Tianqi Lithium Corporation (IGO) Earnings Call Transcript & Summary

Thanks, Ben, and hello, everyone. It is my very great pleasure to lead you through this presentation to discuss this exciting new opportunity that we have unlocked for IGO. This is a transformational investment for IGO into an established high-quality integrated lithium business of scale and long life in Western Australia. The investment supplements our exposure to clean energy metals at Nova, where we produce nickel, copper and cobalt, and positions IGO globally as a unique clean energy company. Joining me on the call today from IGO are Matt Dusci, our COO; Scott Steinkrug, our CFO; Andrew Eddowes, our Head of Corporate Development; and Tony Zaffino, our Business Development Manager, all of whom will be available to respond to questions during the Q&A. Turning to Slide 2, where I refer you to our important notes and disclaimers which are set out on Slides 2 to 5. Turning to Slide 6, although Greenbushes and the Tianqi lithium hydroxide refinery are located in Western Australia, and although Greenbushes has been operating for many years, we recognize that there is limited visibility of these Tier 1 assets in the market. We also recognize that there is some complexity to the structure of our investment in this lithium business. Therefore, our plan is to systematically work through the detail of the transaction and the compelling fundamentals of this established lithium business. To that end, I will provide an overview of the transaction, then summarize the investment highlights, then talk to each of Greenbushes and the Kwinana lithium hydroxide refinery, before closing with a discussion on the equity raise that we launched this morning and a discussion on how this transaction uniquely positions IGO as a clean energy metals company. First, the transaction overview, starting on Slide 7. Let's dwell on this for a moment, which is a great photo of Greenbushes, which captures the scale of the Greenbushes operations with the 2 chemical grade spodumene processing plants in the foreground and the open pit operation below the horizon. Turning to Slide 8, where we provide a high-level summary of the transaction structure. IGO is to acquire a 49% interest in a holding company, which I will refer to in this presentation as Lithium HoldCo, for USD 1.4 billion, through which we will have a 24.99% indirect interest in Greenbushes, the largest and lowest cost hard rock lithium mine on the planet, and a 49% interest in the Kwinana battery-grade lithium hydroxide refinery, the first of its kind in Australia and the first fully automated lithium hydroxide refinery in the world. The transaction is expected to close in the June 2021 quarter and is to be funded with a combination of debt, equity and cash reserves. Due to legal restrictions, we are unable to discuss details around the equity raising other than the terms referred to in this presentation. Please refrain from asking questions about the specific details of the equity raising as we are legally restricted from answering those questions on this call. This was a competitive process, and we have been in it since early this year. We established a nonbinding indicative price several months ago at the bottom of the lithium cycle. Since then, through the final stages of DD and documentation, we have held this price despite positive tailwinds in the lithium market and a rapidly improving market sentiment. We do not believe that we were the top bidder, but we were prepared to consider a transaction structure that worked for Tianqi and which provided IGO the once-in-a-lifetime opportunity to invest in what is truly a world-class integrated lithium business. The transaction is a win-win for both IGO and Tianqi. Slide 9 sets out the highlights of the transaction. The transaction is transformative, delivering exposure to a world-class integrated lithium business, strong return metrics long-term free cash flow and significant brownfields growth potential. The transaction is accretive to NAV and accretive to earnings per share from the 2023 financial year, and positions IGO as a unique option to invest in clean energy metals. Greenbushes is a world class -- is world-class being the lowest cost and largest hard rock lithium mine in the world with an established operating history and established infrastructure in the southwest of Western Australia. Greenbushes is the benchmark against which all other hard rock lithium deposits are judged. Equally, the Kwinana battery-grade lithium hydroxide refinery, which has been designed for the Greenbushes concentrate, delivers a fully integrated business to produce high-quality lithium hydroxide required for the highest performance lithium ion batteries. Kwinana leverages off IP that Tianqi has developed over many years as well as deep customer relationships outside China. We have been disciplined. We have waited for the right assets. We have undertaken rigorous due diligence. We have transacted at what we believe is the bottom of the lithium price cycle and on the eve of the explosion of the electrification of transport and disruptive demand for lithium. Additionally, the funding structure has been designed to maximize shareholder returns. We are proud to establish a level of Australian ownership in this integrated lithium business. Turning to Slide 10. The transaction is aligned with strategy, delivering an interest in a high-quality business of scale and long life in a Tier 1 jurisdiction and with strong ESG and sustainability fundamentals, along with broader exposure to metals critical to enabling clean energy. The transaction also takes IGO downstream while delivering greater relevance in the clean energy metal supply chain and connectivity to end users. What IGO brings to the table is a local presence and upstream capability. We look