Soo JinHou, a full-time investor living in Australia, contributed this article to NextInsight

I first bought Alliance Mineral Assets (AMA) at around 12 cents half a year ago.  Since then, the share price has rallied to close at 30 cents last Friday.  

I bought it as its only comparable publicly-listed peer, Galaxy Resources, was trading at close to a billion AUD in market capitalization vs AMA’s SGD 60m at that time.   

After such a stellar run, why do I still bother to write about it?  Subsequent numbers released since, pivotally the off-take agreement signed with Burwill, suggests that AMA is trading at prospectively PE 6.0 (excluding non-cash items) and total cash profit to market cap of 2.6 (using share price of 31 cents), which are forecasted using conservative numbers.

drill rig TAWDrill rig at work to determine the lithium resource in Bald Hill.
Photo: Company


AMA came to the market as a tantalum producer located in Bald Hill, Western Australia.  When tantalum price collapsed in 2015, AMA mothballed its mine. During the period of inactivity, the management discovered significant lithium deposits and proceeded to commercialize it. 

To minimize capex, AMA initiated a JV with an ASX-listed company, Tawana Resources, whereby the profit will be split with the condition that Tawana spend A$20m on exploration and upgrading the existing tantalum plant to process lithium ore.  

With its existing infrastructure, time to market will be speedy with plant commissioning anticipated in January 2018 and first shipment in Q1 2018.

Lithium is a hot commodity and the historical price has shown growth since 2011.

The most important factor driving lithium prices is energy storage, notably in mobile devices and, more recently, electric vehicles.  A less obvious but inevitable source of demand is from utilities. 

We often read of fossil fuels being doomed because the cost for renewables has finally reached parity with fossil fuels. What attention-grabbing headlines in the media fail to highlight is the inherent problem with intermittency.

A recent case study can be taken from South Australia, which endured a state-wide blackout on 28/9/16.  South Australia has the highest renewable generation, namely solar and wind, among its energy mix. 

Although there are many factors that contributed to the blackout, one reason is a number of wind farms were switched off during adverse weather.  As a response to the problem, the South Australian government has put forth a A$550m energy plan, which includes … you guessed it … a A$150m large battery storage project.  

As the world strives for carbon neutrality and renewables become more prevalent, demand for utility-scale battery will increase.  At the same time, electric vehicles are becoming more mainstream, both from the Chinese government’s effort and Elon Musk’s attempt to produce a mass market electric car via Tesla Model 3. 

Although I have not done any supply-demand studies, I believe any additional lithium supply will be absorbed by increased demand.  As a matter of fact, I believe the risk for lithium price is to the upside due to the common resolve of the global community to move away from fossil fuels to halt climate change.

I depend on 2 sources for my analysis.  First, the off-take agreement with Burwill; and second, an analyst report from Colts by Cannacord Genuity.  It is important to note the distinction between the two -- the former is a legally binding agreement, the latter, a professional opinion. Cannacord Genuity is involved in capital raising for both Tawana and AMA, and as such they are insiders who I assume are privy to the internal details of the project. 

Also, for their services to AMA, they are paid 11.4m options for AMA shares in 3 equal tranches exercisable at S$0.24, S$0.30 and S$0.36.  Therefore, I believe there is significant truth to their report for them to forgo cash in favor of options.  As a matter of fact, the share price still needs to climb another 20% for the last tranche to be in the money.   

These are the pertinent numbers:

Burwill agreement

Colts report

Resources

Min 12Mt > 1.1% Li2O

20-30Mt at 0.9-1.4% Li2O by mid-2017

30-50Mt at 0.9-1.4% Li2O by end- 2017

Throughput

200kt of 6% Li2O over 2 years

Or 100kt per annum of 6% Li2O

120-160kt per annum of 6% Li2O

Sale price

USD 880/ton

Cost of production

AUD 400-500/ton

 

Total profit from 12Mt of resources is:

Resources (@1%)

 12,000,000

tons

Resources (@6%)

 2,000,000

tons

80% recoverability

 1,600,000

tons

Selling price

 880

USD per ton

Selling price ex 5% royalty

 836

USD per ton

Cost

 450

AUD per ton

Cost

 334

USD per ton

Margin

 502

USD per ton

Total profit

 803,200,000

USD

Profit to AMA (ex Tawana)

 401,600,000

USD

Net profit to AMA (ex 30% tax)

 281,120,000

USD

Net Profit to AMA

 390,029,000

SGD

 

Since AMA has a market cap of SGD $147m at 31 cents, the total cash profit / market cap is 2.6. 

