2023-10-17 02:37:25 ET
Summary
- Piedmont is a lithium development company with four projects, including a joint venture with Sayona in Quebec and an off-take deal with Atlantic Lithium in Ghana.
- The Sayona deal is favorable for Piedmont, with the potential for significant returns on their investment in spodumene lithium.
- Piedmont's projects in Tennessee and North Carolina face execution risks and potential permitting delays, making the company's future uncertain.
- Ultimately, the various risks are hard to assess, so I rate this a hold.
There is a rumor that Warren Buffett has three boxes on his desk. As he reads a 10k he makes an initial decision on the company and throws the document in one of the bins. One of these boxes is labeled, "Yes," and one is labeled, "No." The third is labeled, "Too Hard." Whether or not this is true it captures the wisdom of Buffett that you only invest in a company that you, personally, are able to grasp.
I can imagine myself holding the file of Piedmont ( PLL ), hovering between "Too Hard" and "Yes." I have been studying the lithium business as my main area of interest for some time now and Piedmont is one of the more exciting companies out there. Its mission is to create "American lithium," tapping into the new theme of on-shoring important resources. They are seeking to become an integrated lithium chemical producer, both mining the raw lithium from spodumene and processing it into lithium hydroxide, one of the chemicals that goes into EV batteries.
Piedmont has a lot of stuff going on. This is really a lithium development company with a portfolio of four development projects going on at the same time. The prediction is that they will be in full production around 2027, my prediction is more like 2028. In my opinion, to really understand the company you need to understand each individual piece of the company.
Ultimately, I think this will be a good horse to back. They have two great tailwinds: the lithium bull story and the support of the American government. I believe that there will continue to be a shortage of lithium until the end of the decade and any company that can come online before then stands to make good money. Piedmont is likely to cross the finish line with the support of the government, my big question is 'When?'
In this article, I will cover each of the four projects, give my opinion, and then make some concluding remarks.
Project One: Quebec
Piedmont has entered into a JV agreement with Sayona ( SYAXF ), an ASX-listed Lithium. Sayona has a portfolio of at least eight projects, but the one that matters is NAL, North American Lithium. Previously, NAL was producing spodumene under another company which folded in 2012 . Sayona and Piedmont acquired this brownfield mine in 2021 as a JV. It is this deal that keeps my hand hovering over the "Yes," box. In my opinion, in this deal, Sayona has been the loser and Piedmont has been the winner.
The original press release from Jan 11, 2021, says that Piedmont will invest money in a few things. First, they invested $5 million (all amounts in USD) to acquire a 25% stake in the actual mine, now under the subsidiary company Sayona Quebec which directly owns the NAL mine. Second, they also became a major stakeholding in the public company, Sayona, with a $3.1 equity placement for 9.9% of the company and $3.9 in convertible notes, which could be converted for another 10.0% of Sayona. So Piedmont has a 25% ownership of the mine and a 19.9% stake in the company, Sayona.
The deal also has the rights to some of the spodumene at set prices. Sayona will sell 50% of their annual spodumene concentrate up to 60,000 t 'at market prices on a life-of-mine basis."
The Story So Far (for NAL)
Before we discuss this important detail, a few follow-up parts of the story to give the full picture Piedmont acquired more shares for $8 million in March 2021. On August 30th, 2021, Piedmont and Sayona closed the deal for the mine. Piedmont is said to be an 18.8% shareholder in Sayona. In March 2022, Sayona doubled the resource of NAL to 119.1 Mt at 1.05$ Li2O. In May 2022 they declared the PFS . As part of this announcement Piedmont's right to purchase spodumene was increased from 60,000 t/y to 113,000 t/y. The cost of construction was estimated at $80 million.
In their June 29, 2022 announcement, the plan is for Sayona and Piedmont to jointly 'construct and operate' the operation. In this announcement, the details of the deal were amended.
With these new terms, there is a ceiling of $900/t and a floor of $500/t to the spodumene price. This is what Piedmont will pay to Sayona for the spodumene. Further, they are planning to build a carbonate plant together. Once this is built, Piedmont's share of spodumene be preferentially sent to the carbonate plant. Sayona has plans to get this plant up and running by 2026, but it may come later.
I assume that this JV partnership means that Piedmont will pay 25% of the construction costs for the spodumene mine (~$20 million) but I cannot find that explicitly stated.
