The latest Investing Matters Podcast with Jean Roche, Co-Manager of Schroder UK Mid Cap Investment Trust has just been released. Listen here.
So I have been continuing my research into other LIthium miners to see how ALL compares. I thought i would share a few thoughts on a couple...
EMH - good resource, partner in place, fully funded to FID. Then $600m capex required. Recently seems to be making very little progress - perhaps hung up on bureaucracy. $1.9bn NPV8 post tax. IRR though is only 36%. I own a few.
PREM - Premier African Zulu project. £80m MC. pilot plant being developed with Q1 2023 targeted. Fully funded through offtake agreement with Suzhou. But I cannot find a decent IRR or NPV figure at all. It looks very compelling but have not taken the plunge.
SAV: $240m NPV8 using only $685/t which should probably double to be more realistic, valued at £45m MC. But in Portugal. Still need final permits and FID. Not targeting production until 2026. So too far off for me. One to keep an eye on.
Cleantech Lithium: brine Li opportunities in Chile. Interesting. Aiming for Pilot plant in 2023. Good partner.
I have not included Core and others listed on ASX or elsewhere. But I am aware the valuations are an order of magnitude greater than ALL, partly because they are further ahead and closer to actual income but also probably recognising that the Li market has had a step change in pricing.
Which leads me back to ALL. I came to the conclusion that nothing quite compares to the quality of the Ewoyaa deposit. IRR of 133% at $900 /t implies IRR of several times that if they can start production next year as planned. Although it sounds to me like it is going to take longer than the original timeline. Even late 2023 would make a compelling investment case as they will recoup the capex in a matter of months with current prices. So what could go wrong? It feels almost too good to be true. I hold a load but am getting nervous that I could have missed something. The PFS is of course key, hopefully not long to go now. Followed quickly, I hope, by the DFS and final permits and licenses to mine. But will we really be in production this time next year? That feels too fast to me. What am I missing?
Ramble over...
JL
Just read this article, thanks for sharing. It kind of misses the point though doesn't it. If NE comes in then we can immediately jump on appraisal and fast track a development. All of that will presumably be tax deductible, massively lowering the breakeven point for the eventual production. They would still have three years to develop it, very fast but not unachievable.
If NE does not come in then I think we will see a massive change of direction from the board. They will either invest overseas or return cash to shareholders, or both. Unless of course they can find another BKR, but those are looking less likely in the current pricing environment. Who would sell up any producing assets when they are throwing off cash currently?
So where else could they invest? Norway? Good synergy but the tax rate on production is even worse than the UK so could be tricky to make a decent return. But their skills in extending mature fields offshore could be valuable. Where else? Gulf of Mexico?
JL
I didn't manage to attend the presentation but will catch it later assuming it will be on their web site at some point. Thanks for the notes. Those all sound pretty positive.
Overall, nothing surprising in the results today. Pretty much what they flagged in the trading statement plus further detail on margins. Dividend 'only' up 8% so that is pretty cautious. I had pencilled in a sharper rise but otherwise these figures were in line with my expectations.
The only negative for me was the lack of further contract wins. I wonder if they have missed out on a few because I would have thought they would have tendered for quite a few in H1. As per my last message, another large services contract would set this alight. It would also prove Sukari is not a one hit wonder and they can actively target contracts of that nature.
MSALabs all positive. Very impressive growth rate - $30m this year! I had that in for 2023. That business alone has to be worth upward of $150m - 25% margin implies $7.5m EBITDA which should surely be valued at 20 times for that sort of growth rate. Roll forward just three years and we have $20m EBITDA and probably a more mature rating of 10 would be $200m value.
All in the context of an EV of $260m! How is not above 120p by now? Warren Buffets 'the market can stay cheaper than you can stay solvent' springs to mind. At least we get a 3% dividend in the meantime, not to be sniffed at.
JL
I don't agree with this personally. I think the plan is, and has always been, to see what happens with North Eigg. If that comes in, then they will have the cash to immediately move to appraisal and development. A very nice place to be. If it doesn't come in, then they will at least get the tax rebate of 90 odd % of the spend. Only then will the board think about M&A. And even then, I would be surprised if they manage to land one in this environment. I am happy to give them that time.
The KIST bid was very opportunistic IMO, use our cash to scale up. Without this cash, they would not be able to raise enough to buy SQZ so a hostile bid was unlikely to succeed.
