Hello All,
Thank you for the comments and messages, it’s been a busy couple of days. I am going to endeavour to provide more substantive information in this post as well as answer questions / comments from the first post where I can.
To clarify up front, my associates and I are not under any confidentiality obligations as the groups we spoke with were seeking to obtain our thoughts on the Australian lithium sector and we were keen to hear their thoughts on the state of play from their perspective. It was an exchange of views and insights. I will not mention the groups we met with as we have agreed to keep an open dialogue.
As I posted yesterday, one of the largest battery makers in China is currently consuming 2,700t/month of lithium carbonate & lithium hydroxide. This figure is expected to grow to 8,000t – 9,000t / month as new factories currently being constructed come online later this year. We were also told that the plan is to increase this a further 200% through new facilities from 2018. If they completed this expansion plan, then this group alone would consume 100% of PLS’s planned production. It’s my view that there will simply not be enough reliable supply to meet demand from processors and makers as the rush to build capacity continues.
I cross referenced my findings with Joe Lowry and I was surprised to learn that the group mentioned above is not considered a top 5 battery producer. It’s possible that they are making a large push for market share, however when we reconcile this with the expansion plans of the other players we met, then, in my view, the demand for lithium is likely to exceed all published Aussie bank estimates by the proverbial country mile. Some people just don’t get it.
From discussions with the companies we met, the industry hits a crunch point later this year with regards to supply constraints. It’s my belief that the rolling monthly contracts mentioned in yesterday’s post are unlikely to be renewed, or renewed on a much lower volume basis. From here its reasonable in my view, to expect to see the marginal player scramble for supply and by default the marginal price for lithium rise materially.
In answer to some more takeover specific related comments I offer my thoughts below
“The threat of a takeover is very real and this is why we need this DFS to really sell the potential PLS has.”
“Then comes the bidding war oz. PLS won't be sold at the first knock down.”
In my opinion the DFS supports a takeover as it can help to reduce uncertainty of the asset to potential buyers. However, a group may determine there is strategic merit in launching a bid prior to the release of the DFS in order to scare off any other expected or unknown bidders, they may also take advantage of a share price that does not reflect the certainty of the published DFS. Clearly companies can approach this from many different angles.
I’m not going to speculate on the type of offer that may or may not be put to the company and shareholders, but there are a number of strategies that can be utilised in a takeover scenario such as a scheme of arrangement, and all cash offer, an offer for some, or all of the shares in the company etc etc. There are far better qualified people than me to determine the best method, however, it’s my view that the first company to make an approach to PLS will spur others to show their hand as they know the value of PLS and the cost of leaving facilities idle if they don’t have supply.
It’s my view that the payback period required for buying PLS at double the current share price is less than 2 years from production. Reconciling this against the cost of already invested capex in battery production and other downstream activities, makes the decision to acquire PLS and easy one in my opinion.
“In your opinion, does the shareholder group and/or management possess the share numbers to fend-off a hostile takeover attempt?”
Let me preface this buy saying that in my opinion, any take-over attempt at the current share price or 30-50% premium to the last 30-60 day VWAP should be seen as hostile take-over and very opportunistic.
The shareholder group still needs to be very careful how it behaves and acts as ASIC has a very definite view of what behaviour constitutes acting in concert. What may be useful is ensuring that your details are up to date with the appropriate “detail keeper” so that should a low-ball offer come through then the group can decide if it wants to act in concert and voice its collective opinion on the matters presented. In my opinion it would be very hard and even unwise to ignore your key shareholders’ view on price and valuation of the assets owned by said shareholders. Should the time come I look forward to a very robust and fruitful debate on the subject.
“I can't help but feel the MIN situation will continue to stifle interest in PLS until it is resolved and removes any uncertainty. Whilst there is clearly a huge demand in China and many companies have the financial ability to mount a takeover I predict they will not be the only nation sitting at the bidding table with PLS.”
In my opinion it is actually the opposite. In the case of PLS, ignoring size / cost / etc it is one of the few assets not tied up with supply and off-take agreements. The could be potential for pressure on Chinese groups to move before Mineral Resources was to complete their Right of First Refusal (“ROFR”) to prevent Mineral Resources from ever getting any supply in my opinion.
