"Positive" Scoping Study

If you read the word “positive” in the heading of an announcement, you’d expect it to read positively. The assumptions and inputs used in the study were very conservative, typical of our man Mr Kevin Joyce. This is certainly what you want when investing your hard earned dollars in a company, but unfortunately extreme conservatism won’t attract potential new investors who can’t see the vast amount of upside that has not been mentioned in the study. However, this is revision 1. The inputs are likely to get better as the costings become more precise and completely different paradigms are revealed i.e. logistics solutions.

My biggest takeaway from the scoping study was that the project is viable. That is a big weight off of my shoulders. I was pretty concerned that the logistics might not even be possible for BGS, let alone be economically viable. Very good to see that the company can produce with good margins despite the deposit being located within landlocked Mali. More disclosure and information from management on this issue in the past when there were concerns over this unknown would have been good.

The transport and port handling costs are pretty nasty, but it looks like there is definitely scope to reduce these. The study advises that a low CAPEX investment ($3M) in rolling stock would reduce handling costs – seems like a no brainer. Large freight trucks are usually built custom to the job they are doing – look at the beast trucks GXY are using to deliver concentrate to the port at Esperance. I don’t see why BGS and Bollore couldn’t do some sort of cost-sharing JV investment in new trucks with rota-boxes that can be loaded straight onto the SITATRAIN and then tipped into the ship at Abidjan? Or if Lithium hydroxide is the final product, could shipping containers not be packed full of 25kg bags and loaded directly onto the SITATRAIN and then ship? If logistics costs can be cut down to a reasonable level, say under $100/t, which seems certainly doable, then we will become much more profitable despite more than double the transport costs of PLS & AJM. Some innovation may be required to figure this out – does the current board have this?

Due to the high cash costs projected, the current NPV as it stands ($286M) isn’t very impressive however by projection, we are doing better than AJM’s NPV ($411M) if we were to build an equivalent sized (1.5Mtpa) plant, which would result in a NPV > $429M for BGS.

Average feed grade is probably around the right mark with a 13Mt reserve, but with infill drilling in progress, grade increases are very likely plus extensional drilling will prove up more high-grade ore, allowing the use a high cut-off grade for our reserve, therefore increasing the average feed grade.

Unsure why only 75% recovery was used when previous metallurgical test work determined that recoveries between 85 – 95% were achievable from DMS alone and resulted in concentrate grades in the range of 6.5 – 7% Li2O. With additional milling and floatation, these recovery figures would be a certainty. I will concede that prior test work was conducted on ore of higher grade than 1.5% but it is the same ore so results should be very similar. I expect this recovery figure to be increased >85% in the PFS once we have our updated met results which are imminent. Previous met testing:
https://hotcopper.com.au/posts/22061387/single

Transport and logistics are viable. With a lithium hydroxide processing plant onsite, the final product is reduced by volume and weight factor of 8. Plus it sells at a much higher profit margin than spodumene concentrate. Especially if you have access to spot market pricing (Tongdow). Lithium hydroxide is trading at US$22,000/t in China at the moment. A lithium hydroxide processing plant seems like a no brainer and I will discuss this further below.

Plenty of options for water and power delivery to site – most conservative options were considered in this study so we will likely see further CAPEX and OPEX reductions in the PFS on these fronts. Further de-risking of the project.

No social or environmental impediment to mine permitting and development. Outstanding, considering that the ESIA is the most important component of mine permitting in Mali.

Increases in size, and likely grade of the global resource at Goulamina are guaranteed after the drilling campaign currently underway. This may be even more of an increase than expected, as the quarterly update highlighted that the drilling campaign has been modified and expanded due to observations from drilling so there may be another game changer on the cards like when we hit 82m @ 1.64% Li2O from surface. I just want Kevin to continue RC drilling the extents of the strike until mineralisation stops! Hoping for min. 40Mt resource = 32Mt reserve = 2Mtpa for 16 year LOM

CAPEX requirement to get us started is crazily low. A reputable Chinese firm would be able to sneeze out $47M. Increasing to a 2Mtpa operation would probably only increase the requirement to ~$70M for stage 1. I really like the idea of staging CAPEX as proposed in this study, minimizes risk and dilution to shareholders.

Our mining and processing costs are the lowest in the world. These will only decrease further as the size and grade of the deposit increases plus with the IP and resources of a Chinese mining partner onboard. Refer to cash cost comparison table below:



Disappointing that the concentrate sale price was factored at $537/t FOB. AJM and PLS used this price in their DFS’ last year while spodumene contract pricing was at $600/t. GXY secured contracts for 2017 supply at US$905/t in December last year yet BGS has used the same outdated figure. In addition, the ore within the Goulamina deposit has very low iron and mica content which results in a very pure product, which should attract a premium price. Plus we have an MOU with Tongdow with the view of selling our product at Chinese spot pricing which is even higher again.

The sensitivity analysis demonstrates that the most sensitive variables that affect the value of the project are the price of concentrate and plant recovery. This is great because $537/t is very conservative long term pricing given the supply/demand forecasts for lithium and considering prices look like they will surpass $905/t this year. Plant recovery of 75% is stupidly low considering prior test work can produce a concentrate much higher than industry standard specification at recoveries between 85 – 95%.