In March 2023, Sayona produced the first spodumene concentrate from NAL and they are currently in ramp-up. On March 31, 2023, they said the project was delivered on time and on budget for $80 million. They actually released the DFS in April and Sayona made their first shipment in September.
Assessing the Sayona Deal
How should we think about this deal? Piedmont made an investment and will get spodumene lithium for a while. The key fact is that the $900/t ceiling is an extremely attractive deal for Piedmont. It will allow them to print money for years because the price of spodumene will be much higher than 900/t. Effectively, they will do no operational work. They will purchase spodumene for 900/t from Sayona and sell it right away at a much higher rate.
]Between 2010 and 2020 spodumene prices (we are talking SC6 here) were between say $200/t and $1000/t. Today we are in a different world. Over the last few years, the price skyrocketed over $6000/t.
Getting a handle on the spodumene market rate is a little tricky. Most spodumene is sold on contract. There is a public price of Chinese lithium carbonate, but this price is only the China price. Benchmark Mineral Intelligence is a private firm that tracks all the various contracts and produces an average market rate, but their rates are behind a paywall.
They recently published notes stating that the all-time market high was $6401/t in Dec 2022, and the price is not around $3,120. Remember, this is the average price of contracts, some of which are 5 years long and have a ceiling. Pilbara Minerals ( PILBF ) sell most of their spodumene on contract but sometimes sell their extra on their public Batteries Mineral Exchange. In November 2022 they sold spodumene for $8,575/t.
CEO Dale Henderson has said that $2000/t is a good number for a conservative floor. My belief is that the average price over the next few years should be around $3000/t.
Right now Piedmont is purchasing the spodumene from Sayona and selling it at market prices.
Here are a few numbers for illustration. Let's assume that Sayona make nameplate capacity for 2024, meaning Piedmont gets 113, 000 t of SC6. Let's assume three price scenarios: a bear case where spodumene is $1800/t on average for the year; a standard case where spodumene is $2800/t; and a bull case where spodumene is $3800/t.
Spodumene Price | Spodumene Cost | Profit/ton | Annual Profit (million) |
$1800/t | $900/t | $900/t | $101.7 |
$2800/t | $900/t | $1900/t | $214.7 |
$3800/t | $900/t | $2900/t | $327.7 |
Once Sayona gets to nameplate capacity Piedmont will be earning between $100-$300 million/year. This is an incredible investment considering Piedmont invested an initial $12 million and perhaps invested another $20 million for the CAPEX. This is a really good deal for Piedmont. They could be earning a great return on this initial investment every year.
The only problem for Piedmont is that this investment has an expiry date. Sayona is seeking to build a lithium carbonate plant. Once this is up and running the deal is over. This 113,000 t/y will be sent to the carbonate plant. Piedmont will be enticed to any of this spodumene that is not converted in Quebec to Carbonate.
Needless to say, Sayona is highly incentivized to build said carbonate plant. They are saying it may come online in 2026, which I think would be ambitious. Assuming it comes online in 2027 and is running at full capacity in 2028 we can do some rough DCF calculations on the value of the Sayona investment. We assume that each year Piedmont earns $214 million (my middle scenario), except during the ramp-up of 2027 they get half their amount, and then in 2028 they get no more spodumene. We discount each year by 15%, a nice hefty margin of safety.
Year | Profit (million) | DCF |
2024 | $214 | $186.1 |
2025 | $214 | $161.8 |
2026 | $214 | $140.7 |
2027 | $107 | $61.2 |
Total Present Value | $549.8 |
We note that Piedmont's current market cap sits around $650 million and their EV sits around $561 million (they have almost no debt and ~$89 million in cash). If all this analysis is right, it's basically saying that Piedmont's EV is entirely coming from the Sayona deal and that the other three projects are worthless.
On top of this Piedmont's ~16% stake in Sayona is currently worth ~$90 million.
I must stress, that this valuation of the Sayona deal is 'back of the envelope' kind of stuff and assumes spodumene prices will be around $2800/t for the next while. It also assumes Sayona will be at nameplate capacity by 2024, which it may not. The point of these numbers is to give you a sense - this was a great deal.
Piedmont is about to book their first revenue from this deal. Once the NAL mine is operating a near full capacity Piedmont will be able to fund much of their other projects from this cash flow. If they are able to execute their three other projects from this cash flow, then they will be a fantastic company. Now, onto the other three projects.
