A great article Thanks justtrading.I have posted below.Was my...

A great article Thanks justtrading.
I have posted below.
Was my thoughts last week I was poo poo'ed when I suggested PLL was over cooked and we are in an EV bubble of sorts. No doubt will get the up-rampers trying to insult me again, but I think this article is well worth the read and I'm glad I took my money off the table over the last several days. Will watch and wait now to see if I feel safe to re entre this share down the track.

The technical parts

The technical analysis is looked at here by Gold Panda and here by Long Term Tips. A further piece here by Michael Gayed. I'm not going to repeat their numbers and insights. None of them seem to think it's all that exciting an investment - at very best. My point is at a higher - or less detailed - level. There's just not all that much here which is of great interest.

Spodumene mining

Yes, I am aware that spodumene is a viable source of lithium. But I also insist that it's the marginal source. Production from brines is almost always going to be cheaper than from spodumene. I think - please note, just think, wouldn't want to have to try and prove - that geothermal brines will also be cheaper in time than hard rock mining of this type.

We have some proof of this in two spodumene miners going bust recently, Altura and Nemaska. One of those was actually producing, it was the debt from the development costs which sank them.

This isn't directly and wholly relevant but the same mineral, in varied deposits, was also a source of tantalum - at Greenbushes when run by Sons of Gwalia for example. But when compared with coltan (more accurately, or in more detail, tantalo-columbite) it was the marginal source. In that it was more expensive to produce from this source than that coltan. So, when prices changed it was the spodumene miners who left the market, not the coltan.

This is what using an innately higher cost process means. That if - perhaps when - prices decline a mine becomes a money pit rather than a source of rivers of cash.

So, to be interested in spodumene miners means assuming that the lithium price is going to go high and stay there. This is something that, with the vast amount of exploration and extraction R&D going on I think is a high risk assumption to make. Certainly, we face less risk with brine extraction companies like SQM but still an interesting exposure to rising prices if they do indeed rise.

The specific spodumene mine

As Gold Panda points out the price assumption used by Piedmont concerning their mine project is fully 50% higher than current market prices.

Yes, I agree, it is generally known how to extract lithium from the lithium/tin complex they intend to mine. I'm not worried about technical risk here. Rather, to make the project even vaguely interesting as a mine then we have to accept that significant rise in price as an assumption.

As I've pointed out before such assumptions about price rises in minor metals like this are risky. Sure, yes, we can all see that demand is going to rise. But there's no actual shortage of lithium in the lithosphere. No real shortage of workable deposits either, there's not even a shortage of projects being planned and in the process of coming to market. It's entirely possible that we'll have the curse of the minor metals markets in fact. That the projections of future demand rises call forth more supply than those projections justify. At which point, obviously, prices fall.

This is only a chance, a risk, you understand. It's one that makes me think better of the lower production cost brine producers as above. But most importantly here it means that I'm unhappy with a justification for a project that assumes higher than today's prices for the project to make sense.

The lithium processing plant

There's another part to the Piedmont story. Which is that they're going to build a lithium processing plant. That is, something that will convert the concentrate extracted from spodumene into the material ready for batteries. This is justified - the company says it's a good idea that is - regardless of the building of the mine or not. Extracting lithium from spodumene concentrate is a worthwhile business to be in.

I take that to be a hard sell - it's difficult to sell that idea to me that is. Most of this work is currently done in China. Which is a distinctly lower cost operating environment than North Carolina. Not just in wages but in all sorts of ways, including environmental protection and so on. Perhaps more to the point the costs of building - perhaps permitting - a plant are vastly higher, as is the time to completion of such a plant.

There's no great trick to this process, Piedmont are not claiming a new process or method. Putting a processing plant in a high cost jurisdiction just doesn't look all that attractive a manner of competing with plants in low cost ones.

Sure, we could talk about transport costs but the likely source - unless more mines open up in NC - is the same Australia that largely supplies the Chinese processors. There's no grand advantage on that side either. Closeness to consumers really doesn't matter with something like lithium where transport is an insignificant part of the costs. $100 a ton on something that's valued at $8,000 is interesting but it's hardly make or break.

I don't see the value add here of the processing plant that is. Yes, I grasp that if they have their own mine and also their own processing plant then they are free of the costs of getting concentrate processed by others. But that does require both that the mine itself is viable and also that processing in a high cost place is viable itself. I'm not sure either is justified so the combination doesn't seem to add much value.

The Tesla connection

There is much magic pixie dust to be had from a connection, however peripheral, with Tesla these days. Not so peripheral that I have benefitted but still, it's noticeable. However, actual value being added is different from people assuming that a connection adds value.

So, Piedmont has an offtake contract with Tesla. OK, very cool and all that, but how much value does that actually add? It's at a fixed - but unknown - price. So, how much value does that have?

Not a lot is my answer. Think it through. So, when are you interested in having someone who will take your product at a fixed price? When the market price is either lower or risks being lower than the price in that fixed contract. If prices - general market prices - are above that fixed price offtake agreement then you're losing out. Losing out in cash terms, even as you gain in security ones.

So, what's the value of an agreement to take 30% or so of your output at a fixed price? Sure, it gives comfort to your financiers. But think of what it tells us about the future market.

If the market price is below your offtake contract one, then that means two thirds of production is to be sold at lower than assumed prices. And if the market price is above it, then the offtake agreement provides no value - you could have sold all your production at the higher, market, price.

Yes, it's still true that a fixed price, must take, contract provides comfort to financiers. But it doesn't provide as much value as people seem to be ascribing to Piedmont's link with Tesla. A goodly part - I would say near all in fact - of the value being ascribed is just some of that magic pixie dust rubbing off.

My view

I do get the idea that the EV revolution is happening, that Tesla is at the forefront of it and that lithium demand is going to go up.

I don't think that this all extends to Piedmont being a useful risk to take. The mine seems to depend upon a lithium price 50% higher than current market prices. A processing plant in a high cost area doesn't seem all that good an idea. And the Tesla link appears, to me at least, to add little to no value.

The investor view

If you take the view that the lithium price is going to rise significantly, then of course any lithium miner looks like a good bet. Absent that view, I would suggest that Piedmont is overvalued for what it is.