As I understand it, negotiations with LKAB/Mitsui are not about...

As I understand it, negotiations with LKAB/Mitsui are not about taking an equity stake in Talga but their involvement in the anode project.

The original LOI covered stage 1 the Vittangi 19k project, the extension provided an opportunity to finalise a deal for stage 1 AND extend LKAB and Mitsui's involvement into the stage 2 100k project.

All speculation of course but from a management perspective and to minimise loose ends, it would make sense for the agreed project to be run by a separate company and given Talga owns all the elements (mine, refinery, anode plant...) a wholly owned Talga subsidiary would make sense, the point being some equity in that subsidiary could be up for grabs by the partners for stage 1, maybe also stage 2 in return for their involvement.

To state the obvious Talga will want to give up as little equity as possible while they will want the lion's share to make it all happen fast.

As a guess Mark would want to limit their involvement to stage 1 or at worst stages 1 & 2 since after that with USD600m in free cash flow annually he can finance all future expansion from there in-house.

One thing they will all want is crystal clear agreement on is what the roles will be, it won't be good enough to leave it at LKAB to do the mining, Talga the refining and Mitsui the sales and MS the funding package. There will probably be a framework agreement that says who will do what so there's no overlap, how the parts go together and so on and the hardest part of all the fine grain detail.

While there's been a lot of talk around Mitsui helping out with finance they function basically as commission agents, signing up customers and placing orders in return for a percentage of the sale...how much...don't know but given the size of the deals maybe 5%. Unless Mitsui has access to huge amounts of borrowings at close to zero interest why would he want them on board at all, he has customers knocking on the door now so why hire a middleman, a good reason would be to put up the finance to fund stage 1 at minimum cost see below..

The relationship with LKAB is a lot trickier. In a sense they hold the keys to the kingdom because without their involvement getting the Stage 2 operation up and running would be way more difficult. LKAB is an experienced Swedish underground miner operating in almost identical conditions to what will be needed when underground operations start at Vittangi and Nunasvaara. An open pit is one thing, a deep underground mining operation when you are reverse mining is quite another. So, LKAB's involvement is probably not mission critical for stage 1 but it undoubtedly is for stage 2.

Sure, Talga could theoretically go it alone and hire an experienced underground mining manager and contract team for stages 1 & 2 but that would mean further deals and would also add a big unknown risk factor, importantly with no Plan B, so if all that is true he can't push ahead without LKAB's involvement, the question is on what terms.

So, what to do, the answer probably is to sign off on LKAB as the mining contractor for both stages 1 & 2 and to sacrifice some equity maybe 20% to make it happen.

Another option is to gift the iron ore and copper cobalt deposits to LKAB in return for ZERO equity in the project so they would simply work on a contract basis to deliver ore to the refinery but on a fat margin meaning if they can get iron ore to the surface at their mine for say $20 a tonne we offer them $50 or $100 a tonne in the early stage when quantities are low on the understanding that figure can be wound back as we move to 100k tonnes and beyond annually.

I'm not expecting a signed agreement between Talga and LKAB/Mitsui on 30 November but I am expecting an announcement saying they have reached in-principle agreement on the key terms and expect the agreement to be finalised in the coming weeks meaning sometime in December.

If a deal is done with LKAB for stages 1 & 2 it would make sense for the funding package(s) to cover the CAPEX for that development to be well advanced by November as well. On top of that it would make sense for the company to lodge the application for stage 2 immediately approval ids given for stage 1.

Funding wise MS's job will be to put options on the table for the board to consider and could include separate funding packages for stages 1 & 2. The company will be in very different shape as an anode manufacturer in a few years time compared to now when it is still going through qualification processes.

My take is that Mitsui is more likely to be involved in stage 1 financing supplemented by borrowings against off-take agreements and might be happy with a 5% equity stake in the anode project to deliver that while MS is more likely to put together the stage 2 options including a one billion dollar NASDAQ listing once Talga commences production, enough to fully fund stage 2 without the need for any further borrowings.

As for the share price I'm not expecting us to skyrocket to $10 by Christmas but somewhere between $2 and $3 if the drilling results come up trumps and the JV gets the nod. If mining approval comes through in March then another re-rate is on the cards, maybe $5. My take is that we need an off-take agreement to get us to $10 and if that happens I'd expect to hear an update about a NASDAQ listing. Then its off to the races.


As I say, all speculation, we will know soon enough.