Looks like Kevin has engaged all of the right contractors perfect for the tasks required. Now we just need to support him by getting the right people on the board, Michael Langford, James McKay, followed by a technical COO and a metallurgist who specialises in lithium processing.

Our current market capitalisation is $65M fully diluted. That gives the lithium project an EV of around $45M after accounting for our cash and gold project. That is a very cheap entry point into a company that could be turned around and built into a billion dollar company.

Using the inputs from the study, my DCF model shows a pre-tax NPV₁₀ of AU $286M.

A 2Mtpa scenario with 15 year LOM, 85% recovery, assuming a better logistics solution + economies of scale resulting in $290/t cash costs and $600/t average concentrate price (except $900/t for year 1) has a pre-tax NPV₁₀ of AU $1,584M.

Using the inputs from the 2Mtpa solution and installing a 40ktpa LCE plant onsite, (approx. 150ktpa spodumene concentrate leftover every year, available to sell that is not used by the LCE plant), cash costs for LCE of $4,000/t, LCE price $11,000 results in a pre-tax NPV₁₀ of AU $5,277M.

I’m sure you can see the route I would like the company to take here.   

BGS has the lowest mining and processing costs in the world, refer to the C1 cash cost comparison table below:


Note: I can’t find any information on current costs for GXY’s Mt Catlin Mine or NMT’s Mt Marion Mine, but due to their lower plant recoveries and high lepidolite (mica) content, I speculate that their current operating costs are very high.

The C1 cost comparison table above means that BGS has the potential to become one of the lowest cost lithium carbonate/hydroxide producers in the world. With high logistics costs, it is a no-brainer to reduce the final product weight and volume by a factor of 8, not to mention that BGS would be able to produce with a huge profit margin. Logistics issue solved, NPV through the roof.

A JV agreement would be ideal for an aspiring Chinese lithium producer, as they would gain access to cost price spodumene concentrate at $152/t instead of market price ($905/t).

The lithium salt used to manufacture a lithium ion battery is a minor proportion of the total cost of production. Therefore there is scope for the price of lithium to increase further from current pricing.

The feedstock to produce the lithium salt however, is the largest proportion of cost to make the product (~67%) therefore reductions to this cost will impact very positively on the profitability of a lithium producer.

There are many different types of lithium sources i.e. hard-rock (spodumene, lepidolite, amblygonite, petalite), brine and clays and hundreds of junior exploration companies looking to obtain a foothold in the market in supplying these feedstocks. Therefore the lowest cost lithium feedstock producers will be the companies who are able to secure financing to develop their mines, weather any periods of lithium price weakness and will be most profitable due to higher margins. BGS has this.

It is my understanding that lithium end users, specifically battery cathode manufacturers can use either lithium carbonate or hydroxide as a feedstock but have a strong preference towards lithium hydroxide monohydrate as it results in a much higher quality cathode in terms of performance.

Lithium produced from brine is generally in the form of lithium carbonate, I assume, as it is more cost effective and simpler to manufacture. However in order for it to be suitable for battery production, it must meet a certain assay specification, which brine-produced lithium does not meet. The unsatisfactory lithium carbonate is then converted to lithium hydroxide or other lithium salts. This process removes the undesired impurities when the final product is “worked up”. This obviously adds a significant additional cost of goods to the end user of the lithium as the product is essentially being manufactured twice.

Lithium hydroxide can be produced directly from spodumene concentrate, and it can be produced to purities greater than the required battery grade specification.

Another potential benefit to vertical integration of lithium processing within Mali (any Malian accountants out there?), is that the 6% royalty on profit from production may be reduced as the concentrate may be able to be sold at cost price instead of market price to the separate entity controlled by BGS that conducts the chemical processing. Therefore the royalty would be reduced to ~$9/t from ~$54/t.

Using the figures from Michael Langford’s speculation on PLS’ potential LCE production costs and the costings from NMT’s DFS on LCE production, BGS may be able to produce lithium salts under US $3000/t FOB which would be outstanding as no other current producers in the world can match this pricing. The companies that get close are brine producers which need to add an additional US $1000/t at a minimum to convert their product to battery grade specification:



ML’s costing adjusted for BGS’s C1 cash costs for spodumene concentrate supply and transport costs:


NMT’s costing adjusted for BGS’s C1 cash costs for spodumene concentrate supply and transport costs:


Therefore despite the current low NPV valuation, BGS is able to produce, with the lowest C1 cash costs of its peers, the most ideal lithium feedstock type (spodumene concentrate), to a very high standard of quality (high grade, low iron, low mica), which is able to be used to produce the most ideal battery grade lithium salt (lithium hydroxide monohydrate) in one relatively simple process. Because of these reasons, BGS is set up perfectly to take full advantage of the electric vehicle/battery storage revolution as a large scale, low cost producer of lithium salts for cathode manufacturers. I believe that this is vision will become a reality if the right directors are appointed to the board who have the capability and veracity to get this done.