TLG Ann: Talga and ACC graphite anode offtake update - 30th Nov 2022, 8:15am

[anbuck]

the approval of the iron mine next door just gives the final confidence in permits being granted. I would say there is a less than 5% chance of not granted.

I agree. Mark's reiteration recently that every indication he'd received is that the permits would be approved combined with the iron mine getting approved has raised my estimation to a 90-95% chance of Talga receiving the permit.

Initially, when the non binding offtake was announced, I gave the contract a 50% probability of materializing.

The short timeline on the non-binding agreement made me put it at more like 70% chance of materializing when it was announced. Typically the shorter the timeline chosen, the fewer details there are to be worked out.

It appears at the time, that the non-binding announcement was made in order to boost the share price for the CR that we all knew had to come. I rather have a CR at a higher share price than a lower one, so its not like I disapprove entirely of the strategy, but its not nice to be in this situation either. Lets face it, if you want to make a deal, you make a deal. You dont publicly announce you are making a deal, maybe, possibly, have faith in us, we totally didnt tell you this because we wanted to boost the share price.

Boosting share price is one possible reason, but I also think that setting a public date to complete a binding agreement gives the negotiations more urgency and helps force the parties to either reach agreement or go separate ways rather than having the talks simmer endlessly. Additionally, it could also be a way to put pressure on other parties that Talga was negotiating with in parallel.

Now we are in a new situation. Talga said, that we should expect a result 'shortly'. On an initial time scale of ~8 weeks, 'shortly' certainly means a small fraction of the initial time period. I interpret this as 2 weeks. My expectation of the contract being signed, at all, sits at around 50% contract, 20% long delay, 30% walk away. And its going to drop fast starting at the end of the 2 weeks 'shortly' period. So if we dont here anything by December 14th, my expectation is going to be: 30% contract, 10% long delay 60% walk away. If nothing by Christmas, its going to be at 10% contract, 0% long delay, 90% walk away.

I agree. My interpretation immediately after the "shortly" announcement was that we'd likely have another announcement within two weeks. The way I looked at it they had three options at that time, given that no agreement had been reached:

1. Announce that the contract would be completed "shortly" with no date specified.
2. Announce the negotiations would continue, but provide a new date that they would be completed by.
3. Announce that negotiations had failed and that there would be no offtake with ACC.

If there were significant items to still be negotiated, option 1 would not make sense because then the situation would be back to being an indefinite simmer with less urgency. Therefore, option 1 only made sense if no significant disagreement remained. This could still be the case and hopefully it is, however, the likelihood is diminishing by the day.

Here's my latest assessment of the possibilities (very similar to Semmel's):

1. Reach agreement with ACC before the end of the year: 60%
2. Reach agreement with ACC after the end of the year: 20%
3. No agreement with ACC: 20%

Regardless of what happens with ACC, I'm confident that Talga will sign one or more binding offtakes prior to needing to raise money again, so I don't think the outcome of the negotiations with ACC would only have minor ramifications for the overall future of Talga. If Talga doesn't reach agreement with ACC, it's clearly because Mark was making aggressive demands, not because Talga doesn't have the right product because any concerns about the product would've have come up prior to this. Talga likely signed the non-binding offtake with ACC instead of a different party because ACC was the most amenable to the pricing terms that Talga wanted. If they aren't able to come to an agreement with ACC they'll still be able to reach a binding offtake with a different party, but it will likely be at less favorable terms, so lower margins is the main effect I see on Talga's future if they can't reach an agreement with ACC.

Lets face it, on the customer or partner level contract front, Talga is not great. Which is why I will give very little value to any future or existing non-binding agreements. I dont think Mitsui adds any value to Talga a this point for instance. More likely than not, they are already gone. Development as coating additive for ship paint? Probably a nothing burger. Graphene for concrete? Probably 0 value.

I tend to disagree here. I agree that we shouldn't put much weight behind any specific non-binding partner announcement, but that doesn't necessarily have negative ramifications for Talga's future. The fact that Mitsui may not be able to add value to Talga now is a good thing because it's due to Talga being more established with more options now than when they signed the MoU with Mitsui. So getting excited any particular MoU is probably unwise, if MoU's end up coming to nothing, that isn't an indication that Talga can't close a deal in the future.

Whether or not graphene for ship paint or concrete works out, doesn't mean that graphene additives in general have no value. Graphene is an immature technology, but once Talga is producing graphene at scale, there will be more impetus for companies to test it and integrate it in their products. Until it's actually available, there isn't much incentive to put R&D dollars into it.

 

[Coolbeans]

Hi Semmel
Always good to get your thoughts on Talga and I appreciate your sensible and considered commentary on Talga’s progress.

Agree with many of your comments, but I will respectfully disagree with one point regarding negotiations and Mark’s capability. I would not go so far to describe Mark as a ‘masterful negotiator’ either, but I do believe that just because he hasn’t closed many deals, doesn’t mean he is incapable of doing so. First and foremost, I believe he is always assessing whether the deal is in the long term interests of shareholders and that includes himself as the 2nd largest shareholder. Sometimes, it is just as important to know when to walk away than to sign a deal for the short term appeasement of the market.

