Thesi’s soapbox questions for Ken Brinsden, page-9

Thesi’s soapbox questions for Ken Brinsden - Managing Director of Pilbara Minerals It would be difficult to find someone that hasn’t heard of lithium and its importance in the drive towards a new energy future. Can you please provide a brief overview of where Pilbara Minerals fits into that future? The consensus view is that there will be significant growth in the lithium raw materials market, driven by the mass adoption of lithium-ion batteries for electronic mobility and in particular electrification of the transport industry. With the scale of growth expected, its not just existing operations that are required to expand to meet the market demand but also the development of new projects. Pilbara Minerals Pilgangoora project fits squarely in the latter category as a new, important source of lithium raw materials supply and particular for the Chinese market. Key characteristics of the Pilgangoora project that put Pilgangoora to the front of the development queue include; o A huge resource and reserve facilitate economies of scale and therefore a low-cost of operations, and scaleability of the project to grow and meet future market demand. o Its high-grade, particularly after consideration of the tantalum by-product credit. o Its Pilbara location adjacent to the port of Port Hedland is the premier location to develop a mine globally with access to efficient infrastructure and proximity to key downstream markets. o The pegmatites at Pilgangoora are clean, ensuring higher product recovery and overall a higher quality spodumene concentrate. Other than Greenbushes, Pilgangoora will be the only project to deliver SC6.0 Product + Technical Grade spodumene for the glass and ceramics market. The product will therefore attract premium pricing outcomes relative to a lot of our peers. All of those facets imply that the Pilgangoora project is ideally set to assist in meeting the objectives of a cleaner and greener economy, including the displacement of the internal combustion engine in the transport industry and support/co-commitment for the effectiveness of renewable sources of energy. Recently we have seen spot market pricing in China reaching upwards and exceeding USD$25,000 per tonne (AUD$32,000) However less than a handful of the major car companies have made any meaningful entry into the electric vehicles space but we are often hearing about the massive spike in demand. Where has the demand been coming from recently and what are the primary factors that will continue that momentum going forward? While a lot of what we hear about in the western world relates to stories about moves towards EV adoption (Tesla, VW, Audi etc.), the real story to emerge during the course of 2015/16 was the speed with which China was pushing for the electrification of their transport industry, in addition to the growth otherwise in mobile electrification. This in turn, was driving demand throughout the Chinese Lithium-ion supply chain. To my mind, you really only need look at the Chinese domestic lithium carbonate price for the evidence in that demand spike. There are those that try and excuse that price spike as just the ‘spot’ price for small volume traded at the margins of the industry. This is not correct. Real buying demand for large volumes, from large buyers of cathode making materials have driven the China domestic price. In turn, the import lithium carbonate price has also started to respond during 2016, again pointing to demand pressure arising from China. These are real phenomenon and not something easily explained away by those who might have ulterior motives. My view is that the Chinese central government will continue to support the battery industry, as it drives an agenda to mass EV adoption and support for the continued roll-out of renewables. I am often perplexed when I hear others try to talk down the potential demand for lithium, meanwhile there are many others that provide an entirely different view. For instance recently you might have seen the preview of Leonardo DiCaprio’s National Geographic documentary that will be released on the 21st of October titled ‘Before the Flood’ in which Elon Musk states “We will need 100 gigafactories globally to transition the whole world to sustainable energy.” Calculations I have made on the demand for lithium to convert the 82.9 million vehicles sold globally last year might require 5.2 million tonnes if each vehicle has a 60KWh battery. Right now we only produce around 3.5% of that figure with most of the current demand being used for other applications. Furthermore, to transition a more reasonable figure of 10% we would still require 520,000 tonnes per annum of lithium on top of the current production at 170,000 tonnes making for an annual need of around 690,000 tonnes allowing for the other applications to expand also. For example, Sundar Pichai CEO of Google recently pointed out at the launch of GooglePixel, mobile phones currently only reach 50% globally, and we all know Google knows, so to me it sounds like there could be an incredible increase in demand from that application I didn’t factor for. So when people say there is a lithium bubble, and that there will be an oversupply what comes to mind for you? When people point to a bubble in the lithium industry, it seems to me a gross simplification of a very complex market. Is the reference to listed markets? Lithium markets themselves? Or both? In any case, I want to call bullshit on the lithium bubble thesis for all the reasons you listed above and a couple more. Neither supply nor demand are ever going to be static, and any statement about either has to be time-bound. Further, supply and demand are a function of an incentive price to inspire new supply and a purchase price to secure supply. Clearly the market today is sending signals that it requires new supply, with the price now well disconnected from the historical norm. In fact the domestic price in China signals new supply is required urgently, and import price movements to China indicate a longer run of elevated pricing to incentivise new production. I believe the market has the hallmarks of an industry undergoing major structural changes in both supply and demand, with quite a way to run for all the reasons you outlined in your question. Think Chinese steel making capacity in the early 2000’s as an emerging growth industry, and I would say that is about where we are at with lithium markets…….. My final point on this subject…. Even if you are a bear and you are fearful of there being too much spodumene in the market (think recent Maquarie analysis amongst others), you cannot ignore the cost and quality of supply of incumbent players as a real supply side dynamic defining the industry. Pilgangoora has a place in any market for its very low cost of supply and high-quality product driving premium pricing outcomes relative to most of its peers. To overuse another iron ore analogy…... you don’t see FMG as a new player in the industry complaining to much about today’s iron ore price, even though they have gone through the ringer during the supply/demand crunch. Even better than that, Pilgangoora is a RIO/BHPB style asset, i.e. Genuinely tier 1 and likely the lowest cost for the hard rock lithium supply base. Where do you speculate pricing for spodumene and lithium in general might be in the next 3 to 5 years? As above, my view is that the industry is going through a period where the supply base is