forward to collaborating with both Tianqi and Albemarle to safely unlock additional value from both Greenbushes and the Kwinana lithium hydroxide refinery by leveraging our capabilities and presence to optimize and maximize this integrated lithium business. Turning to Slide 11, which summarizes the detail of the transaction, some of which we have already discussed. I will, therefore, focus on the key conditions precedent to completion. First, there are no Chinese regulatory approvals required for the transaction. The only regulatory approvals are in Australia and the United Kingdom associated with the restructuring of these assets that Tianqi will complete prior to closing. The only approval required in China for the transaction is the Tianqi shareholder approval. The Chairman and Founder of Tianqi, who currently owns 35% of Tianqi, has committed to support the transaction in this Shareholder Meeting. In the event that this Shareholder Meeting approval is not delivered, Tianqi will pay a USD 70 million break fee to IGO. In this event and for any other reason that the transaction does not close, the bank facilities will be terminated and not drawn down, and IGO will consider mechanisms to return the capital from the equity raise. Turning to Slide 12, where we set out the sources and uses of funds. As discussed earlier, the transaction is to be funded with a combination of AUD 1.1 billion of debt, up to AUD 766 million of new equity and up to AUD 150 million from cash reserves. The AUD 1.1 billion syndicated facilities are underwritten and will comprise a AUD 450 million 3-year amortizing term loan, a AUD 300 million 300 -- sorry, 3-year revolving credit facility, and a AUD 350 million 1-year bridge facility. The commitments have been secured from a club of banks including CBA, ANZ, Citibank, NAB and Westpac, many of which have been long-term financial partners of IGO. The new equity raise of up to AUD 766 million will comprise a fully underwritten AUD 700 million placement and accelerated entitlement offer to institutional investors and a non-underwritten retail entitlements offer. Turning to Slide 13, the debt facilities have been secured off IGO's existing assets and cash flow from Nova and Tropicana. Post completion, we demonstrate here a robust balance sheet with pro forma cash on completion of approximately AUD 424 million and debt of AUD 1.1 billion. The bridge is to be repaid by the end of 2021, and we have multiple levers in place to affect this. As a backstop, the company will have sufficient cash on the balance sheet to pay down the bridge. Other options include the sale of Tropicana, which would allow the bridge to be closed out and the term debt and revolver partially repaid. Turning to Slide 14 where we set out key dates for the transaction. As indicated earlier, we expect the transaction to close in the June 2021 quarter once the internal restructuring of the Australian assets by Tianqi is completed. Stepping back from this, we expect Tianqi shareholder approval to be obtained in February 2021, and we expect the retail component of the entitlements offer to complete in January 2021, and the institutional placement and accelerated portion of the entitlements offer to complete late next week. Turning to Slide 15. Again, we have here another great photo, this one from the Kwinana lithium hydroxide refinery. This refinery comprises 2 trains. Train 1 is built and ready for commissioning, which will commence in the coming months. Train 2 is about 20% to 30% constructed, with about 50% of the construction CapEx spent. Total sum capital to date at Kwinana is about USD 700 million. What you cannot see in the photo is the Tesla charging station in the car park, where I will be able to charge my Tesla when visiting Kwinana. Turning to Slide 16. We are investing in a Tier 1 lithium business in our own backyard in Western Australia. As many of you recognize, Western Australia is a Tier 1 mining and resources jurisdiction, well-located with respect to emerging markets for clean energy metals. The world-class Greenbushes mine is located in Western Australia's Southwest, about 3 hours' drive south of Perth, and proximal to port infrastructure in Bunbury. The Kwinana battery-grade lithium hydroxide refinery is located in the Kwinana industrial area within the greater Perth environs and proximal to port infrastructure at Fremantle. Turning to Slide 17. Greenbushes is aligned with our strategic preference for assets of high-quality, scale and long life. Greenbushes is the world's lowest-cost and highest-grade hard rock lithium mine as well as the largest by reserve size and market share. In 2019, Greenbushes represented 21% of global supply. From a quality, scale and mine life perspective, Greenbushes is in a league of its own. Greenbushes is also an established producer with well-established market recognition and a lower overall risk profile from a resource, process technology, infrastructure and market perspective than new greenfield lithium projects. Turning to Slide 18. The world-class Kwinana refinery is Australia's first lithium hydroxide refinery and is the first fully automated lithium hydroxide refinery in the world. Kwinana leverages off IP developed by Tianqi over many years. Consequently, based on work by CRU, Kwinana is expected to be a bottom-quartile cost producer by 2025. In addition, Kwinana will benefit from an established customer base with premium off-take partners in South Korea and Europe. Turning to Slide 19. Both Greenbushes and Kwinana present brownfields growth opportunities. At Greenbushes, existing production capacity comprises 1 technical grade plant and 2 chemical grade plants, one of which is currently mothballed and is expected to recommence operations in 2021 as lithium demand picks up. This will be closely followed by construction completion