Australian Lithium Reshuffle Lithium Merchant Alita Bankrupt

- Oct 24, 2019-

A lithium mining company listed on the Australian Stock Exchange in 2018 was in a state of bankruptcy due to the double pressure of customers and lenders.

On Wednesday 28th, after meeting with lenders and key stakeholders, Australian lithium mine company Alita Resources (ASX:A40) announced that it has appointed an insolvency administrator to restructure the company.

In the case of several Australian lithium mines temporarily suspended, Alita became a high-profile victim of a plunge in lithium prices.

Why is this company not "life and death"?

To establish cooperation

As the most common type of electric car battery, the price of lithium carbonate doubled in 2016 and 2017, but it has fallen by more than 40% in the past year, and the price of lithium has dropped from more than $1,000 per ton. Tons less than $600.

Among the price fluctuations, the biggest hit was the Australian lithium mining industry. In the past year or two, the supply of new lithium mines in the Chinese market has mainly come from Australia. The demand for lithium-ion battery industry's key raw material lithium mine market began to deteriorate due to the decline in demand from Chinese manufacturers after the subsidies for electric vehicles and global trade tensions.

A year or two ago, the Chinese and Australian companies in the lithium battery industry chain failed to predict that the change would come so quickly.

In October 2017, a wholly-owned subsidiary of Jiangte Electric (Shenzhen: 002176), a company listed on the Shenzhen Stock Exchange, invested RMB 40 million to establish “Jiangxi Baojiang Lithium Industry Co., Ltd.” with Baowei Materials, each of which has a registered capital of 50%. The joint venture company has locked in 200,000 tons of lithium concentrate. In the same month, Jiangte Motor disclosed that its subsidiary, Muir, subscribed for 11.32% of the shares of Australian listed company Tawana (ASX: TAW) and became the largest shareholder.

Tawana and AMAL (Alliance Mineral Assets) jointly own the Bald Hill lithium mine project in Western Australia. Last year, Tawana merged with AMAL and changed its name to Alita. The German subsidiary of Gent Motors has also become one of the major shareholders of Alita.

In March last year, the Bald Hill lithium mine project was completed and put into operation. Baojiang Lithium's joint venture Fangbaowei Materials owns a five-year exclusive underwriting rights and a five-year pre-emptive right to purchase lithium concentrate from Bald Mountain.

According to the contract, Baowei Materials will purchase Baldeshan Lithium Concentrate from February 2018. The purchase amount will be no less than 200,000 tons in 2018-19, and it will be sold exclusively to Baojiang Lithium. The agreement stipulates a price-linked price mechanism. Between February 2019 and December 31, 2022, the price range is between $680 and $1080 per ton (grade is 6%).

In 2018, Balde Mountain produced a total of 68,546 wet tons of lithium concentrate, of which 17,403 tons in the first half and 51,143 tons in the second half.

In May of this year, Alita signed a separate subscription agreement with Gent's subsidiary, Muir, and another Australian exchange lithium mining company, Galaxy Resources Ltd (ASX:GXY), to raise A$32.5 million at a price of 20 Australian cents per share.

Galaxy contributed A$22.5 million in the institutional placement to acquire 12.22% of the company's shares and became the largest shareholder of Alita, while the subsidiary of Gent, Germany, provided A$10 million through conditional placement, increasing its shareholding ratio to 9.06%. The placement proceeds from the ongoing upgrade of the company's processing facilities and future exploration of the Valde Hills lithium mine.

At the time, Alita's managing director, Mark Calderwood, said that the company was satisfied with the support of its existing partner, Gent, and welcomed Galaxy as a strategic investor.

Calderwood said: "Our focus for the past 18 months is to put the Valde Hills mine into production and we have a reputation for producing and supplying high quality spodumene concentrates."

Bald Mountain Lithium Mine changed hands

Alita's initial goal was to produce 180,000 tons of lithium concentrate in 2019 and to increase production to 240,000 tons in 2020. This year, Alita achieved strong production in Bald Mountain for two quarters. In the second quarter of this year, it produced 38,717 wet metric tons (wmt) of 6.2% high-grade lithium oxide, which is slightly more than the output of 38,291 tons (6.1% lithium oxide) in the first quarter of this year. There is an increase.

