Ann: Restructure of Lithium Offtake Agreements, page-54

Short Term Pain, Long Term Gain

Alright, on the business side it's probably not even a pain to begin with. Only the market is reacting downwards on low volume.

From the past few months shipping schedule, it is quite evident that Burwill does not have the ability to continue taking spodumene from Alliance Minerals Assets. So this change has to come sooner or later. The transfer of rights to the 50:50 JV between Jiangxi Special Electric Motors and Burwill is a logical move. Jiangxi is much bigger compared to Burwill and is the end user of lithium carbonate and hydroxide. The financial situation of Jaingxi ensures that the JV has the ability to continue taking supply from Bald Hill.

With the fall in Lithium carbonate price in China, it is pretty certain the US$880 per ton wont stay. Other market players are already adjusting their spodumene price downwards in this difficult market (hopefully temporary). New offtake price to be in range of US$680 per ton - US$1080 per ton, linked to lithium carbonate pricing. Assuming similar type of pricing mechanism based on China Lithium carbonate price, we are better off than other market players.

And we got what we wanted for the longest time. The removal of exclusive rights and preemptive rights from Burwill Holdings. Having only one offtake partner is a major risk to Alliance and we are not able to have more offtake agreements signed due to the exclusivity clause wtih Burwill. The removal of this clause means that we are free to diversify our client base. Given the exceptionally high quality of bald hill spodumene, expect offtake agreements to come shortly after this. Offtake interest is strong according to the company and rightly so.

Ofttake prepayments to be frozen till 2021. Nice addition as it frees up some cash in the short term.

We are likely to earn a nice profit in the quarter ending March 2019, which is very important right now. The market will want to see this. The JV will be purchasing 18000T of spodumene from 2018 production at US$880 per ton. This gives a revenue of about 18000 x US$880 = US$15.8m.

Production guidance between Jan 2019 - June 2019 is 65000T to 80000T. Assuming half of the lowest end (65000T) of guidance is shipped in the quarter ending March 2019, we will have 32500T. Assuming selling price for this batch drops to US$800 per ton, we will have additional revenue of 32500T x US$800 = US$26m. Without accounting for tantalum credits, we are likely to see quarterly revenue of US$15.8m + US$26m = US$41.8m ~ A$58.1m. Production cost is likely to be higher at US$585 per ton as stated in the announcement. Production cost to be US$585 x (32500+18000) = US$29.5m. 

Gross profit for the quarter could be US$41.8m - US$29.5m = US$12.3m or A$17.1m. This is also before tantalum credit, taxes, royalties and other administrative costs.

Overall, a nice announcement and opens Alliance Mineral Assets up to possibilities.