of the tailings retreatment plant in 2022, resulting in a further lift in production capacity. Longer term, plans are in place to construct 2 additional chemical grade processing plants. Kwinana consists of 2 trains. Construction of Train 1 is complete, with commissioning expected to commence in early 2021 and ramp-up to full production expected by late 2022. Construction of Train 2 is expected to commence again in 2021. Further potential exists for Trains 3 and 4 at Kwinana, with land available adjacent to Trains 1 and 2 for these possible developments. Turning to Slide 20. This brownfields growth potential delivers significant optionality to flex production to respond to changes in demand for spodumene and lithium hydroxide. Cash flow from the existing lithium business and a revolving credit facility at the Greenbushes level is expected to fund the majority of the capital requirements with expected cash call on IGO of $40 million in 2021 and less than $10 million total beyond 2021. Turning to Slide 21. Through our transformative investment into this world-class lithium business, IGO continues to evolve into a truly unique investment proposition globally within clean energy metals, delivering exposure to nickel, copper, cobalt and lithium, all from the Tier 1 Western Australian mining jurisdiction and all delivered to the highest ESG standards. Turning to Slide 22. We have communicated our strategic focus on metals critical to enabling clean energy for some time. We have also communicated our growth strategy with a parallel focus on both organic and inorganic growth options to deliver increased exposure to high-quality assets of scale and long life. We have been disciplined, and we have waited for the right assets and the right point in the cycle. The charts on this slide illustrate where we are in the cycle, and as I said earlier, we believe that the price for spodumene and lithium hydroxide has bottomed out and is now moving up. We believe that the outlook for clean energy metals is strong with increasing demand for electric vehicles over the coming years expected to drive disruptive demand for all metals critical to enabling this, including lithium. Turning to Slide 23. Tianqi is an established vertically integrated lithium producer with IP developed over many years and a strong customer base within and outside China. By capacity, Tianqi is the third-largest lithium producer in the world and has held an interest in Greenbushes for many years. Tianqi secured an interest in SQM at the top of the lithium market in 2018, and it is market knowledge that the debt put in place to fund this acquisition has created significant financial stress for Tianqi. Without this stress, these Tier 1 assets would not be coming to market and IGO would not have this opportunity. Our transaction is a win-win for both companies. IGO gains exposure to this world-class vertically integrated lithium business at the bottom of the cycle, and Tianqi secured a local partner, as well as the acquisition proceeds to cornerstone a refinancing of its debt facilities. Through the due diligence and commercial discussions, we have developed strong relationships with the Founder and Chair of Tianqi, and I look forward to continuing this collaboration through the investment. Turning to Slide 24. The transaction is NAV accretive and expected to be earnings per share accretive by the 2023 financial year. Importantly, it meets our internal investment hurdles and delivers a stream, a long stream of free cash flow over many years to fund continuing returns to shareholders and continuing investment in organic and inorganic growth. We expect that there is the potential for a re-rating for IGO post-transaction. We say this because vertically integrated lithium businesses globally trade at a premium multiple to EBITDA as a result of their scale, life, diversification and downstream integration. Turning to Slide 25 for a more detailed overview of the Greenbushes and Kwinana assets. I do note that additional detailed information can be found in the appendices to this presentation. Turning to Slide 26, where we summarize the key technical and financial metrics for Greenbushes, which has a proven operating history and a significant brownfields growth pipeline. All ore is mined from a single open pit with an expected life of mine strip ratio of 3.7:1 and a current reserve life of about 20 years. In addition to this, the Kapanga deposit represents potential upside to extend mine life for another 7 years. Turning to Slide 27. Ore is processed in either a technical-grade processing plant or chemical-grade processing plant. There are 2 chemical-grade processing plants in place, of which only one is currently running. The second and newest chemical-grade processing plant is expected to recommence operations in 2021 as spodumene concentrate demand picks up. Current chemical-grade production capacity at Greenbushes is 1.2 million tonnes per annum, and this is planned to increase to 2.5 million tonnes per annum through the proposed development of 2 further chemical-grade plants. Life-of-mine costs are expected to be about USD 217 per tonne. Turning to Slide 28, where we provide further detail on the Kwinana refinery, which is a battery-grade lithium hydroxide refinery in the Kwinana industrial area, about 1 hour's drive south of the Perth CBD. To date, about USD 700 million has been spent at Kwinana to complete construction of the first 2 trains and to partially -- sorry, the first of 2 trains and to partially complete a second train. The CapEx on the second train is about 50% spent, and construction is about 20% to 30% complete. Train 1 is to start commissioning in early 2021 and to be fully ramped up by late 2022. Train 2 is expected to start commissioning in 2024. Additional land adjacent to Train 1 and 2 has been secured