Thank you for the response Zoulou, I agree with your points. I...

Thank you for the response Zoulou, I agree with your points.

I have been wondering about what joint ventures can end up looking like, in specific examples. I have decided to investigate into just one company I know who mines around the places I lived. Some of the arguments and information in this post will be familiar/old hat to the frequent readers of the forum, but it should also have novel information. If you do not want to read about another JV, please skip this post.

I. An existing JV

Rio Tinto:
Rio Tinto Group mines all over the world. The Aussies know this better than me. Rio Tinto (RT) entirely owns many mines, but it also participates in a number of joint ventures, which can be found here. From what I can see, Rio Tinto has JV ownership profiles from 10% of a mine to 80% of a mine. These are independent from the many mines RT owns outright, which is another substantial list.

Other commenters have mentioned what is seen in RT's JV list: a holding company is created and stock ownership is split between the invested parties. The revenues of the holding companies are forwarded to the primary companies, who then report their financial data.

I really wish I knew more about all of their joint ventures. The research into these things would take a very long time. However, I have chosen one to investigate, as it is near to where I live: Resolution Copper (Arizona).

Rio Tinto has 55% ownership of the Resolution copper mine. The mine was previously owned entirely by BHP (formerly known as Broken Hill Proprietary Company, more aussies my goodness).

"In April 2001, Kennecott Exploration signed an earn-in agreement with BHP Copper Inc. and initiated a five-year drilling program to further identify the size, grade and boundaries of the porphyry deposit while also initiating baseline environmental studies. During this time, Kennecott Exploration transferred all its assets and interests in the project to Resolution Copper Company, a wholly-owned Rio Tinto subsidiary. By May 2004, Resolution Copper Company had met all the terms established in the earn-in agreement and became the managing member of the Resolution Copper Project." source

In the 17 years since the Resolution copper project started, " The project partners have spent over $2 billion (Rio Tinto share $1.1 billion) to date to develop and permit the Resolution Copper project" -RioTinto, 2021

It would seem that Rio Tinto's vision to initially investigate the deposit netted them a buy-in of 55%. Since then, the two companies have shared the cost according to their percentage ownership.

Comparing Resolution to Vittangi is very much an apples to oranges comparison, but at least we are still talking about fruit. A few conclusions I make from this:

1. Taking the initial risk to explore a deposit earns a considerable slice of a JV. I presume (but do not know) that all of the initial exploration was planned and paid for by Rio Tinto.
2. BHP owned the mining claim, which again was a favorable factor in a JV.
3. Both BHP and Rio Tinto have significantly contributed to the capital expenditure of this mine. If BHP had not contributed to capex at all, surely they would not have gotten an agreement with RT at 55% 45%, it would have been much less. It is entirely unclear to what extent Talga will contribute to the capital expenditure of the Vittangi mine. One would assume Talga will somewhat, and if that is so, it must be done by dilution.

II. Talga JV

Now, entering into speculation land, what might we expect will be the result of the JV? I suspect others will have their own opinions, but I will my own guess here.

I suspect that MT wants to be the largest shareholder at the end of the day, no matter what. If that is the case, and he has 14.7 million shares (4.7%) currently (with another maximum 10 million shares in options available to ALL employees, let me for a moment assume all of them go to MT (3.2%): the maximum share in stock MT could possibly have is 7.9% or ~25 million shares. If Mitsui and LKAB both were to purchase say, 25 million shares, the total dilution would be on the order of 16%, surprisingly close to Gero's prior estimates of 15%. At market price, this would have talga contributing 50 million USD to the up-front capex and provide LKAB/Mitsui with significant future revenues.

Talga owns the claim and has explored the claim. Talga can only somewhat contribute to capex. I would guess that Talga will own at least 50.001% of the Vittangi deposit based on its exploratory work, ownership, and its capex contribution, but how far beyond 50% is to me an open question. LKAB can argue that it has the expertise and the nearby equipment, and should own more. Mitsui could get a bigger slice if they threw down more capital. As to the price of the graphite that talga will pay to the subsidiary Vittangi mine, I have no idea. I would imagine operation costs + 10-20% for full production, a number tied to inflation. I just hope it is not tied to the market price of graphite.

I suspect the holdup in the JV is the % ownership of the Vittangi subsidiary. Perhaps MT is trying to help Talga by doing more exploration: “TalgaSupersizes Graphite Target in Sweden”. Now the crux of the issue emerges: What is the cost-benefit ratio for current shareholders to increase the share price of Talga stock? Basically we are all balancing the risk, “What will happen when the inevitable dilution occurs?”

-People assume that it is better to buy AFTER a dilution event, because the share price is cheaper and therefore an investor gets more shares. However, counter to this point, the project would be de-risked AND the higher the share price is, the more ownership Talga will have of the mine, which means $$. How much does the ownership % matter? Maybe not so much. My opinion is that the balance between dilution and de-risking is a wash, and thus, shareholders would be better served by a higher price before rather than after a JV announcement. Certainly this is true of existing shareholders. Unclear about prospective ones.

-If the share price doubled, Talga would effectively contribute 100M instead of 50M of capex to the mine. Instead of barely scraggling past 50% of vittangi mine ownership, maybe it is 60%.

Other posters have alluded to this fact: it is in Mitsui and LKAB’s best interest to keep the share price low. It does not surprise me in the least that now, in this critical stage where share price might matter most in the setup of the company, there is significant selling pressure on the stock. There is uncertainty, long term holders are bidden to worry about permits, people see other EV and even graphite stocks shooting up, but not this one. FOMO is taking hold, people seek to secure their profits or cut their losses. It is kind of strange, seeing groupthink work. Dilution is a fear we have all seen in other stocks. Nouveau Monde Graphite (NMG) is a ringing example of the power of dilution. For those who do haven’t watched closely, the price per share of NMG has dropped from $15USD a share to about $6.50, after a 20% dilution. Crazy. There are many differences between NMG and Talga however: NMG doesn’t have major JV partners to lean on, NMG will make far less anode for far worse margins, and NMG no longer had permit risk holding down its share price. Prior to NMG’s dilution its market cap was higher than Talga’s. I am sure others could go on.

Conclusion:

I think MT perhaps is hoping to increase the share price by the release of favorable information: “LifeCycle Assessment Talga’s World-Leading Green Battery Anode”; “TalgaAttains ISO 9001 Quality Accreditation”. MT has been circuiting all kinds of presentations, and has been confident and knowledgeable. It is certainly in HIS best interest to make the share price higher. On the other side, shareholders and potential investors are being bombarded with fear in the hopes of keeping prices low, so that Talga gets less of the mine.

It is up to investors: what matters more, de-risking or dilution? Institutions will have their say. Does an institution fear more of how a junior miner will possibly fund an enterprise, or does it fear known/forecast amounts of dilution? As Zoulou mentions, Talga at times seems criminally undervalued. We retail investors make our bets. For myself, I am just going to dollar-cost average a portion of my investment portfolio. I will buy when I can, It is what it is. We shall see how it goes.

TLDR I think the JV will turn out better than any pessimist's worst fears. I think MT will get the mine without ‘giving away the company’. I think Talga will keep 50% of the mine ownership at least, and existing shareholders will retain ~90% of the valuations that Gero has outlined in his valuation thread. That is enough for me!

I encourage others to explore a JV if they are so inclined, and see how ownership/costs/profits are shared.

Finally I would like to thank the posters of this thread for motivating me to actively learn more about my investments. I have enjoyed what people have shared, and this is my attempt to give back.