In terms of LKAB - you questioned why Talga signed a MOU with them in the first place. You have to remember the timing and strategic rationale that this was well before Russia’s invasion of Ukraine and any genuine sense of urgency from Sweden/EU of needing to secure critical raw materials via improved permitting and crucially well before funding options via the European Investment Bank etc were a viable debt financing option for a graphite company like Talga.

It made a huge amount of sense to partner with LKAB, being a Swedish State owned mining entity to potentially assist Talga with attaining permits and having the financing to support construction of the project as well as the mining itself. Whilst, we don’t know for sure, but I believe LKAB wanted a major stake in the potential JV and Mark wasn’t willing to give away such a large chunk as other alternative pathways came available that weren’t obviously there when they first entered the non-binding MOU.

In terms of the ACC deal, we need to remember that graphite is only just starting to get on Auto OEMs radar as it has been assumed to be in plentiful supply as an industrial product and it is only predicted to become the major use for batteries in 2023. Mark has commented that it is only in the last 6 months that OEMs have started to take their graphite/anode supply seriously and it is coming off a low price base unlike lithium, which is already in deficit and has gotten all the media headlines. I think we need to appreciate that urgency to secure lithium hydroxide/carbonate has not extended to graphite/anode just yet. To top if off - Mark is trying to build in a floating price mechanism to ensure TLG captures the upside from future price increases. Naturally, the OEMs who are getting burnt on lithium prices right now would want to minimise their cost control on yet another critical battery mineral and would be doing all they can to minimise this.

Therefore, I think we need to appreciate the challenge a small cap mining stock like TLG trying to negotiate with major multi billion dollar Tier 1 automotives might be flexing their legal muscle to extract the best outcome for themselves. I think ultimately a deal with ACC and others will be done as it would just be pure negligence to rely on Chinese anode supply given the geopolitics and environmental regulations forecast to be implemented in Europe. It is pointless to predict exactly when it will come through and perhaps there may be some compromise on both sides to eventually get it done.

It's inevitable we will predict when it comes when MT puts in shortly! Text mark and tell him to leave out the shortly next time.

 

[Coolbeans]

It's inevitable we will predict when it comes when MT puts in shortly! Text mark and tell him to leave out the shortly next time.

Or email him, however you guys communicate

 

[Semmel]

I tend to disagree here. I agree that we shouldn't put much weight behind any specific non-binding partner announcement, but that doesn't necessarily have negative ramifications for Talga's future. The fact that Mitsui may not be able to add value to Talga now is a good thing because it's due to Talga being more established with more options now than when they signed the MoU with Mitsui. So getting excited any particular MoU is probably unwise, if MoU's end up coming to nothing, that isn't an indication that Talga can't close a deal in the future.

It made a huge amount of sense to partner with LKAB, being a Swedish State owned mining entity to potentially assist Talga with attaining permits and having the financing to support construction of the project as well as the mining itself. Whilst, we don’t know for sure, but I believe LKAB wanted a major stake in the potential JV and Mark wasn’t willing to give away such a large chunk as other alternative pathways came available that weren’t obviously there when they first entered the non-binding MOU.

@anbuck and @TentCity , I value a heatly discussion with disagreeing opinion as well. Lets continue this way!

At the time of dropping out, LKAB seemingly surprised Talga with it. At least thats what was communicated from Talga. If LKAB was asking for too much of a stake, it would have been Talga that walks away, and not LKAB in a surprise turn of events. Later, we found out that LKAB "had enough on its plate", but who knows whats going on behind closed doors? We might never know for sure, but as far as communication goes, it wasnt very clear.

We all seem to agree that MOUs dont really have the value that many shareholders expected, me included. Maybe because they are presented as market moving significant announcements, but I guess its part of the learning experience in the stock market. Anyway, I dont really know how to judge Marks negotiation skills, as not much of signed papers are accessible. So .. I simply dont know. But @TentCity , you make a good point with OEMs only now starting to become aware of the graphite problem. Its not only that its not readily available, its also that all the raw materials go to china for processing, even when mined in Africa for instance. Talga is a huge strategic asset being not subject to this process. And EU at least knows that, question is if OEMs also know it.

There is a bit of circular reasoning going on in terms negotiation skills. Suppose we have any of the non-binding agreements that didnt end up in a binding contract. That is interpreted as evidence that the other party wanted too much from Talga, and as evidence that Talga did good in walking away in the end. This in turn is used as evidence of positive negotiation skills by Talga management, may it be MT or someone else. And because they are good at negotiating, they know when to walk away. See where the circle is? You can argue the other way around as well and say that negotiations came to nothing, therefore skills are bad, and because they are bad, negotiations fail. Both trains of thought are circular reasoning and both are equally wrong because we never learn specifically why some negotiations fail. If they were to succeed on the other hand, we would be able to look at the terms of the contract and draw conclusions about how well negotiations went from that outcome. But without these, we are just shooting in the dark. Therefore, I am hesitant to draw any meaningful conclusion.