for a possible Train 3 and 4. Turning to Slide 29. When fully operational, each train is expected to produce approximately 24,000 tonnes per year of high-quality battery-grade lithium hydroxide. Life-of-mine all-in sustaining costs are expected to be between USD 7,200 and USD 7,850 per tonne. The photo on this slide provides a further perspective of the Kwinana refinery. Turning to Slide 20 -- sorry, 30. We will hold our interest in the world-class vertically integrated lithium business through Lithium HoldCo, an entity incorporated in the United Kingdom, of which we will own 49%. We will be in a minority shareholding position and therefore, a key derisking focus for us has been the governance structure and the minority shareholder protection mechanisms. Lithium HoldCo will own the 51% interest in Greenbushes, the world's largest and lowest-cost hard-rock lithium mine, as well as the 100% interest in the Kwinana battery-grade lithium hydroxide refinery. Lithium HoldCo will market lithium hydroxide globally outside China. Mechanisms for key approvals at both the Lithium HoldCo and Greenbushes level are summarized on this slide. Turning to Slide 31, where we map out the Lithium HoldCo and Greenbushes governance structures. Key to IGO at the Lithium HoldCo level is that we will nominate 2 directors. Tianqi will also nominate 2 directors and a fifth independent director will also be appointed. At the management level, IGO will appoint Lithium HoldCo's CFO, while Tianqi will appoint the CEO and COO. Notwithstanding this, we have already had an excellent level of collaboration with Tianqi to agree the capabilities and qualities required for each of these roles with the goal from both groups being to secure the right people to ensure the success of the lithium business. At the Greenbushes level, there are 4 directors, 2 of which are appointed by Albemarle, and through Lithium HoldCo, 1 will be appointed by Tianqi and 1 appointed by IGO. The Tianqi nominee is the chair and has a casting vote. Of the 3 key management roles, Lithium Holdco will appoint -- have the right to appoint the CEO and CFO. Turning to Slide 32, where we will provide some greater detail on the equity raising launched this morning. Turning to Slide 33. Approximately AUD 766 million of the funding for the transaction is to be raised by issuing approximately 166 million new shares. This will be by way of a AUD 446 million institutional placement and up to AUD 320 million, 1 for 8.5 pro rata accelerated non-renounceable entitlement offer to existing shareholders. The placement and institutional entitlement offer are fully underwritten by the joint lead managers and underwriters. I, along with the other directors who are shareholders, intend to participate in the entitlement offer. Turning to Slide 34, where we provide additional detail around the timing for the equity raising. The placement and institutional entitlement offer commenced today, and we expect that to be settled in shares allotted late next week. The retail entitlement offer booklet will be dispatched on Tuesday, the 15th of December, and the offer will settle on Friday, the 22nd of January, and shares will be allotted the same day. We anticipate making further announcements with respect to the equity raising in accordance with our ASX continuous reporting obligations in due course. We will communicate directly with investors with respect to their eligibility to participate in the equity raising. Due to legal restrictions, I cannot discuss any further details relating to the equity raising. Turning to Slide 35. Before providing a summary of the key takeaways from this compelling opportunity and opening the line to questions, I would like to acknowledge the contributions of the integrated team who have worked diligently on this transaction since early this year. This team, consisting of IGO employees, technical consultants, legal firms, investment banks and other advisers collectively has made it happen. Thank you to everyone for your tireless and invaluable contribution. Turning to Slide 36. The transaction is aligned with strategy delivering an interest in a high-quality business of scale and long life in a Tier 1 jurisdiction and with strong ESG and sustainability fundamentals, along with additional exposure to metals critical to enabling clean energy. The transaction also takes IGO downstream while delivering greater relevance in the clean energy metal supply chain and connectivity to end users. Transaction is a transformative once-in-a-lifetime opportunity, delivering exposure to a world-class vertically integrated lithium business, long-term free cash flow and brownfields growth potential, which positions IGO as a unique clean energy metals company. Further, the transaction represents a compelling value proposition for IGO and its shareholders, delivering strong return metrics as well as being accretive to NAV and accretive to earnings per share from the 2023 financial year. We have been disciplined. We have waited for the right assets and have transacted at what we believe is the bottom of the lithium price cycle on the eve of the explosion of the electrification of transport and disruptive demand for lithium. We have undertaken rigorous due diligence and have structured the funding to maximize shareholder returns. The transaction is a win-win for both IGO and Tianqi. IGO gains exposure to a world-class vertically integrated lithium business at the bottom of the lithium price cycle with exposure to Tianqi's IP and markets developed over many years. Tianqi secures a local partner as well as the acquisition proceeds to cornerstone a refinancing of its debt facilities. Finally, we are proud to establish a level of Australian ownership in this integrated lithium business. Thank you, everyone. I will now have Ben open the line to questions.

