Valuation Discussion

Been spending a good deal of time gathering my thoughts on how I would begin to look at a valuation for PAM - at this point in time - given what I know from other investments and this very "distinct" investment that is PAM (choosing my words carefully). Got to stress though, this is JIMO. Your's might be different. If I'm saying something factually wrong please shout out. If your opinion or interpretation is different, that's fine too, but it's JYO.

PAM, for me, was a buy to further "diversify" my electrification portfolio. Sure its a "lithium stock" and in that regard it fails as I have plenty of those (ASX, TSX, NYSE and NASDAQ), but PAM is different in that:
1. It is Lepidolite as the lithium source ... all my others are Spodumene, Brine or DLE
2. The asset is in Asia ... all my other "pure plays" are either in Australia, North America, South America or Europe
3. The company strategy is "Concentrate-to-CAM" whereas all the others either sell concentrate, carbonate or hydroxide.
4. Highly exposed to "China-Tech" by design
5. SE Asia Low Opex (and probably) Capex environment compared to Australia/NA/Europe

There are other points of difference but those are my key ones. And I think the convolution of them is why PAM is probably "mispriced" on the ASX ... which understands mining spodumene and selling concentrate via OTAs to Chinese Hydroxide refiners. On top of that, I think Lepidolite gets a value discount (and perhaps rightly so) given some of the history on ASX. And also the "anti-China" geopolitical concerns that sound loudly - and I would typically not give an investment in China a second look ... or an investment in Chinese tech ... or a company dependent on Chinese capital. That said, sometimes it cannot be avoided (e.g. hold LLL and its partner is Ganfeng, hold LAC (NYSE) and its partner is also Ganfeng, ALB (NYSE) joint refining assets in China)

But if you're going to mine and concentrate Lepidolite and then convert it into Lithium Carbonate, to be successful you more than likely need a partnership with a Chinese company that has that know-how. And if you are going to refine Lithium Carbonate into CAM LFP powder then once again the Chinese are the go to guys (e.g. CATL) ... or close to it (e.g. Aleees in Taiwan).

So one could do a form of DCF and NPV now and make a whole heap of assumptions, but a more conceptual valution might be along the lines of "potential asset value". The diagram below is how I see PAM "re-structuring itself". At the moment, PAM's only asset is the light blue left hand box "Resource Exploration and Development RED))". And to be blunt - it aint worth much and not that attractive (small by global standards). Many may object to that - don't bother is my reply in advance. This is company is not about "RED" - that's simply a means to an end. IMO. (btw anyone pick up on the RED and China pun).

My play here is to invest to take advantage of SE Asia strengths (large target market, low cost environment and scarcity of resource in area Ex-China). I see PAM growing its "value" to its equity shareholders (that's us and PL) by making money ... and specifically by using OPM (Other People's Money) and that means very selective partnerships. In the diagram you seee SPV1, SPV2 and SPV3. These are "Special Purpose Vehicles (SPV)". They are "off balance sheet" ... i.e. off of PAM's balance sheet as in there is "no recourse" to PAMs other assets in case things go pear shaped. They appear on the PAM balance sheet as "Equity Investments in Unconsolidated Investments". The picture below is built UPON THE PREMISE of PAM delivering a RED that is capable of supplying lepidolite ore than can be concentrated to feed a Lithium Carbonate plant that can produce 10KTpy for 10 years. That is the basic scaling unit year. From that we grow everything else (in Thailand).

From everything PAM is saying, it is very very close to having RED to be parlayed into the real red boxes of mining/sorting and the concentrating lepidolite ore to be converted into Lithium Carbonate. The red text is the KISS for the deal. PL is believes Chinese lepidolite producers can build a 10KTpa Li2CO3 plant for US$70M (thats in China) and has validated that with Yongxing. Big believer in "Trust but Verify" (anyone remember Ronald Regan). This is not being built in China, but if a Chinese company - say its Yongxing just to out a name to the SPV - I'm fine but I would want to see some contingency here so I've got the partner paying US$100M cash into SPV1 for a 50% equity ownership (with PAM retaining the other 50%). Ore in the ground isn't worth much. The question, as a PAM equity investor, I ask myself would be "is parlaying 100% of lepidolite ore to be converted into 10Ktpy Li2CO3 for 10years and receiving as payment 5Ktpa of Li2CO3 for 10 years". The KISS bit is analysts are Euroz made the "value call" that every 10MT of SPODUMENE RESOURCE with a clear path to production is worth AUD$150M - AUD$300M in "speculative development value". Converting to US$ thats US$100M - $200M. There could be a "lepidolite discount" but the saleable end product is not a concentrate but Li2CO3. So I'll take US$100M as the PAM "value contribution" to the SPV, and hence PAM and Yongxing are equal (Ore from PAM and $ from Yongxing) in their respective contributions.