In the first half of this year, the total output was 77,008 tons, and the lithium content was 6.15%, equivalent to 78,937 tons of 6% lithium, which is the upper limit of the previous production indicators.

But behind this year's strong production, Alit's business crisis is hidden. The parent company of its major Chinese customers is facing market difficulties and Alit needs to find new orders. In order to keep inventory in the case of excess lithium supply, Alita also lowered the price of lithium concentrate shipments.

In the first half of 2018, the price of lithium chemical products of Jiangte Motor is still relatively high. Since the second half of 2018, with the adjustment of the supply and demand pattern of the industry, the price of lithium chemical products has been significantly corrected, resulting in lithium in the first half of 2019. The sales revenue of chemical products decreased significantly compared with the same period of last year. Affected by this, Jiangte Electric achieved operating income of 1.36 billion yuan in the first half of 2019, down 18.53% from the same period of the previous year, and achieved a net profit attributable to the parent company of 72 million yuan, down 76.49% from the same period of the previous year.

Alita has delivered 10,500 dry metric tons (dmt) of lithium concentrate to Jiangxi Baojiang Lithium, which has only completed half of the original commitment. The latest supply price is lower than the originally agreed reserve price of US$680 per ton.

In the past two years, Baojiang Lithium Industry is the single largest customer of Alita, and almost all of Alita's “big orders” are maintained in Baojiang Lithium. Earlier this month, however, Alita said it was discussing with Jiangxi Baojiang Lithium Industry Co., Ltd. to re-sign the off-take agreement signed by both parties in January this year.

In July this year, Alita announced that there were 38,000 tons of spodumene backlog in the port, and another 2,200 tons of backlog in the mine. The price in the second quarter of this year was $1070 per ton, and the cash cost was $774 per ton. However, in the past two or three months, the price of lithium fell and fell again.

Before Alita found a new order, the last straw that crushed it was a high-yield debt. Alita's $40 million secured loan is scheduled to expire at 7pm on August 29. The loan comes from Tribeca Investment Partners, a 5% stake in the company, with an interest rate of 15%.

Alita said last week that it had received a lender's default notice requesting a loan worth 40 million Australian dollars ($27.02 million). The lender said that the debt default was due to a sharp drop in lithium spot prices and weak demand for spodumene concentrate.

In the discussion of the loan with the secured creditor and other major stakeholders and lenders, Alita finally reached an unsustainable situation.

On August 27th, the $40 million debt was acquired by the industry miner, Galaxy, the largest shareholder of Alita. Galaxy CEO Simon Hay said that the acquisition of debt can make Galaxy flexible to become Alita's secured lender and the largest equity holder. As a senior secured creditor, Galaxy can work directly with all stakeholders to review the best restructuring options.

Galaxy acquired the Tier 1 mortgage claim of the Bald Mountain Lithium Mine while acquiring the debt.

The under-funded mining company negotiated with various parties on the terms of negotiations for the restructuring proposal, saying the company could not ensure its commitment. Alita had to enter bankruptcy after drawing conclusions that the company was "incapable of repaying, or may be bankrupt at some point in the future." Korda Mentha's Richard Tucker and John Bumbak have been appointed as the bankruptcy administrator of Alita.

Australian lithium mining "struggling"

Recently, Australia's lithium export plan has been cut sharply again, and one of the large producers temporarily idled their mines, delayed sales and delayed expansion plans. Most Australian lithium producers report that the slowdown in China's lithium processing plant in 2019 is a key factor in curbing lithium demand and forcing lithium mines to reduce delivery.

In a recent announcement by Pilbara Minerals, the production plan was substantially adjusted and the plan to sell a 50% stake in the Pilgangoora mine in Western Australia was abandoned.

Pilbara made the final investment decision in November 2018, spending $231 million to double the export capacity of the Pilgangoora mine. According to the plan, by 2021, the output will increase from 330,000 tons per year to 800,000 tons per year, and the first batch of products will be delivered before Christmas 2019.