required to grow substantially, over a relatively short period of time, and with that comes general growth in the industry’s cost base. That’s because on average new tonnes in the market are more expensive than the current tonnes. To paint a picture, the cost of iron ore supply (as defined by the cost of supply + nominal returns) over the entire supply base grew from USD$20/t in the early 2000’s to something that is probably more like USD$50/t (or greater) today. With that as a backdrop, anybody who thinks that carbonate or spodumene pricing is going back to the historical norm has the market wrong. As a result I would suggest the days of $6k to $7k battery grade carbonate are long gone. Where the price ultimately lands will be a function of just how much the industry is required to grow both in the near and long-term. With my iron ore analogy above, who's to say that carbonate prices don’t settle at double the historical norm? The big news at the moment is what some are calling the David vs Goliath disagreement between Pilbara Minerals and Mineral Resources. On the surface it appears to be fairly simple, match our current offer or receive only the royalties associated with the Right of First Refusal. Can you please explain what discussions are taking place that are making such a simple thing appear more complex? Since we announced our offtake agreement with General Lithium we have been both confident in the strength of the deal for the future of the Company, and the strength of our legal position. That said, we have also maintained an open mind as to whether there were alternative paths (other than contractual or legal disputes) to seek resolution. That has driven our behaviour, however we have also had to respond to the various directions that Mineral Resources have taken the dispute. While it's frustrating for shareholders dealing with the apparent uncertainty, we remain confident that common sense will prevail and the outstanding project economics at Pilgangoora will see it become the premier new lithium development project and a key part of the supply solution to the Chinese market in the near term. Our recent win in the courts seems to indicate that we are heading in that direction. Hypothetically, if there was a company interested in acquiring Pilbara Minerals that would still allow the goals set with General Lithium to go ahead, would Pilbara consider such an offer as a way of removing the Right of First Refusal once and for all? Has there been any discussions surrounding that idea? Our strategic plans consider many combinations and permutations, however being taken over to circumvent the ROFR has not been one of them. Pilgangoora is an outstanding asset in an industry that is undergoing transformational change, and we are keen to be an active participant in it. The signals we hear from the customer base in China indicate the same. Of course if someone launched a credible bid, then Pilbara’s board would be compelled to consider it in light of our own Company objectives. Right now that’s not something we have to consider, but like you we don’t know what the future holds…… Congratulations on your recent announcement on the 6th October acquiring the Lynas Find Lithium Project from Dakota Minerals which borders the current Pilgangoora project. Strategically could this be the project that propels Pilbara Mineral forward and reduces any concerns surrounding the Mineral Resources disagreement delaying Pilbara Minerals? There are many reasons as to why we considered purchasing the Lynas Find project and they principally revolved around the high-grade nature of the resources at the northern end of Pilgangoora and the significant exploration potential on the ground as a result of the Dakota leases being on the main pegmatite trend. We believe a lot more tonnes will be found in the area. Otherwise, its about general consolidation of the core Pilgangoora leases outside of our existing project base. I have read that you are a mining engineer with more than 20 years' experience in surface and underground mining projects. What benefits does that experience bring to Pilbara Minerals? I have managed, developed and led teams to achieve strategic objectives over many years. A lot of that related to mine development. In more recent times I have done a lot of that in the Pilbara. Its for those reasons that I got involved in Pilbara and I hope given my experience and that of the people within my team that we can deliver on the promise that Pilgangoora provides. Most of all, I enjoy building things. Mines, teams, culture and at Pilbara we have a chance to be a participant in an industry that I believe is going to change the world. Lithium Ion battery technology is the tool for mobile electrification, as for the first time we have the power to weight ratio to truly drive all mobile applications. That's immense and will transform most facets of our everyday life. Its great to be a part of it….. Having seen you in person at the Benchmark Minerals world tour I was very impressed with the way you present and I realised that there might be more to this company than meets the eye, as we just covered you are currently in a disagreement with Mineral Resources. What motivates you in times of adversity? I’m just one person and the real power comes from the team. Pilbara has some great people on board already with more to come. They and the contribution I believe we can all make to the broader community as a result of the growth of our Company are what motivates me. One of my favourite quotes is “We create our tomorrows by what we dream today!” It is positive and keeps me thinking about the future. What is a favourite quote for you? A boss early in my career said, “Ken, anybody can do more with more, however it takes great people to do more with less”. Its stuck with me over my career and a thought I have shared many times with my peers……… We often hear investors talking about where they perceive the share price will go, and one thing I like to hone in on is the fundamentals of the business as I believe they are core to where the share price will go. With this in mind, why should any investor consider Pilbara Minerals as the place for their hard earned money to call home? The lithium investing universe has become increasingly more complex over the last 12 months as a result for the hype in the industry and the sheer number of firms getting involved. It’s one thing to have a lithium intercept/exploration result, however that is just step 1 of a multi-part process……. Where is it? Is it 100’s of kms from a port? Is the port efficient/accessible? What’s the grade? Even that’s not enough, as you need to know how the spodumene recovers? Is there deleterious elements in the product? What’s the overall recovery? Whats the product quality? A lower quality product may not receive the headline price, nor be saleable in all market conditions. Is it under 100mtrs of cover? What’s the initial pre-strip and overall strip ratio? Is there potential for many tonnes? Resource/reserve tonnes will drive economies of scale which will ultimately lower costs. Who’s on the team involved in the project and company? I would argue at times that the market has not been that discerning in assessing key lithium resource criteria, but inevitably at some point in time the market will become discerning and their will be a flight to quality. So, from here what defines where your hard-earned dollars should go by the key criteria I have outlined.