Short version1. Given AVZ is an explorer it will need to lock away some Offtakes for funding, especially bank lending for example.
2. AVZ needs to create a contestable market to ensure it doesn't give away too much of the farm.
3. The DFS allows for staged development, so that is a major consideration of how AVZ scopes the project to mining to maximise SH value here.
Long versionI have a slightly different view, which I provided to you when asked the same type of question in one of those LTR threads. Refer that post of mine back in LTR when asked this question of why I feel some Offtakes are required to assess debt markets for explorers seeking to be miners - Post #:
43888320. My view is offtakes are critical to funding, albeit the risk with offtakes with the Chinese is whether they honour them which is something I posted about in ADN last night - Post #:
44931666.
But for lithium, I would be expecting the Chinese to honour the contracts with AVZ, and other greenfields projects btw, especially with an impending lithium shortage occurring at the time of AVZ's entry to market, if the forecasts are correct, should the road to 2000 GWh by 2030 become the reality (leading to supply shortages). Also having (CATL) backed Yibin on board probably reduces the risk of Offtakes with the Chinese, but obviously the central question in any Offtake is price.
Obviously, if the demand forecasts do not eventuate then this discussion becomes theoretical in any event.
My personal view is that given AVZ has no other income, it will need to
lock away some Offtakes to at least meet the interest payments on borrowings assuming, assuming we don't get equity for Offtake agreements and therefore need to rely on third party debt (but I think we will get the former, been equity for Offtakes, by the way). So would be expecting a good deal, especially if AVZ gets its act together, which it has been doing more so of late these days, and start talking to the Europeans since they seem to be incentivising itself to move into downstream processing of lithium chemicals and producing EV vehicles itself, because IMO Europe does not want to be totally dependent on your lithium hydroxide inputs in Europe sourced from China - risk diversifcation of supply an outcome of COVID 19 . And the time is ripe for AVZ to seek to secure the best funding deal by putting on place a contestable market between the various players, albeit Yibin is in the box seat given its needs and the fact it has provided some funding to AVZ of late, as we well know.
Suspect if we don't get a European customer early on, best course of action might be a staged approach to production, i.e. the DFS allows it by the way, where you lockup say 40% - 50% of the Stage 1 part of the project, i.e. here I make Stage 2 sulphate btw for avoidance of doubt from the DFS, in Offtakes prior to funding, and then use market based Offtakes after funding on the rest of Stage1 supply. You then seek to use as much internal funding as possible for Stage 2, and obviously that means DFS targets come in relating to recovery rates and opex cost of Stage 1 spodumene supply, as much as possible, after project start up to fund expansions. Obviously what I am suggesting is stage production to maximise shareholder value, if funding all the DFS upfront (i.e. spodumene and sulphate production) gives away too much of the farm, meaning with an impending supply shortage, and noting some supply needs to be contracted to get funding, take the opportunity to enter market but then once entered you use remaining capacity to benefit SHs by contracting that at more appropriate prices.
My view is the DFS provides options for staged development as well, given the initial DFS 4.5 mtpa produces 700,000 tpa of spodumene production (stage 1), with then 150,000 tpa used to produce 45,000 tpa of sulphate production (stage 2). Meaning once sulphate production starts you would be exporting 550,000 tpa of spodumene concentrate and 45,000 tpa of sulphate (stage 2 in totality), assuming no expansion scenarios (which obviously in a shortage scenario to 2000 GWh by 2030 is a ridiculous assumption by me, but trying to make a very very very long winded point here LOL).
Turning to interest rates, given they will be US$ based, and noting the low long term bond rate and/or LIBOR rate in the US (which underpins interest rates before you put in your debt risk premiums on that rate), I suspect looking at an interest rate (if entered to in now on a fixed basis of 8% - 10% max). Yes still significant risk premium for operating in the DRC, and just for others work out more recent WACCs for DRC based entities. A WACC includes a return on equity (i.e. here this becomes your equity for Offtake Agreement) and a return on debt (i.e. like bank lending), so here we are interested in the return on debt as that is the basis of the interest rate. A overall WACC is more you hurdle rate from recollection in a DFS context for operating in the DRC with a US$ based functional currency. The WACC itself is higher than operating in Oz, and just for clarification Australian players use 8% of late as discount rates in projects, whilst AVZ used 10% overall, and that 10% to reiterate encompasses an assumed return on equity component which obviously is higher than the return on debt component.
Sovereign risk is in the discount rate used in project assessment, and not interest rate btw, and many confuse the two - Post #:
34527760 and Post #:
34529458 Obviously perception of discount rates is also a function of how a company views its relationship with government at that time, and you would expect the current AVZ relationship to be ok given the govt already has a 30% stake, likely to go down to 25%, in the project itself so would want it to succeed as well.
Long winded post to say very little.
All IMO IMO
