REM AGM 24 July 2015 – Tradecraft notes – v3

Proviso – this is my own view of various conversations at the REM AGM on 24 July 2015 – neither exhaustive nor necessarily accurate – but I’ll do my best to reproduce what I can, in case it’s useful for anybody. Please note that DL explicitly asked for certain elements not to be “blogged”, and I will not reproduce these here.

[TC note – My commentary/opinion interspersed in italics.]

PART I – In which the Players convene in a small, overheated room on London’s Strand

Meeting starts 10am. Attendance about three times higher than last year (I’m guessing 35 people). Good attendance from LSE & III BBs – at least 9 posters/readers that I met, probably a few more besides. I won’t name people here as it’s for them to reveal whether or not they attended. Also quite a few investors who aren’t on the BBs that I know of. Next year we’ll need a bigger room...

In attendance from REM: David Lenigas, Donald Strang, Kiran Morzaria, David Bick (Square 1 Consulting - PR).

Apologies: Adrian Fairbourn and Andrew Suckling who would have liked to attend but are occupied in New York on “other pressing business”.

DL opens by addressing the repeated online comments about REM directors not buying shares, apparently a topic that irritates him. At no point since the 2014 AGM have they not been in possession of inside information, and therefore have not been allowed to buy shares. He suggests that it is not even authorised to say “I wish I could buy shares”.

Ordinary Resolutions 1 to 4 all pass with no commentary or questions.

Before putting Resolutions 5 & 6 to the vote, DL makes a point of acknowledging that PIs often have issues around placements & dilution, but emphasises that this is the nature of growing a business. Debt is neither desirable, nor easy to obtain (e.g. 2yrs to obtain debt for LGO). If the BoD can issue £300k of shares at their discretion, this gives them the flexibility to build and grow the company, adjust its direction, respond to changing circumstances, and seize opportunities that present themselves as the project develops. When asked if they had used the equivalent facility that was approved at the 2014 AGM, DL responded that “there is still some headroom, and in any case the BoD will only use this facility for the right reasons”. [TC note - I take this to mean “yes, but only in part” – perhaps to fund the SIP and EBT that were announced on 11 Sep 2014 – although I did not ask for confirmation of this.]

Following this, DL emphasises that there are currently no plans for additional share placing or fund raising. The company has good cash levels. One fund manager in New York has offered £7m but DL turned them down.

Special Resolutions 5 & 6 both pass. Resolution 6 attracts some “Noes”, to which DL comments that he understands some people think that a business can be built on bottle-tops, but he also welcomes the democratic forum of an AGM vote. (But he also comments that Special Resolutions require 75% majority and that this is already covered by the submitted proxies...)

The formal part of the AGM concludes. DL invites questions but cautions that they may not be authorised to answer some of them due to restrictions on inside information. First he launches into a quick summary of the year elapsed and the year to come.

PART II – In which Lenigas and Morzaria expound on the year elapsed and the year to come

One year ago we were still drilling up La Ventana. REM was assisting / goading Bacanora to get moving. At that point Bacanora saw the borates as being a bigger play than lithium.

During the last year DL met the individual from BAML (Bank of America Merrill Lynch in New York), who helped orchestrate the Albemarle/Rockwood transaction. That person had no idea of the existence of the Sonora lithium project. He is now very aware of it.

We already have significant interest from a number of interesting and eclectic offtake partners – as well as interest from quite a few conventional/boring ones.

Our ambition is to make Sonora the single largest contained lithium project on planet Earth.

Everything is in place for this to happen, Bacanora has good cash flow, REM has good cash in the bank. REM have advanced funds for additional drilling and will continue to do so.

Once an exploration company announces a date for PFS, there is usually a very boring period that can be one or two years or even longer while all the work is done. We are taking an unusual approach in that we continue to drill in order to increase the resource, so as to attract attention to the project.

We already have multiple NDAs (non-disclosure agreements) in place with multiple potential offtake partners. These NDAs are stricter than you can possibly imagine, this is why there are a lot of questions that we cannot answer directly here today.

We have continued to increase our holdings in Bacanora, and we now have two representatives on their board, i.e. DL and KM. It was a bit tetchy for a while, they did not want DL on the board. But DL got COE to understand that it was better to have DL on the BCN board than off it.

We have increased our exposure to the US market, which is where the future lies. Andrew Suckling has joined us to help with the corporate aspect. He is a resource and commodity specialist.

We have done twelve months of metallurgy work, and as you know we have demonstrated that we can get battery-grade lithium which is a box-tick for the lithium end-user market. In reality it is important to understand that what counts is not the 99.5% of battery-grade lithium carbonate – but rather the make-up of the remaining 0.5%. Different manufacturers will tolerate or even request specific parameters – and the wrong impurities in that 0.5% can be a show-stopper for a deal.

