Hi all,
As promised, some further analysis following comments made in last week's post - refer
49502305 and extract below.
[...and more importantly looking forward to the company providing a pre-Xmas update and / or one or two announcement/s re;1. Lithium OTs - IGO's US$1.4billion investment (25% stake) in Greenbushes values the project at US $5.6billion. Remember that Greenbushes is a 30-year old mine that has seen the best of its days and may only be good for another 8-10 years as it goes deeper into the earth's crust. Compare that to 'from surface Manono & King of All Hardrock' with its 50-100 year mine life, and yet Manono is still only valued at US$300m ????? !!!!! 
The penny will soon drop IMHO as the market begins to look for value in this space & finally wakes up (more about this in my next post).2. Tin OT (Tin price going through the roof and now more than double [correction: almost double]
the estimated 20-year LOM price as stated in the DFS, adding an additional US$700m [now ~US$740m]
to the project's bottom line over LOM).3. Pit floor drilling (due to be completed next week [this week]
& still on track as of early last week according to BTD),4. ESIA works / geotechnical survey holes and permitting5. Sulfate Testwork results (overdue - Canada get your act together please ).6. SEZ (ministerial reshuffle update and completion of SEZ ETA) ]Following the above, I wanted to elaborate on the valuations of select Lithium projects (all of which have enjoyed substantial re-rates in recent months) and the massive opportunity that I believe AVZ provides current and future investors by comparison. So lets dive in and I'll try to be succinct as possible with the help of tables and charts.
1. 2020 AVZ vs 2017 AVZ vs select Lithium development peers (LAC, LTR and PLL)In a recent post
49056680 , I noted the significant fundamental improvements to AVZ over the last 3 years. The slide below highlights the major milestones and 3 years ago the SP was 25c (Nov 2017 average) and there were 2,216,539,071 shares (fully diluted excluding performance rights) on issue valuing AVZ at $554m.
View attachment 2745352In the below table I've added an 'AVZ 2017' column to compare the 'then vs now', with the main differences being the no. of shares on issue and AVZ's share (%) of the Manono project. Interestingly, the negative/dilutionary effect of a higher no. of shares on issue (approx. 750m higher vs 2017) is almost completely negated /offset by the addition of a 15% increase in the Manono project (option to acquire from Dathomir).
For the purpose of the exercise, I've also assumed that AVZ had a JORC resource & DFS in 2017 so as to compare apples with apples on an NPV and EV/t valuation basis, though in reality the above slide shows that AVZ didn't yet have a 2mtpa PFS (let alone a DFS) nor had it begun it's extremely successful 30,000m drill campaign which then paved the way for a mammoth JORC resource of 400mt at 1.65%.
Nevertheless, and keeping the above facts in mind, a 25c SP in 2017 terms equals 24c in today's terms when comparing values such as project EV/Resource tonne and attributable premium/discount to project NPV. And yet, clearly the market hasn't
at all factored these comparisons into AVZ's current market valuation of A$270m (or 9.1c per share which represents a massive discount of over 60% vs AVZ in 2017) whether unknowingly, in its naivety or simply perhaps choosing to ignore or to not re-rate AVZ's SP accordingly until significant news arrives (a little more on that later).
The other points to make with regards to the below table is that even at 24c per share, AVZ would STILL be trading a 32% discount to attributable NPV and a whopping 61% discount to ASX hard rock development peers on an EV/t basis, or a 46% discount after a 15% country risk discount is applied. Furthermore, looking at the market caps of LAC (A$1.3B), LTR (A$630m) and PLL (A$480m), and its clear to see that AVZ can easily justify a re-rate to 20-24c (A$600 - $700m) on a peer vs peer basis.
View attachment 27463852. AVZ vs 9 other spodumene development projects & what's changed in 2.5 months?
note: ASX listed FFX not shown but included in both peer average calculations to provide a more representative global average.
a) Below is a comparison of spodumene rock development projects on an EV/t basis as at
30th Sept. 2020View attachment 2746246b) Now lets compare the above graph to the below update i.e. as of
15th Dec. 2020View attachment 2745859As you can see from the above, the Lithium development project peer average Enterprise Value per Resource tonne of Li20, has increased by ~$100 to $357 per tonne. By comparison, AVZ's EV/R t Li20 has only increased by $29 to a paltry $51 per tonne. In other words, the discount gap on a $ per tonne basis has widened significantly since Sept.30, and AVZ continues to trade at a massive 86% discount vs its development peers (not to mention an even greater discount vs current producers such as PLS).
Given the sheer size and scale of AVZ's project, trading at a discount to peers is hardly a surprise. However, it's the level of discount that IMO still truly astounds and is quite frankly bemusing (in a f**ked up kind of way). IMO the market has been too dismissive of AVZ, primarily due to its location but also the perception among market commentators that AVZ hasn't delivered on promises in the past - which in terms of the timing of its milestones (endless delays) I think is a fair assumption.
However, major milestones are slowly and quietly getting ticked off one by one, and I do think the next important milestones are lot closer than most commentators are prepared to consider or believe, particularly given Christmas is just around the corner. Therefore, IMO any meaty announcement will likely catch traders and potential investors off guard and should surprise to the upside, particularly if announced during the traditional 'thin volume' Xmas holiday period.