Anyone still reading???

Continuing on.

Of course remember that PAM's RKLP is bigger than just enough ore to feed a 10Ktpy Li2CO3 refinery. That growth we can address later (when PAM) gets cash flow.

The output from SPV1 is 5Ktpy LiCO3 to PAM and 5Ktpy to Yongxing and they exit the picture at this stage. This refinery might be a little bigger and if thats the case the surplus Li2CO3 could be sold by the JV (or simply taken by each equity owner and sold ).

We now focus on the 20Ktpy CAM plant, which requires 5Ktpy of Li2CO3 as input (amongst other things like PPA and met-grade Iron). Now 5Kt of Li2CO3 is worth ~US$200M at spot pricing at this time. The quandry is what is the average price over say a 5 year period starting in a couple of years. For simplicity of math among many other reasons US$25K/t is used. The KISS here is that is worth $125M per year. I'm suggesting that PAM could enter into an OTA to sell to knowledgable LFP Battery maker (I picked Gotion - which is Chinese - somewhat randomly). The non-negotiable part of the KISS is the prepayment requirement of US$125M annually. Why?? Because we use that US$125M as our 50% equity contribution to building a 20Ktpa CAM plant (on the basis that in the USA a 30Ktpa LFP CAM costs ~US$450M ... ergo every 10Ktpa CAM costs US$150M) and to pay our share of future Opex. At the end of this process, PAM is going to receive 10Ktpy of LFP CAM powder to sell to anyone (and Gotion gets 10Ktpy of LFP CAM powder too).



So what does that "big picture" translate to?

If by "magic" this all happened today then we would have "Equity Investments in Unconsolidated Investments" equalling ~US$225M (i.e. our 50% share of SPV1 plus SPV2). Nothing much else. A little bit of cash and carrying value of RED assets. Last FY has Total Assets ~US$11M and Total Liabilities ~US$1M ... so Total Equity (that's us) worth ~US$10M and with 155M Shares on Issue (SoI) a book value of US$0.065 or say AUD$0.10. Can't argue that ... just math.

But now, with those partner transactions, Total Assets goes to US$235M. NoDebt. Total Equity becomes US$235M and with SoI now ~160M, on a per share basis its US$1.40 or AUD$2.10. Hmm what just happened?

Sure I've left a lot of things out. Haven't attempted to show costs and revenue and EBITDA or any of that (and our costs are low, really low. Our only "cost" is digging out the ore. The rest of the "costs" are in the SPVs. So maybe PAM contributes enough ore to produce 11Kt of Li2CO3 and the SPV sells 1Kt to cover Opex (1Kt at $40K/t is $40M for PAM share and Yongxing pays $40M cash for their share... or about avg $6,500/t for Opex). Likewise for SPV2. We have 5Kt of Li2CO3 and an OTA ((which pays our Opex with plenty left over). We end up with (effectively net of all costs) 10Ktpa of CAM LFP powder to sell at US$25K/t.

Think about ... its possible that PAM ends up clearing US$250M per year just passing through the Ore it has dug up. If it can manage to pull that off, anyone with a calculator can come up with a rough NPV for 10 years generating $250M/y and discounting (say at 12%) that back to todays terms .... I make it roughly US$800M ... US$5/share ... AUD$7.50

Lots and lots of things have to go right to pull this off. It all starts with getting the resource right and convincing a partner that can make big money too simply by fronting the cash to build the initial concentrator and conversion facility.

Just remember ... IMO ... could be fantasyland ... but it is why I think this is a worthwhile speculative investment that may well be completely mispriced.