[To a question from the audience of whether we still expect to be taken out within two years of the 2014 AGM:] Can’t comment on that. We are working very hard to make Sonora so big that nobody can ignore us, including the banks doing their due diligence. If there is a take-over offer then everybody will have a choice to make, but I can’t comment.

[Audience question: Do we expect to be producing before 2018?] KM continues to work with various industry-leading consultants. Would we like to be producing before 2018? Of course. But I’ve never said that we would be. [Audience comment: COE did say so in an interview.] If that’s what he said then great. He’s free to say what he wants. Bacanora is pushing to move this into production sooner rather than later.

Sonora will come out of the box as a large project. We have scoped for 35/50/70 ktpa and we have significant ability to scale. You all know that there is going to be a huge increase in lithium demand. Based on the inability of the big 3 to scale, Sonora will give them a hernia when it comes online. SQM (the biggest with 53ktpa) is in trouble at the moment, Albemarle is in the mid-40s, FMC comes third. We are going to give them a headache because for them it would cost 100s of millions and at least 4-6 years to bring new production sites online. By contrast we have an open-cut operation in one of the most proactively mining-friendly provinces in the world. We can easily scale to 100 or 200 ktpa production capacity based on the resource measured to date, and there is no reason why we would not do this – all it takes is money, capex, planning and people. Very straightforward. And our metallurgy is sorted.

[Audience asks again about the takeover within two years.] If this is what I said at last year’s AGM then we still have another year to go. I won’t change what I said then. We are still playing the same game of chess, and we are only two moves away from check-mate. [Audience: a lot of us here have white hair so we don’t want to wait too long. Laughter.] DL – I want to make a lot of money for myself and for you in this room, and I don’t plan to wait until I’m 60. [TC note – he’s 54 now.]

At this point the overview moves into a more interactive Q&A phase.

Part III – In which Questions and Answers fly

[TC note – I have taken the liberty of rephrasing, re-ordering and even combining some of the questions, to make this part more succinct and easier to read. I am fairly confident that I have not changed the substance of what was said, but feel free to let me know if I have grossly misrepresented what anybody said!]

[TC – Questions on Sonora]

Q: What about the production of lithium hydroxide? There is some debate around whether you have to produce lithium carbonate first and then lithium hydroxide, or whether you can produce lithium hydroxide directly.

A: (DL) I cannot comment on that.

A: (KM) All we can say is that the plant will have two outputs, one spitting out lithium carbonate and the other spitting out lithium hydroxide.

A: (DL) Also what is important is the composition that offtake partners ask us for – some of them want very specific chemistry. Battery grade is all very well but it’s a bit of a box-tick - depending on what’s in the 0.5% it can change whether you are able sell the product at high volumes or for a higher price. [TC note – cf. remarks above regarding 0.5% impurities.]

[TC note – it’s worth mentioning here a side conversation I had with KM at the Master Investor Show 2015. He confirmed that if you can produce lithium hydroxide economically, then it is relatively trivial to get back to lithium carbonate (you just need to bubble carbon dioxide through a solution). In contrast, it is much more costly to produce lithium hydroxide from lithium carbonate. My personal view is that BCN and/or REM will have patents at some point in the direct production of LiOH from lithium clays.]

Q: Do you intend to exercise your right to increase the stake in Megalit?

A: (KM) First of all, it is a right of first refusal to negotiate an increase.

A: (DL) It’s not in our interests to buy more of Megalit. We’d much rather spend our money on increasing our stake in Bacanora directly. This reduces our risk if they decide to focus production on La Ventana initially – even if the SRK report covers both LV and JV1. Also in a way we are victims of all the good news we have been generating – the larger we make the resource, the more we will have to pay to get a larger piece of it. So it’s more cost-effective to spend our money buying BCN on the open market, especially while the price is so low.

Q: Are there any plans for REM and BCN to merge?

A: (DL) Absolutely not. Even to consider a merger of REM/BCN would be costly. It would take at least a year and cost millions – and we would lose momentum in the marketplace.

Q: Is it true that you can only buy up to 20% of Bacanora before you have to make a bid for the company?

A: (DL) Not true at all. We can buy up to 30% under London rules. Just to make things very clear, neither Kiran nor I can influence how or when REM purchases BCN shares. The Investment Committee makes those decisions, and they are not involved in Bacanora business. In our capacity as Directors of BCN, Kiran and I do not participate in those decisions.