But Chinese automakers such as Great Wall and Yanfeng Lithium have slowed down in building processing plants that convert lithium-rich spodumene concentrate from Pilbara into battery-grade lithium. The funds to support the expansion were stretched, and the client requested a delay in delivery of the goods, and Pilbara decided to postpone the expansion plan.

According to the recently announced new plan, Pilbara will decide whether to invest 70 million Australian dollars to increase capacity by 100,000 tons in early 2020. It is expected that these projects will be completed by the end of 2020. If the production increase plan is promoted, then by 2023, most of the capacity expansion, that is, an investment of 150 million Australian dollars to increase production by 370,000 tons, seems unlikely to be put into production.

Pilbara has been reducing exports, and the company recently announced that sales for the three months to September will be between 20,000 and 35,000 tons; lower than previously expected 35,000 to 48,000 tons. Moreover, reduced demand and existing spodumene stocks mean that it may significantly reduce its Pilgangoora mine activity in the coming months, and said the mine may sometimes be discontinued.

Pilbara said in a statement, "Mining activities will be reduced to the minimum required... including periods of inactivity."

For the year ended June 30, Pilbara's business had a net cash flow of A$10.40 million. Reduced mine activity, coupled with slower expansion, should help maintain the company's cash balance until the lithium market improves. The sale of its stake in the Pilgangoora mine is expected to increase its cash reserves, but as expected, the company decided not to sell during the lithium market bear market.

Albemarle Corp (NYSE: ALB), the world's largest lithium miner, has also cut its Australian investment plan by $1.5 billion in the near future. Lube Kissam, CEO of Albemarle, said that cutting investment is not a denial of Australia's attractiveness as an investment destination, but he also acknowledges that the cost of the Western Australian mining industry is rising. Compared to China, the cost of building a factory in Australia is much higher.

"temporary" excess?

Although Australian lithium miners are cutting sales and expansion plans, Chilean lithium giant SQM is planning aggressive supply expansion, with sales expected to be 30% higher in 2019 than in 2019. For the lithium mine market, some lithium miners in Australia still have hope.

Adrian Griffin, managing director of Lithium Australia (ASX:LIT), believes that traditional lithium production will not be able to meet demand by 2030.

He said that the current "panic" and analysts' judgment that lithium supply is going over surplus and the popularity of electric vehicles is lower than expected does not take into account long-term market fundamentals. The current oversupply situation is only temporary.

Ken Brinsden, Managing Director and CEO of Pilbara Minerals, agrees. He believes that the lithium battery industry is in a "rebalancing period" and today's "market uneasiness" will be "short-lived."

At present, China is the only country that processes lithium ore into lithium carbonate and lithium hydroxide required by the battery industry. Brinsden's view is that the current rebalancing period is a necessary stage and China can continue to improve processing technology and increase production capacity.

Brinsden said that only five years ago, lithium mining was still a small market, most of which were used in ceramics and medicine. But now, with the exception of China, the rest of the world continues to “crazy” buying lithium, especially South Korea and Japan, which are looking to build downstream lithium processing plants. The new chemical production capacity will be launched next year, the use rate of electric vehicles will continue to grow, and the growth of lithium demand will still exist.

On the other hand, Australia now has basically only four full-load lithium mines, and even with planned expansion, these mines are difficult to meet growing demand.

Bruce McCracken, managing director of BMG Resources (ASX:BMG), a lithium distillate exploration company, is also convinced that lithium's long-term demand drivers are "increasingly obvious." The current concern about excess lithium batteries is the result of "wrong information and misunderstandings."

BMG is about to start drilling in a joint venture in northern Chile, and McCracken points out that lithium brine operations have a greater advantage than hard rock operations, including shorter mining times and costs.

Lithium Australia Managing Director Griffin said that by 2030, it is estimated that there will be about 50 million electric vehicles in the world, and about 3.5 million tons of lithium carbonate will be needed for electric vehicles every year. In addition to the demand for electric vehicle drives, as the demand for energy storage and electronics continues to grow, the growth of the lithium market is unlikely to stop. Current mining and planning projects and expansions will not be able to meet consumer demand in the long run.
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