[Operator Instructions] Your first question comes from Nick Herbert from Credit Suisse.

Congratulations on the deal.

Thank you.

A few questions for me, please. Can we just start by clarifying the total capital contribution required from IGO to meet the committed expansions at Greenbushes and Kwinana? I think you mentioned that $40 million next year and $10 million beyond, but just assuming that's over and above what you're getting for cash flows and everything will be at sort of an equity share participation level.

Yes. Yes, as I indicated on the call, by and large, the majority of the CapEx required or substantially all of the CapEx required for the brownfields expansion, at both levels, is funded either from cash flow generated in the vertically integrated business or it's funded through the existing revolving credit facility at the Greenbushes level. And as I said, our only funding requirements based on our current modeling is a capital -- a cash call in 2021 of about AUD 40 million and a cash call in 2022 of less than AUD 5 million. And beyond that, we don't have any further IGO funding requirements in our model.

Okay, great. And then are you able to disclose some of the core assumptions around your comments that the deal will be EPS accretive from FY '23? And what spodumene and the hydroxide prices you assume in your modeling there?

Yes. We've provided a very high level of detail throughout the deck and both from a bottom-up perspective with the necessary physicals and costs to understand that side of the model and then some guidance there around where market's going in the near term. And having done the work ourselves to build a fresh model from the deck, we believe that can be done. And so we would leave it to you guys to do that work and form your own opinion. And the overall pricing assumptions in line with those forecasts from the likes of CRU and Roskill.

