is more likely to beinvolved in stage 1 financing supplemented by advance payments from customersand might be happy with a 5% equity stake plus commissions,while LKAB would probablybe looking for a figure closer to 20%. MS will have an eye for the bigger picture and will likely be putting together finance options to cover both stages 1 & 2 including a one billion dollar NASDAQ listing enough to enable Talga to become "stand alone".
(20min delay)