Due the lack of news flow in recent weeks, there has been some speculation that the AVZ team are already on holidays. However, according to my BTD, nothing could be further from the truth and his understanding is that they are working their backsides off in the hope of delivering a milestone or two before Xmas. Hmmm, I wonder if Santa will actually deliver 'the money' (via a sack or two) that the Easter Bunny of 2018 famously 'lost' before running for the exit with egg on face.
3. Will Santa deliver the outstanding and long awaited, and allow for a truly festive season for AVZ shareholders???View attachment 2746327
4. (Exhibit A) AVZ vs signifcant Lithium Projects - valuation analysis based on either current market or recent sale.View attachment 2747237Yes, AVZ should be trading a significant discount to the profitable producers. (just how many of those are there again?
). BUT BUT BUT, AVZ is officially trading at
less than 5% of the recent valuation applied to Greenbushes by AGO, even though Manono officially has 2.5 x the resources (unofficially 7.5 - 10 x the resources of an aging Greenbushes) and a conceptual mine life that is perhaps 50-90 years longer. "Your honor, with this slide I rest my case. Exhibit A clearly shows that Manono is hopelessly undervalued."
4. AVZ vs Global X LIT ETF update. The performance gap since Lithium Boom 2.0 (early 2018) continues to widen! Note: The red lines that are of equal length and help illustrate AVZ's previous record gap (July 2020 & new sector uptrend confirmed) and AVZ's under performance ever since. Note the short term SP target (22 - 24c) just to maintain (not bridge!!) the July 2020 gap.
View attachment 27466255. AVZ monthly candlestick chart - 2018 - 2022 Cup and Handle forecast. Not much has changed since last month's update (MACD, Stochs, TSI etc continue to rise from multi month oversold levels) and although AVZ recently set a new high of 11c this month without news, I didn't bother updating i.e. therefore December candle not shown below. Now just patiently waiting for some imminent news (sorry, couldn't resist
) which IMO will allow the SP to blow past 10-11c and perhaps for good.
Short term target of 24c - 25c maintained i.e. prior to the commencement of construction, and with the way the sector and AVZ's peers have been behaving of late, am growing in confidence that the 15c range will provide some but less resistance than would have been the case a month or two ago. However, and as per the usual caveat, the quality of news flow in the coming days or weeks will ultimately determine the level of re-rate.
View attachment 2746718 6. Tin Futures (weekly chart)Again, nothing has changed in terms of my short term target price since last month's update, so I haven't bothered updating the below chart. However, be aware that the breakout from the reverse H&S neckline (in green below) has been confirmed with a decisive US$1000 increase in just 3 weeks. If you're invested in the largest ASX listed Tin deposit (or thinking of doing so) and that news doesn't create just a little tingle of excitement, then indeed it might be time for a holiday.
It's important to remind oneself (IMO) that for every $500 that the Tin price rises, this adds ~US$37.5m in gross profit to the Manono project's bottom line. So in the last 3 weeks for example, US$75 million has been added to the DFS NPAT over LOM. Not bad for a by-product estimated to contribute only 5-10% of project revenues. External fundamentals continue fatten the potential cash cow that is Manono IMO (refer to the simple equation beginning with Tin chart below - assuming the penny still hasn't dropped
).
As illustrated, current technical short term target is ~US$23,300, which represents a US$13,300 p/t increase vs the DFS, or an additional ~US$1 billion to the bottom line over current LOM (not including the potential to double or trebling artisanal Tin production which is not considered in the maiden DFS).
View attachment 2746816
+View attachment 2746891= View attachment 27468657. Manono Price and cost sensitivities - a dozen cases / possibilities and their impact on NPAT & EPS over current Life Of Mine (20 years) - However, CASE 3 or 4 is what I'm leaning towards.From 2022/23 and as AVZ's value becomes a function of revenue & EPS, IMO it's looking more likely that
Case 3 or
4 Manono price estimates (as per the table below) are probably the most realistic over the 20 year LOM. Overall, my assumptions are still conservative IMO, as am using Maiden DFS cost inputs (set to significantly improve in 2021) and base case production estimates, and am also assuming that a Sulfate plant is built onsite but have not included any plans for a potential Hydroxide plant to be built in Africa, Europe or Middle East over the next few years.
Should
Case 3 price estimates prevail, for example, and if we assume that a further ~1.2 billion new shares are issued between now and first production to fund any equity component of the Project finance. Should financier/s want to invest directly in AVZ (as opposed to directly investing in the project / Dathcom - another option for the BOD to consider) and they want 20% of the finance to be equity (or ~A$180m at say 15c per AVZ share = 20% of US$545m), then Case 3 in the table below with VAT refund applied shows that an SP of ~
$2.50 (USD $1.88) is certainly possible using a conservative Chemical Manufacturing Industry P/E ratio of 35.
Note that Global X LIT ETF P/E is currently 60 and Lithium producer P/E average is over 80, but IMO these are both too high for the purposes of conservatively forecasting AVZ, albeit all IMO will be collectively driven by enormous sector growth this decade (refer post
48916751 ) - growth that should continue to surprise to the upside IMO, and therefore attract and command higher valuations versus other (lower growth) sectors.
View attachment 2747194View attachment 2747195GLTA and lets see if Santa 2020 can deliver for AVZ shareholders a truly festive season i.e. a season that sets a course to prosperity for all stakeholders, and provides many more festive seasons for those involved (including the many beneficiaries) over the next few decades at least.
Ho ho ho
Cheers
Elpha