Okay, noted. And then just one, in previous calls we've had, you've spoken about moving into downstream nickel sulfate processing potentially offshore. Just wondering where that fits in your thinking now in terms of strategy, whether there's a deal that's potentially done there within the next 12 to 18 months, or has that now moved to a longer-term proposition given what's coming here with this transaction?

Yes, it remains an aspiration. I'd characterize it as long term. We continue to advance it in collaboration with our potential offshore partners. And -- but right now, and at the moment, the focus is on this transaction, getting that bedded down, getting it completed and then working with both Tianqi and Albemarle to optimize and maximize the businesses.

Okay. Great. And then final one just to clarify. The comments around debt repayment should a Tropicana sale be forthcoming, can I just clarify 100% the intention there from any proceeds would be to fully repay acquisition debt before considering any form of special dividend?

Yes, that's correct.

Your next question comes from Levi Spry from JPMorgan.

Big, big congratulations. Well done. Good deal.

Thank you.

Can you just help me understand your view on, I guess, where you attribute value when considering the mine and the downstream?

Yes, sure. Like we look at the NAV contribution from the 2 and where we would allocate price. The allocation of price into the refinery is not dissimilar to the pro rata share of sunk costs, and maybe a fraction over that. And that's probably as much guidance as we can give there.

Okay. And so just to be crystal clear, though, can you sell any spodumene on the open market?

So with the way the off-take agreements work, that both Tianqi to date has and which Albemarle has, is that they each have their share of off-take of spodumene, which they can use in their own refineries. And currently, spodumene from Greenbushes that is to Tianqi's account is shipped to China and are processed in refineries there. The transfer pricing is done in a very transparent manner and leverages off benchmark pricing for spodumene concentrate of 6%. And going forward, our first steps for that spodumene off-take would be the Kwinana refinery that would have first call. Any excess would continue to be shipped to China under that transparent and market-based pricing structure. We expect that at any stage along the journey, until we build possibly Trains 3 and 4 in the future, Kwinana's only going to take about 50% of the spodumene or our share of the spodumene production from Greenbushes.

Okay, yes. That's where I was going. So just so I understood that properly. The -- any excess spodumene production that you can't process downstream potentially goes to Tianqi in China and you make a margin and cash goes into the JV for that?

Correct, correct, yes. And then for completeness, that same transfer pricing is used to price the feedstock going into the Kwinana refinery.

Yes, okay. And so just following that on a little bit, Stage 3 and Stage 4. Can you talk to us a little bit about CapEx intensity for that and how that affects the -- or if that was excluded in the numbers you gave there to Nick on cash calls?

No, it wasn't. And in fact, in our models for the acquisition, we have not incorporated Trains 3 and 4. The relevance to the NAV was immaterial given the -- given how far out they are. And therefore, we left them out. I think it's fair to say that learnings from Train 1 and then future learnings from Train 2 will help inform capital decisions on Train 3 and 4. And we would expect that those learnings would result in a better CapEx intensity for those subsequent trains.

Okay. So maybe just the last one on that then. So just thinking about timing. Can you give us any time frames there? Or is there a period you talked about 50% of your share of spodumene still going to China. So is there a period there where it's really about the mine? So my original question around where the value is. It could be really about the mine there for a period of time rather than the downstream.

Yes. But as we show there on the charts, the building capacity of both tend to match. And then, as I said, until Train 3 and 4 are built, if they are built, it will be about 50% of spodumene going to Kwinana and 50% offshore. We wouldn't characterize Trains 3 and 4 as not happening. And the dates that are shown there in the presentation as when they could happen are realistic. We've just taken the view from an internal modeling point of view that it's not going to change, move the dial on valuation and pricing. And therefore, we've left it out and then the right time to revisit some of the economics around those future trains would be post completion of the transaction and once we're able to really fully establish our collaboration with Tianqi.

Yes, okay. I'm going to squeeze 2 more in, please. Off-take, so your share of off-take, is that accounted for? And are there contracts in place?

Yes, they…

Sorry, this is for hydroxide now. Yes, sorry. Yes.