The ROFR only works against processors in my view, as if you are an integrated battery manufacturer, you have the ability to use a higher transferred price for the product (transfer pricing) to your Chinese factory at such a level that it would be uneconomic for Mineral Resources to exercise its right and try to compete on the same terms.
In my opinion the only way for Mineral Resources to guarantee control over supply is through a full (and properly priced) take-over of PLS, otherwise they may be left out in the cold. It’s also my view that various Chinese groups see Mineral Resources as someone to at best potentially manipulate in a take-over situation, and at worst as competition.
“Isnt it too risky for a T/O, wouldn't you wait till all permits are in place and plant is built bit like Tailson Greenbushes scenario? It would be reckless to bring so much risk to a company like MIN?”
In my view the Chinese groups we met with are at greater risk in not having surety of supply. Nobody wants to have facilities idle and lose hard-fought market share in a rapidly growing sector as you wait for the operations of PLS to be completed, in my opinion.
Talison and Greenbushes was a transaction done at a different time in the market place and industry cycle, they had a first mover advantage type outcome in my view. As it stands today the circumstances for players in the industry are very different, the balance of power has shifted to the raw material suppliers in my view, and I believe the time is right to take advantage of this.
“I cant help but think that unless a Chinese company takes MIN under their wing (so to speak) then MIN would not last into round two of the bidding (if it takes place).”
In my opinion other deals such as Baosteel / Aurizon have been a successful demonstration of this but as supply appears to be such a critical issue, I believe finance is unlikely to be an issue for a company looking at a lithium stock in Australia.
In my opinion MIN could make a cash/scrip offer and sell on the upside of remaining a shareholder in the entity as opposed to just selling it completely, i.e. mine construction, management and operation etc. This may be compelling to some shareholders depending on the merits and if it ever happened.
“God I hope the fed gov blocks any foreign takeover bids on PLS. It's a strategic asset of national importance imho. Let's keep a hold of it.”
In my opinion the government will not block this. It’s not a strategic asset as we have no downstream processing industry and no real ability to create one out of thin air. The product from the mine will end up in China and we will see the benefits of this through the rapid development of an asset that employs people and pays millions to the State and Federal governments through royalties and taxes, assuming the company acquiring PLS doesn’t implement the transfer pricing strategy I mentioned above of course.
“I think its funny that SN can post something about a "trip" with "top management" and "key industry players" and then in the same breath say there are few if any long term supply contracts around. Turn it up. ALB, SQM and FMC (most of global supply) are built on long-term contracts. Feels a little bit like either hearing what you want to hear, or the meetings are with companies out of the loop.”
ALB / SQM / FMC in my opinion are more aligned to USA / Japanese supply and the Chinese have historically been “screwed over” (do not know what context) by these groups. It is what led to the Chinese sector deciding to take control over supply security, and focus on hard rock processing in my view. Of course long term contracts are in place and will run their course, we were focussing our discussion on the marginal supply contracts that are being issued as long term contracts expire. This in my view is what sets the price for product.
“Can I ask 'was graphite mentioned?'”
No the discussion was all around lithium / supply / demand / China and the participants in Australia. But here’s something that may be of relevance to you.
http://www.asx.com.au/asxpdf/20160616/pdf/437xvnz8xpsjpj.pdf
“It’s unsubstantiated, that’s all. Really why would a big Chinese company take time out to whet PLS holders appetites.”
You’re right, all of this information is unsubstantiated. That’s the very nature of this forum. The information I’ve posted is my opinion on the industry after I have conducted countless hours researching the industry, its participants, and my interpretations of the meetings I had recently with my associates in China. Big Chinese companies don’t know everything, in fact, like most corporates they can be quite myopic when running their business on a day to day basis. Every now and then its good business practise in my view to stick your head up in the air and take note of what’s going on around you. Meeting with industry investors and observers is quite a smart and efficient way to do this. Most companies actually do it already.
I’ve taken the opportunity to post yesterday and today as I think the information we gathered benefits all shareholders. Clearly I do not have to post my insights just as others can and do, choose to post selectively. I am a happy holder of the stock and it’s in my interests to see a higher share price. Let’s not fool ourselves and assume corporates don’t read the forums here, how do you think we managed to arrange our meetings in China….
As always, do your own research.
Best Wishes,
Super Ninja
(20min delay)