Now, if Eigg fails, they could wait a few months and then make a serious go for KIST using their financial firepower. Or find something else they prefer. Or return the cash to shareholders. I give them 1 year to decide otherwise I will join the use it or leave crowd.
JL
I agree. A better result than Q1. QoQ growth of 6.4% is really strong. YoY growth is less important because that relates to the Sukari ramp up last year. MSALabs must be providing much of the growth. $3m to $80m revenue in only five years! That is growth. And it is being completely ignored by the market as we are sooooo cheap. We have a nice yield to enjoy while we wait for the rerating.
So all good. Strong buy at anywhere near this level. I would be surprised if we don't hit 120 -130 this year.
JL
Really positive update on MSALabs today. The $50m revenue target has been superceded by an $80m target a year later. I'll take that. With that sort of growth, I wonder if they are thinking of a separate listing to ensure it gets valued properly. In the meantime, this just highlights the value here.
JL
I agree. Two good contract wins here. This should secure our revenue stream for the coming couple of years. Still very hard to work out what their growth trajectory will be though. The B2Gold win is the more significant of the two IMO as it is new business. If that performs well then they are in prime position to expand that contract further. Not long to the H1 results - that will be key. I would like to see some growth on Q1 otherwise they are effectively treading water currently. I am particularly intrigued by what they say about MSALabs. That is the hidden gem in my view.
JL
I don't feel the same I'm afraid. I think this is a fairly straightforward update, as you were basically. Q1 is in line with Q4 (0.6% growth) so was spot on my forecast of 67. They are still investing in more rigs so that should fuel growth in Q2 and beyond. Contract wins were also fairly run of the mill.
Lots still to come, but it does need another large contract to beat the forecasts. I hope they land another one this year to really move the dial. If they don't then they will move to ex-growth this year, which would be very disappointing.
In summary, Q1 ok, still all to play for over the rest of the year.
JL
it is very quiet on this board. Clearly they are still under the radar. I wonder what is needed to move them more into the limelight. New drilling contract awards? Another Sukari contract? More details on Labs roll out? Anyway, quiet Q1 on the news front but I assume they would only announce material wins - not just run of the mill drilling contracts.
Looking forward to more news.
Thanks for the updates Rivaldo - you are very much on the pulse here and they are very much appreciated.
JL
Interesting development. Not overly surprising given the difference in valuation compared to their peers. Although the board need to stay strong and not just accept any bid. They are well set to defend any lowball offers - and Piedmont will surely not be a silent partner and let them go without a fight. Nice place to be. :)
JL
I'm with Seahawk on this one. They set out with really high expectations for this winter season, they met some of them but not all. Which is disappointing. At Talitha they should have had ample time for testing because the drilling was already done. The fact they had to move the test equipment to TW rather than double up is clearly an error. They left funding to the last minute, which likely delayed them being able to firm up a second test rig, so they couldn't secure one in the end. TW is a good result but again they ran out of time so partially tested one zone and haven't tested the upper one. Now they are P&A the well, if they want more data then they have to drill another one next winter. - cost will be the same as this one for a vertical but more likely to test a horizontal and place it on test production for a short time before suspending as a producer. But will they need a gravel pad for that, or will another ice road work for one more year?
On the positive side, there is still all to play for. There were no zones that didn't flow as hoped so all are still potentially in play. But they are still a long way from proving commerciality of any of the zones as of today.
The way I look at it, if we had a 20% chance of TW being a huge commercial find before the season started, this has probably risen to maybe 30% (feel free to suggest alternative COS figures). The oil is there, it moves, and it is light. But at 50-60 bopd from a vertical, they will need long horizontals to get a decent flow rate. We don't know what that could be yet. 30 fracs won't equate to 30 times the 50 bopd. And how much would 10 of those cost in a development scenario, let alone 30-50 or more? I have no idea myself but my guess would be $40m-$50m per well . If they get 1200 bopd initial production, what would the payback time be? Lots of questions they will have to answer next year. This is also critical to the value that another company would farm in for. If there was indeed $1bn on the table in December, I actually don't think that figure will have grown much further yet. Perhaps by 20% tops in my uninformed view.
Having said all that, the upcoming Alkaid well is key in my opinion. If they can get that into production and prove that it is sustainable for the longer term, then they will be able to book their first reserves. That is a key milestone for a revaluation. If that produces as hoped, then the farminee will have to sit up and pay attention. And cough up if they still want in. Roll on the summer drilling, and they can also test the SMD while they are there which would be another objective ticked off.
I am planning to hold through the summer drilling season. After that we will know so much more.