Project Two: Ghana
Piedmont's second project is also a JV in that they are not the primary operators. Piedmont has an off-take deal with AIM and ASX-listed Atlantic Lithium ( ALLIF ) who are developing the Ewoyaa lithium project in Ghana.
This mine currently has a declared resource of 35.3 Mt at 1.25 Li20 . Atlantic hopes to get into production by 2025. The DFS predicts an all-in-sustaining cost of $610/t of spodumene, which is pretty low on the cost curve. They are aiming for 325,000 t of spodumene concentrate a year.
The Story So Far (with Atlantic)
In July 2021 Piedmont and Atlantic announced the terms of Piedmont's investment in Atlantic. There were several parts to the deal. First, Piedmont bought a 9.4% stake in Atlantic for $15 million. Second, they paid $17 million for a 22.5% ownership of the actual Ewoyaa project. Atlantic used $12 million to fund the DFS and $5 million towards exploration and drilling. Third, Piedmont pledged to spend another $70 million towards the CAPEX of the construction, conditional on FID (Final Investment Decision). This amount would grant an additional 27.5% of the Ewoyaa project making Piedmont the 50% owner of the project. Atlantic has not yet started construction, so this money has not been spent yet. Fourth, as the 50% partner, Piedmont would be responsible for half of the remaining CAPEX after the $70 million had been spent.
The DFS estimates the CAPEX for the full construction at $185 million, quite low for a mining project of this size. This means that, after the $70 million is spent, both Piedmont and Atlantic will need to find approximately $57.5 million of funding. A handy chart from Atlantic (below) summarizes these expenditures.
As part of this whole deal, Piedmont has off-take rights to half of the spodumene product, approximately 182,000 t/y. Critically, they will pay Atlantic market rates. To quote the announcement , "Offtake pricing will be determined via a formula, which is linked to the prevailing price of lithium products, ensuring [Atlantic] captures value-add margins."
Assessing the Deal with Atlantic
In my opinion, Atlantic is the real winner of this deal. Off-take agreements abound and rarely are the terms this good for the developer. For example, Liontown ( LINRF ) is a spodumene line that is coming online soon. They have off-take agreements with LG Chem , Tesla and Ford . In none of the three are the customers paying for Liontown's CAPEX bill. In the first two agreements, LG Chem is agreeing to purchase the spodumene at market rates-the same as the second. The off-take agreement is simply the parties saying, "We will be exclusive customers for this allotment of spodumene. You will sell it to us; we will buy it from you." In the third, Ford has given Liontown the added perk of a debt facility which Liontown has used towards their CAPEX.
Where Ford gave Liontown a loan, Piedmont gave Atlantic cold hard cash. Sure, Piedmont has a 50% ownership stake in the project, but they will buy the spodumene as a customer, just like Ford or LG Chem with Liontown. In this deal, Piedmont, basically, has spent ~$128 million to get off-take rights, which often come free.
It is worth noting that a 9.4% stake in Atlantic would be worth about $18.0 million today.
Jurisdiction Risk
This deal will surely help Atlantic get off the ground. We don't have the time to discuss it fully here but we must mention it. Atlantic looks like a great project. Low OPEX, low CAPEX which has been mostly funded by Piedmont and a Ghanan government grant. The question that hangs over the Atlantic, and thus hangs over Piedmont, is the jurisdictional risk. Will this lithium mine get operational in Ghana, an African country? Each of the last three projects has an execution risk. For Atlantic, the risk is connected to jurisdiction.
There is a general impression that mines struggle in Africa. Governments can delay permitting; they can apply haphazard and punitive royalties; workforces can be difficult; getting energy can be hard. There is political risk. This is the general perception.
If you look at the market cap of Atlantic there is a discount, and I think it is to do with this jurisdictional risk.
The thing is Africa is not one country and this gross generalization above can hide important nuance. When you look at a company like Leo Lithium ( LLLAF ) they have major problems as they are operating in Mali. Ghana is one of the most prosperous and stable countries in Africa, and I don't see jurisdiction as a major risk.
The Minerals Income Investment Fund of Ghana has agreed to invest $32.8 million in Atlantic, which would go towards Atlantic's portion of the CAPEX. While this agreement is currently non-binding, it is a statement that there is political and social support for this mine being built. I think there is a good chance the Atlantic will come online sometime in 2025 and ramp up through to 2026.