I might also add, that a signed contract can accelerate the project outside of permits. Talga could preemptively order machines and equipment that have long delivery times if we had funding. We would have funding easier if we had an off-take agreement, conditional on getting funding and permits maybe. But the earlier processing that this would enable is worth signing a less than perfect offtake agreement. There is a way to square the circle, its hard though. And am sure Talga somehow can make it happen, question is to which terms and when. Time is of the essence in my opinion. We need to get moving asap. The market is running into a graphite deficit sooner rather than later. And we need to get the expansion (hopfully much larger than currently planned) ready to go by then. If we continue the same pace as for Vittangi, Niska wouldnt be available before 2030, and that is too late to capture the largest part of the market growth.

Cheers all!

 

[anbuck]

At the time of dropping out, LKAB seemingly surprised Talga with it. At least thats what was communicated from Talga. If LKAB was asking for too much of a stake, it would have been Talga that walks away, and not LKAB in a surprise turn of events. Later, we found out that LKAB "had enough on its plate", but who knows whats going on behind closed doors? We might never know for sure, but as far as communication goes, it wasnt very clear.

It was clear to me from the tone of Mark's comments in the days leading up to the termination of negotiations that things were not going well. He said "on track", but his body language and awkwardness made it clear that something was wrong, but I suspect that he was indeed surprised at how abruptly LKAB decided to walk away. I agree that Mark made a mistake by saying things were "on track". I think he should have just said that the couldn't comment on it, but it doesn't undermine my confidence in Mark. Based on how awkward he was, I think he just got a question that he didn't expect and made a mistake trying to answer it off the cuff.

There is a bit of circular reasoning going on in terms negotiation skills. Suppose we have any of the non-binding agreements that didnt end up in a binding contract. That is interpreted as evidence that the other party wanted too much from Talga, and as evidence that Talga did good in walking away in the end. This in turn is used as evidence of positive negotiation skills by Talga management, may it be MT or someone else. And because they are good at negotiating, they know when to walk away. See where the circle is? You can argue the other way around as well and say that negotiations came to nothing, therefore skills are bad, and because they are bad, negotiations fail. Both trains of thought are circular reasoning and both are equally wrong because we never learn specifically why some negotiations fail. If they were to succeed on the other hand, we would be able to look at the terms of the contract and draw conclusions about how well negotiations went from that outcome. But without these, we are just shooting in the dark. Therefore, I am hesitant to draw any meaningful conclusion.

I'm not sure if you're referring to my comments or someone else's, but I never said that Mark had good negotiating skills, only that if ACC walks away, it's likely because Talga was making strong pricing demands, not because of a problem with Talga's product. Without being privy to the communications between parties, I can't judge their negotiation skills. I do think we can say that Mark is clearly not desperate and clearly not a pushover or else the deal would've been signed already. It is always possible though that Mark is making demands that are unrealistic, but based on the limited data I have, that's not the sense I get.

I also want to make it clear that I view the ACC non-binding offtake differently from the MoU's that Talga has signed in the past because it is more focused and concrete. It's clear what each party would get from the offtake, whereas with MoU's with LKAB and Mitsui, the relationship of the parties seems much more open ended and more difficult to settle on. As a company progresses and as political and economic conditions change, it's common for parties that were interested in each other in the past to lose interest in one another and signing an agreement too early can be a mistake. The ACC deal is not that. Both parties are clearly interested in signing a contract and have an urgent need to do so. So, if the ACC contract doesn't get done, it's due to pricing terms, not growing apart.

I might also add, that a signed contract can accelerate the project outside of permits. Talga could preemptively order machines and equipment that have long delivery times if we had funding. We would have funding easier if we had an off-take agreement, conditional on getting funding and permits maybe. But the earlier processing that this would enable is worth signing a less than perfect offtake agreement. There is a way to square the circle, its hard though. And am sure Talga somehow can make it happen, question is to which terms and when. Time is of the essence in my opinion. We need to get moving asap. The market is running into a graphite deficit sooner rather than later. And we need to get the expansion (hopfully much larger than currently planned) ready to go by then. If we continue the same pace as for Vittangi, Niska wouldnt be available before 2030, and that is too late to capture the largest part of the market growth.

Yup, negotiations are always a game of chicken. The way to be a good negotiator is to think about what it's like from the other party's perspective. What aspects of the deal do they most care about (even if they claim otherwise)? If the deal falls through, what are the ramifications of that to them? What alternative options do they have? Keep in mind that ACC and other potential offtake partners are also under pressure to close battery materials deals as more and more of the future mining output becomes spoken for. If you act based on your own fear of the deal not closing, you will not get the best terms possible. You have to weigh the fear of both parties to understand what terms are possible.

 

[anbuck]

Well my initial assessment that "shortly" meant that ACC was essentially a done deal was clearly wrong at this point. I'm very curious to know what happened. I hope we find out at some point down the road rather than it being forever a mystery.