JL
Results look fine. I was struck with one element... The Piedmont deal requires:
"the minimum "DFS criteria" is to deliver a 1.5 million tonnes per annum ("mtpa") to 2mtpa run-of-mine
("ROM") operation for an 8-year to 10-year life of mine ("LOM") respectively; "
But, if I understand this correctly, the scoping study was for a mine of 300,000mt p.a. for 11.4 years. So they need a huge further increase in resource to meet this criteria for Piedmont farm in to proceed as planned. Is this a correct interpretation?
If so, my take on this: it is clearly a risk, if they don't find enough high quality resource to meet this criteria then it all falls apart. But if we look at it with glass half full, Piedmont would not have entered into a deal if they felt that this was not possible. And their earlier comments of the resource increasing in size 'several times' to 60 or 70 mt becomes more important. As drilling proceeds then the resource should hopefully increase even further. We are at 30Mt now but it sounds like it still needs to double for the DFS criteria to be met.
Does anyone else read this the same?
JL
@haggisismchaggis, Great name, may I call you haggis for short? :) Great chieftain of the puddin' race.
If it were only that simple. They cannot sign off the development without a DFS, and cannot do a DFS without PFS. Each of these takes time. If they really went full speed, it would be at least 6 months for an independently credited DFS. - which will be required to secure some debt to help fund the mine - I doubt even Piedmont would use 100% equity as that is not capital efficient. They would then need to finalise permitting before development of the mine could begin. end 2023 is a very aggressive timeline already - if they managed Q3 2023 that would be very impressive.
There is plenty for them to get on with, no need to over-rush things, take the time needed to do it right.
JL
@Swest
Sorry, for late response. I think all mines have risks associated when moving from engineering to production. Cost and time overruns being the most common with political / governmental / environmental also being a regular factor. I agree that Ewoyaa looks easy on paper, but until the DFS is done and the mine has received full governmental approval to proceed there is a risk. The Ghana government will also see the Li price rocketing and may well want their cut of the action - I don't know the tax situation for their license, can anyone enlighten?
I sincerely hope that this will not be the case, but the market will see it that way until the deal is signed. And even then, until production happens and income hits the bank, risk is ever present.
JL
I won't argue with that. The only bit that I would probably disagree with is the 30% reduction because they are further behind, that feels a little low. Until we have the PFS, it could all go horribly wrong. There is a huge risk in starting a mine from scratch so I am not surprised by the current discount. But that is what we are investing in. If we believe in the story, then this discount will narrow over time. PFS will narrow it, DFS will massively narrow it, construction starting will narrow it, until in about 12-18 months time we will be in a similar position to Core. At that point we will either have closed the gap or will have been bought out. Core themselves would buy us at this price.
As the risk declines the price will rise. The valuation still looks compelling. IRR of 133% is unbelievable. And that is before the recent upgrades, and on a very conservative price for Li. What I love about this share and is the reason I am not selling a single share even though my initial price target has now been hit is that there are so many reasons this should rise further:
Upgrade in resource from the current drilling
Upgrade in LI assumption in model
PFs reducing risk
DFS reducing risk
Each of these could easily double the share price in time.
And we are also fully funded through to production means fund raising will only be done for incremental growth. Which is unlikely when they are only a couple of years away from a wall of cashflow coming in.
JL
Hi Rivaldo
Thanks for the reminder on this presentation, I planned to dial in but couldn't on the day.
What struck me most was the confidence in the pipeline. They have the financial and organisational capability to take on another Sukari size project. And this is not in the forecast at all. They also took their time to note that they upgraded forecasts twice last year, that could well be a sign that they plan to do the same again this year. As per my last message, the current forecast of $270-280 includes no new contract wins at all. Indeed it probably doesn't include enough if they manage to maintain the utilisation rate at 80% with the increased number of rigs. So I would be amazed if they didn't upgrade at some point this year - if they don't that will be a sign that their sales team have not delivered. But let's hope it does not come to that.
In summary, still my largest holding, still ridiculously cheap on a very low multiple with no upside priced in at all. They were at pains to tell us that this is the start of the cycle with more than 10 new mines moving to DFS so they are, for the first time in their history, in a position to bid for those from a position of strength with a fantastic case study of Sukari. It will only take one more of them to move the dial forward massively. If they win two big ones, they may have to raise to fund the expansion, but that would be from a position of massive strength. Their balance sheet can cope with plenty more debt currently too.
Lots more to come after a successful 2021.
JL