Project Three: Tennessee
Piedmont is planning on building a lithium hydroxide conversion plant in the City of Etowah in McMinn County, Tennessee. This plant will take spodumene concentrate and convert it into the chemical LiOH, lithium hydroxide, which is used in making many of the batteries for EVs.
The spodumene from Atlantic is earmarked to be the feedstock for this conversation facility, thus Piedmont is seeking to finish building this plant around the time that Atlantic is ramping up.
Piedmont completed a DFS on Apr 20, 2023. The project is estimated to cost $809 million in CAPEX. They plan on making 30,000 t/y of LiOH, which is a lot for America. The project has an NPV(8) of $2.5 billion and an IRR of 32%. Not bad.
This project is fully permitted and Piedmont is getting ready to build in 2024. They don't have $800 million on hand. They have a $147.1 million grant as well as a little bit of cash flow from Sayona, but they will need to raise money soon, probably through a combination of equity placements and debt.
After getting this up and running Piedmont is planning to spend more and double the capacity.
A Few Comments on LiOH
Most lithium hydroxide conversion capacity is in China. Unless I'm mistaken, there is currently only one company that has a LiOH plant in America. Livent ( LTHM ) has a plant in Bessemer City, NC. They are currently expanding the capacity at that plant by 50%. The capacity of the Bessemer isn't public, but Piedmont has claimed that "Current total U.S. production of lithium hydroxide is just 15,000 tpy."
Not all the other hydroxide capacity is in China. Albemarle ( ALB ) has the Kemerton trains in Australia, for example. Further, Piedmont is not the only one building new hydroxide capacity in the America or America-allied nations. Albemarle is planning a 'Mega-Flex' facility in SC that will initially produce 50,000 t/y LiOH, to come online in 2026. There is hydroxide capacity coming in Canada too.
An important connected point is that the US government is currently serious about funding lithium production in the states. Piedmont has received a $147.1 million grant from the DOE, which should be 18.2% of the CAPEX.
However, the big point is that the demand for batteries is growing. It is my belief that there will be a large and sustained demand for LiOH for years to come.
The advent of LFP batteries does not change this picture too much. LFP uses lithium carbonate, rather than lithium hydroxide. LFP demand is growing more rapidly, as these batteries are cheaper and lighter and more safe. The NCM batteries that are made from hydroxide are more powerful. Each should have thick markets going forward. For example, most EV buyers in America are more concerned about range than those in China. People in the US drive more on highways for longer drives, so they tend to desire the more expensive NCM batteries.
Hydroxide Execution Risk
I recently heard about McNulty curves. The basic idea is that if a mine or train is coming into production there will be a ramp-up time period. The more experienced a team is and the more well-understood the process is, the faster the ramp-up time will be. We label an experienced team working on a well-understood process at a McNulty 1, and a slightly less experienced team as a 2 down to 4 or 5 as least experienced.
This McNulty guy said level one teams can ramp up in about a year, level four teams might take three to five years to get to nameplate capacity.
I hear that making LiOH is hard. Most of the experienced engineers are in China and won't be available to help build the plant in Tennessee. Albemarle does have experience, having built their plants in Australia and China.
I don't know exactly how long it will take Piedmont to ramp up. I'd bet money they won't be at nameplate by 2026.
Project Four: North Carolina
The fourth project that Piedmont has is actually two projects integrated into one. Piedmont has a spodumene asset in Gaston County, North Carolina. In their BFS they declared the asset has 44.2 Mt at a grade of 1.08% Li2O. This is a sizeable asset with a fine grade, but not amazing.
They plant to get a mining operation to produce a spodumene concentrate. At the same time, they plan to build a 30,000 t/y hydroxide plant in the same facility. The spodumene from the ground there will provide the feedstock for the conversion facility.
The BFS declared the CAPEX would be $988 million and the OPEX would be $4,377/t LiOH, placing them as the lost cost producer of hydroxide on the planet. We shall see.
A Good Idea?
The idea of creating an integrated lithium chemical facility that mines spodumene and converts on-site is the dream of a CEO. It has all the value-added steps in one place. The problem is that each of these steps is individually difficult. Doing them at the same time is doubly difficult.
Albemarle has been building its Kemerton hydroxide plants near the wonderful Greenbushes mine. But Albemarle has been getting spodumene from that mine for years, and they are not the operators. They just have off-take rites for a portion of the spodumene.