[TC note – this counters a widely held view that 20% is the maximum, and suggests that by purchasing the maximum amount of BCN shares without making a bid, REM could control up to 51% of JV1 and JV2.]

Q: Two of the Sonora concessions are still awaiting definitive titles (El Sauz I and Megalit). Can you comment on where these approvals are in the process, and whether there is any risk of the approvals not coming through?

A: (KM) The Mexican government takes time to issue these approvals. Everything appears to be proceeding normally and we have no reason to think there will be any upsets.

Q: Another question on titles. West of Buenavista there are two concessions currently assigned to other parties, that are embedded within the Megalit territory. Are you taking any action to secure these titles?

A: (DL) No comment.

Q: You have been working on metallurgy for over a year, but there is not much detail on the potential by-product credits. Can you comment on this?

A: (DL) Very simple. We want Sonora to stand alone on the lithium. Anything else will be a bonus.

A: (KM) Materially speaking, our plant design is based on production of lithium hydroxide and lithium carbonate. Including anything else in the main plant design would increase the capex and make it longer and more complicated to get to production. If there are any economically viable by-products then of course we will consider developing something downstream, but we will not let that distract from the main play which is lithium.

A: (DL) If you look at most other lithium producers you will find that they include by-products in their lithium production costs. We plan to be low-cost on the lithium alone, and everything else will be a bonus.

Q: What is the value of the lithium in the ground?

A: (DL) Based on everything we’ve drilled up, currently fifty billion dollars and getting bigger.

Q: When is production due to start?

A: (DL) Production may well start sooner than people might think. Bacanora have secured the services of a senior metallurgist with experience at FMC. He will advance the JV profile.

[TC – Questions on Western Lithium]

Q: David, I have come from far away, and I love to see your face!

A: (DL) So do my three ex-wives… [laughter]

Q: Western Lithium appear to be well advanced, what do you think about that?

A: (DL) We like WLC, but they are not as far advanced as you might think. Our pilot plant is three times the size of theirs. They have announced an expected production capacity of 26 ktpa, we have scoped up to 70 and can scale significantly beyond that. Also bear in mind that their production costs take into account all sorts of by-product credits. If you eliminate those from the equation they are at $3,500 per tonne or higher.

[TC – Questions on European Metals Holdings Limited]

Q: Can you give us some background on your decision to take a stake in EMH?

A: (DL) For EMH I am on the Investment Committee [laughter]. They are shaping up to be the largest and lowest-cost European producer, and they are on the doorstep of Germany which will be the single biggest lithium consumer in Europe. They have lower grades but the volume is high, and they also have tin  - it’s an old tin mine – and everybody wants tin.

[TC – Questions on Yangibana]

Q: Do you intend to liquidate your interest in Yangibana at some point?

A: (DL) Absolutely not. We love Yangibana as a project, it keeps getting bigger and bigger. I met Charles Lew [TC note - non-executive chairman of Hastings Rare Metals] just last week. The metallurgy is excellent, they have vastly reduced the required capex, and Charles Lew is playing a sharp game with the Chinese. REM is happy to fund them if they come knocking at our door, including to help them get to BFS faster if that is what is needed.

Q: What is the impact of the water supply they have just discovered? Does it matter that this is not on our JV concessions?

A: (DL) It’s a huge impact. It will drive down capex even further – I have worked on a mining project in Australia where we had to construct a 150 mile pipeline complete with pumping stations, just to supply the operation with water. With this discovery – and potable water, even better – Hastings will be able to avoid all that cost. It’s not relevant which tenement it sits on – presumably the supply will be used for the whole operation.

Q: What is the value of Yangibana to REM?

A: (DL) Yangibana is going to be an absolute corker. It is the same size as Sonora, in terms of potential value to REM. Also you didn’t know this, but we own a chunk of Hastings. We are not forced to report this because we are still below the threshold... [pause] just below the threshold, for now. [TC note – this is new information as of this AGM, and confirms that we do indeed have a stake in the tenements that are not part of the JV. Sound familiar?]

[TC – Questions on Greenland]

Q: Is there any progress on Greenland?

A: (DL) Greenland is a grass-roots project. It is difficult to make progress quickly in Greenland, and as previously stated we have preferred to focus our resources on Sonora this year. We are basically waiting for GGG to release their Feasability Study and for the Greenland government to authorise production on Kvanefjeld. Once those two steps happen, our adjacent asset will increase significantly in value without us having to do much. Incidentally we have spent enough money for the moment to secure the acreage, but of course we are keeping a close eye on developments there.

[TC note – it occurs to me that REM may well have a stake in GGG – not reported to my knowledge – to be confirmed.]