The projected PE ratio, at the rate of the 100kt per annum of lithium concentrate, is:

Production volume

 100,000

tpa

Margin

 502

USD per ton

Annual cash profit

 50,200,000

USD

Profit to AMA (ex Tawana)

 25,100,000

USD

Net profit to AMA (ex 30% tax)

 17,570,000

USD

Net Cash Profit to AMA

 24,380,000

SGD

     

PE

6.01

 


The crux of this entire writeup is not about how good these numbers look, but about them being derived using conservative estimates. Why?

1. Quite obviously, using the Burwill agreement rather than the Colts report is being conservative.

The Colts report wrote that: “Pegmatite mineralisation within the Bald Hill mining licence area remains open to the west and south west, with most of the project area considered underexplored. The potential to discover additional mineralisation is considered high…” (emphasis mine).  Finally, in Tawana’s AGM presentation, the company revealed that the main target area is only 3km by 2km.

2. The committed minimum resource is likely to be conservative because the existing exploration is only a fraction of the entire 59,000 ha concession area, which is slightly smaller than Singapore’s land area, or 24.2x24.2 km square. 

A quick check of some of the scales of the exploration reports shows that they are carried out on a small section of the entire concession area.  


3. Throughput is likely to be higher than the 100kt per annum committed.  On 18/5/17, Tawana announced that they have procured a 1.2Mt spodumene ore concentrator.  Assuming 80% recoverability, the theoretical yield is 160kt of concentrate product. 

Also, according to the Department of Mines and Petroleum website, “Bald Hill is targeted to come into production early next year at a rate of 120,000-160,000 t of concentrate per annum”.  The website: http://minedexext.dmp.wa.gov.au/minedex/external/common/appMain.js

4. Management guided that average cost of production of lithium in Australia is approximately A$400-A$500 per ton.  However, Tawana’s Managing Director Mark Calderwood commented that “Resource infill drilling is focusing on an initial block extending for 1,000m by 300m with multiple pegmatites extending from near surface to about 140m depth.  This drilling will enable a significant resource upgrade.  At recent pricing, the in-ground combined values of lithium and tantalum mineralization is significant, and tantalum by-product credits have the potential to cover a large share of mining costs (emphasis mine).” 

In other words, all the computation above has not included any contribution from the sale of tantalum products.  Since both minerals co-exist, the production cost can be significantly covered by the sale of tantalum by-products.  The A$450 production cost is therefore a conservative estimate.

Having established that the numbers used are conservative, here are some additional positive indicators:

1. The table shows the top lithium producers in the world and their respective PE ratios:

Albemarle

SQM

FMC

Tianqi Lithium

Jiangxi Ganfeng Lithium

PE ratio

26.91 (Gurufocus)

33.42 (Gurufocus)

27.40 (Bloomberg)

27.11
(Bloomberg)

35.46
(Bloomberg)



2. Burwill’s chairman and managing director has been mopping up Burwill shares in the open market.

SooJinHou8.17"I have never written on a loss-making company before.  Due to its highly speculative nature, the share price is extremely volatile.  Strong stomach is required to withstand wild gyrations.  Much can happen from now to a year later, and this is definitely not a stock for those who don’t watch over their portfolio like a hawk.  For AMA, I think the old maxim rings true, “high risk high return”.  

-- Soo JinHou (photo)

Now for a douse of negativity:

1) Management has indicated they are still short of around A$10m to fully fund the project.  Whether this will be raised via debt, or private placement or rights issue is anybody’s guess. As at 31/3/17, AMA had A$3.9m in cash and very marginal amount of debt.


2) Feasibility study and first resource estimate are supposed to be out early April.  The missed deadline may suggest that they have trouble meeting the 12Mt commitment, or perhaps they’ve decided not to announce the number until they hit 20-30Mt.  Nobody knows.

3) There is potentially new technology that will completely disrupt the use of lithium in batteries.  There is no shortage of research trying to increase the energy density of batteries for longer battery life and ever smaller device size.  Occasionally, there are attention grabbing headlines on newly discovered technology, such as tin-based batteries that contain 4x as much energy as Li ion ones.  However, the reason Li ions still reign supreme is alternatives often suffer from the inability to mass produce or short longevity of the battery. 


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