There are currently a few mines in Canada that are developing both spodumene mines and hydroxide plants. However, many of them are taking the route of first mining spodumene to get cash-positive, then becoming an integrated chemical producers.
Below are the plans of junior miner Frontier Lithium. They are seeking to produce spodumene concentrate by H12 027 and begin building the conversion facility in H2 2027.
Building mines is hard. Building conversion plants is hard. Doing both at the same time is risky.
Another Problem for Carolina
So, the Carolina project has the McNulty curve problem twice, for both the spodumene mine and the conversion plant. This Carolina project was their original project. They have added the other three along the way. This Carolina project is the only project not permitted yet. And it may not get permits for a while.
There is considerable opposition to this plan going forward at a local level. Piedmont recently held a town hall meeting in Gaston, NC. The reports are that the locals were skeptical and angry at the prospect of this mine. One local said, "Piedmont Lithium doesn't care about the community. They only care about the money they can make off our homes."
Permitting is difficult in America, as mine can require interlocking permits on the Local, State, and Federal levels. Just look at the delays that have plagued the Thacker Pass project. It was delayed by strong legal battles.
My guess is that this project will be permitted eventually, but it may see long delays. If there are permitting delays, this could to mining construction delays. It could be many years till this site produces hydroxide.
Putting it All Together
Below is a slide about their capacity which we need to think about carefully.
They are claiming that by 2027 they will be able to sell 92,500 t of spodumene and 60,000 t of hydroxide. Just for some rough numbers, assuming a spodumene price of $2500/t and a hydroxide price of $25,000/t they would have $1.7 billion in revenues. That's about double Livent's revenue, the closest comparable company. Their current market cap is $3.0 billion. So conceivable Piedmont might be worth a s ~6.0 billion market cap after they have been running at capacity for a year or two. If we say they'd be worth $6.0 billion in 2029 and discount that back by 15% today, we get a present value of $2.5 billion. So that's great.
However. I am extremely uncomfortable with this evaluation. It assumes that Piedmont will execute everything perfectly. This is like listening to the salesmen at your promising this new lotion will make your hair grow back. Piedmont has a monumental task ahead of them. Even Sayona is just getting started and might run into the ramp-up problems common with spodumene mines.
In that chart are a number of assumptions we need to question. The Sayona spodumene will dry up when the carbonate plant comes online. We don't know when that will be, but it should happen at some point. Atlantic may be produced by 2025, but they may not. Most mines are delayed by a number of quarters if not years. And both mines need to ramp up. At least two mines in Australia have had difficulty with ramp us: Finnis and Katlin.
And then there is Tennessee. Will this really be at nameplate capacity by 2026? Even more so for Carolina. I'm not saying that Piedmont is a sloppy company. Mining is hard and delays are standard.
It might be that having all these different projects helps spread the risk around and de-risk the company. However, normally this sort of de-risking is done by a cash-positive incumbent like Albemarle. In this case, the story was a developer with major risks taking on more risks. It looks like it has worked. They have a great deal with Sayona, which very well may make the company survive the risks of the other three projects.
My Opinion
So, this is where my hand begins reaching for the too-hard bin. Looking at this company is stressful. There is a lot going on. There are lithium juniors that have difficulty executing on one single project. Piedmont CEO Keith Phillips did not attend the town hall meeting in NC, and I can understand why. There is a lot going on. But if he can't attend that critical meeting, what other things are falling through the cracks?
But then again, the Sayona deal is so sweet. But then again it'll mutate in 2026. As I stand back to assess this company, my hunch is that they will execute all these projects eventually, but it is too messy for me. I prefer thinking through a developer like Frontier, as it is simpler. I haven't even really discussed the relative quality of the ore bodies of their three mines as, well, it would take too much time.
It is this feeling that makes me give Piedmont a hold rating. Buffett says you should imagine becoming the 100% owner of a business before you buy a single share. There are too many moving pieces in this company that would keep me up at night.
Again, this company seems a bit like Albemarle, with a lot of moving parts. But Albemarle is an incumbent. They have been in this business for a long time and have proven they can execute across their complex and disparate operations.
In the end, my hunch is the Piedmont will do well as they ride the lithium tailwind. Buffett says you want to love the companies you own. There are just other lithium companies out there that are more appealing to me.
For further details see:
Piedmont Lithium: A Developer With Many Moving Parts