Ecclestone on Neometals “superb” deal-making with the Chinese
In the beginning there was MinRes and all was good but not much money was forthcoming. MinRes was earning in by building the plant for Mt Marion, but that was just not happening as Lithium prices doodled about in their post-2010 torpor. Then along came Ganfeng. They paid a lot of money to earn in by buying a large part of Neometals share in the project, and then earned in for the rest, in the process diluting down Neometals to its current 13.8% of Mt Marion. Neometals soared on the succession of deals but eventually the share price ran into the buffers as the market started obsessing that nearly 14% was in some way “not enough”. This brings us back to the classic paradigm is 14% of something large, and producing, worth more than 50% of something (the split in the original deal with MinRes) that remains a perennial plan on the drawing board. I know what we would prefer and that is the same as what Neometals have decided they like also.
Neometals and Mineral Resources own 43.1% and 13.8% respectively of RIM, the owner of the Mt Marion Lithium Project. The two partners also have offtake arrangements with RIM that will allow them to collectively purchase 51% of total spodumene production from Mt Marion from around 2020. The remaining 49% of spodumene production from that time has already been committed for purchase by 43.1%-RIM shareholder Ganfeng Lithium Co. Ltd, which is obligated to purchase 100% of production from RIM in the interim.
The Real Prize
While angsting about percentages the investors have missed a key fundamental of the Ganfeng deal and frankly Neometals deal-making with the Chinese has been nothing short of superb. They have managed to end up (with MinRes) with 51% of the production post-2020 to market how they see fit despite the fact that Ganfeng own a larger percentage than either of them of the equity in the project. This is what the market has failed to grasp and failed to build into its calculations. Neometals will probably hate us for saying this but they seem to have outsmarted the Chinese. This then promises one of two solutions, either Neometals and its partner MinRes will become one of the largest players in the sale of non-Chinese lithium to the global market or the Chinese partners Ganfeng will have to crack open their piggybank and pay a very large amount of money to acquire back what they lost initially at the negotiating table.
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The Third Leg
Those that have followed the stock have often confused the technology aspect of Neometals with the deal with the Chinese. They have little to do with other and a lot to do with the 51% of production that the Australian partners will have post-2020. Uninformed observers thought that Neometals and MinRes were “missing out” in some way by not having part of the production before 2020. However, what could they have done with a Lithium concentrate product pre-2020 than just be mere intermediaries vending on the product to one of the inner circle of processors of Lithium concentrate?
By choosing the 2020 trigger date they have given themselves time to get the Lithium processing flowchart totally ironed out and derisked at which point they will get their “share of the action” and effectively become fully vertically integrated producers of concentrate through the end product Lithium Hydroxide in competition with the heavyweights that currently, dare we say it, make up the cartel in the this space in Western markets for Lithium.
Making it Happen
In recent weeks, Neometals and Mineral Resources announced the signing of a Memorandum of Understanding to progress the development of a downstream chemical plant in the Eastern Goldfields of Western Australia.
Key activities under the MOU will include front end engineering and design (FEED), site selection and acquisition, negotiation of reagent supplies (gas, sulphidic acids, caustic soda) and assessment of environmental and regulatory approvals.
Under the terms of the MOU, the partners will use lithium concentrate form their jointly-owned Mt Marion Project to produce a battery-quality, Lithium Hydroxide product intended for direct sales to the Lithium-Ion battery industry.
The MOU will see Neometals and Mineral Resources jointly assess the technical and commercial feasibility of the construction and operation of a plant with nameplate capacity of 20,000 – 25,000 tpa of lithium carbonate equivalent production, utilising the conventional sulphate/caustic soda process used by leading Chinese lithium converters, including Ganfeng.
Neometals indicated that it is fast-tracking this project with initial work streams under the MOU commencing immediately, with an investment decision expected by the third quarter of 2017.
One of the most interesting features of the latest announcement is that the siting will be in the Eastern Goldfields of Western Australia. For a long time Australian companies have dallied and dabbled with ideas of putting plants for value-added anywhere but in Australia. The company that paid the highest price for this strategy was Lynas with its extended period of Malaysian torture trying to get its plant there moving after they had sunk too much in the country to even consider departing. This brutal lesson plus the AUD now being more than 30% lower than it was five years ago have set the scene for onshoring in the further processing of Lithium and other metals.
The latest announcement shows that Neometals and its partner plan on showing Ganfeng that they will not only be taking their designated share but upgrading it and then playing a role in the global Lithium market that has hitherto not been pursued by any of the other players lower down the food chain. The only way that Ganfeng (or the Cartel) can now stymie such an evolution in the industry if to pay up and pay up big to ensure that waves emanating from onshore in Western Australia don’t disrupt the designated “order of things” in what has long been too cosy of a market.
Christopher Ecclestone is a Principal and mining strategist at Hallgarten & Company in London. Prior to founding Hallgarten & Company in New York in 2003 ... <Read more about Christopher Ecclestone>