Excerpts from KGI Research report
Analyst: Joel Ng
|Visit down under – Lithium is the new gold.
We visited Western Australia recently and were pleasantly surprised by the positive sentiment from all the companies we met.
All the nine mining and engineering companies we talked to were expanding operations and cited the recovery in key sectors such as O&G, mining and infrastructure.
Perth, Australia is an important operating base for many global resource companies including BHP Billiton, Rio Tinto, ConocoPhillips, Newmont Mining and Barrick Gold.
|Alliance set to be top three pure-play Australian lithium miners. Excluding those companies with overseas mines or downstream operations (e.g., Tianqi, Mineral Resources), Alliance would be the third largest pure-play Australian lithium miner by lithium production in 2019, after PLS (Pilbara Minerals) and GXY (Galaxy Resources).|
Accidental lithium producer.
Alliance initially listed on the SGX in July 2014 as a pure-play tantalum producer but transformed into a lithium producer through its JV with ASX-listed Tawana Resources in 2016 after the lithium minerals found on Alliance’s Bald Hill mine were of high-quality spodumene concentrates that were economically viable to mine and export.
Merger and dual listing. Alliance would be acquiring 100% of the shares of Tawana, with the post-merger company 50.1% owned by Alliance shareholders and 49.9% by Tawana shareholders.
The group expects the merger to be completed by 4 December 2018 and for trading on both ASX and SGX to commence trading on a normal settlement basis on 17 December 2018.
Bald Hill tantalum and lithium overview. The mine is located around 600km from Perth, Australia and is currently operated as part of the JV with Tawana. The Ball Hill mine had a total of 11.3mt of lithium reserves, which would support a mine life of 9 years at a processing rate of 1.2mtpa.
There is still upside potential from the large quantity of inferred resources waiting exploration. Total production has been committed to a 5-year offtake agreement with HK-listed Burwill Holdings (24 HK) for a minimum price of US$880/t FOB for 2018 and 2019.
|Valuation & Action:
"Based on a conservative set of assumptions, Alliance compares favourably against its peers, trading at only 5.8/4.4x FY2019/20F EV/EBITDA, vs peers at 5-13x. There is significant upside opportunities in 2019F to increase its lithium reserves from further exploration, all funded by operational cash flows. As a potential major lithium producer in Australia, the current downturn offers an attractive opportunity for investors to position for the industry recovery."
-- Joel Ng (photo),
Analyst, KGI Research
Above and beyond. Alliance’s processing plant was designed for 160 tonnes of ore per hour (tph) but has been processing an average throughput rate of 202tph in 3Q18, which is 17% higher QoQ and 25% above the original capacity.
When it installs the fine circuit by the middle of 2019 with a minimal capex of A$10mn (+/- 20% estimates), total production could potentially reach 300 tonnes per hour.
Risks: Lithium prices after 2019 and execution risks are key risks. Alliance has a fixed price of US$880/t with offtake partner Burwill until 2019 but prices after that will be based on market conditions.
Lithium prices, especially in China, are heavily influenced by government policies on Electric Vehicles (EV).
Full 10-page report here.