Yes, there's off-takes in place for lithium hydroxide with a firm on 2 of the customers, 2 are still in negotiations, but at a very advanced stage. And negotiations are really about rolling an existing contract rather than starting from scratch.

Yes. Okay. And last one, promise, due diligence on Stage 1. So my understanding is there has been some issues in terms of commissioning of Stage 1. Can you give us an idea of your DD and what has gone wrong and why you're confident that it's been addressed and…

Yes. As I said on the call, there are a lot of learnings out of Train 1. And those learnings were largely to do with design decisions that were made around piping and instrumentation, and there was a lot of rework that had to be done around that, which contributed to a cost overrun. Obviously, having learnt that lesson once, Train 2 is informed -- better informed. And so the right capital decisions, the right design decisions are made straight out of the gate. And then potentially, to a lesser extent, future trains 3 and 4 will be better informed again.

Yes, so there weren't necessarily commissioning issues. They were construction issues.

Yes, and that rework is completed. There's a detailed punch list and commissioning schedule for Train 1. And the total cost of that punch list and the commissioning is about $30 million.

Your next question comes from Daniel Morgan from UBS.

Just a quick one. I know you said that it's a legal requirement, you can't talk to the equity raising structure. Just wondering, however, if you can talk about that and talk about why you raised equity, the subject of equity dilution versus why not going more into bridge finance or monetizing Tropicana.

Yes, sure. So at a high level, there's -- we're at a stage on our strategic review and potentially understanding value in the market for Tropicana. There's no guarantees that, that would complete. And therefore, we've had to design the funding structure about -- to deliver certainty, and that's led to us pursuing the structure we have. We have, as I indicated on the call, maximized the debt based on the current business, i.e., the financial fundamentals for both Nova and Tropicana. And given the equity-based ownership of the assets we're buying, we weren't able to size the debt facilities any higher to take advantage of the contribution of the assets being acquired. Does that help, Dan?

Yes. And probably a follow-up on that would be how is the cash going to work with regard to this business structure? So I imagine that -- just how much influence do you have to get cash flow out of the business? It would sound from how you've created this financing structure that you might not have a lot of influence over it and so your base business has to support the funding structure.

That's why we sought the right to appoint the CFO, maximize visibility and control of the financials. But more thoughtfully around that, the -- at the [ win ] field level, there's an established dividend mechanism. That's a twice-yearly dividend mechanism. At the Lithium HoldCo level, the documents -- or the agreement in the shareholders' agreement is that that'll be a quarterly dividend mechanism and will effectively operate like a cash sweep.

Yes. And Tianqi, your new partner, it looks like, if I've read this correctly, you are making a deposit of $70 million. Now, it's my understanding that Tianqi has been having some issue refinancing their debt. And therefore, this transaction has been available as an opportunity for you. But is -- can you just talk about the risk of if that loan that they have is not rolled over by the time a decision is made and this transaction is crystallized, is there a risk that you're an unsecured creditor for that amount?

The deposit goes into escrow.

Okay. So it's protected under that mechanism.

Yes.

Is there a requirement for the JV partners, so you and Tianqi, to bring non-China lithium assets into this JV? So if you identify or explore and find a great lithium deposit, want to develop it, is there a requirement and mechanism to bring it into this vehicle?

There is, and that's a 2-way -- that works 2 ways. And the way it would work is that if either Tianqi or ourselves identified an opportunity, we'd present it to the joint venture. The joint venture would then make a decision on whether to embrace that opportunity. If that was declined, then the party that bought it up then has the right to pursue that by itself. So that's our level of protection there. And then if we were to discover something, the discovery itself doesn't crystallize that obligation to present it to the JV. We would have the right to continue to understand it, progress it, take it through the studies, understand the value proposition and then present that as an option to the JV.

Yes, sure. And just the last question. You've got a cost that you've given us for your hydroxide, which, in principle, does imply there would be a transfer price that you've implied in that cost structure. Have you disclosed that? Or can you give us an idea of what that transfer price that you've just assumed in that cost structure for spodumene?

We've used the sort of lithium -- the spodumene pricing model that we've used. So that's ramping up over the next few years and then there's a fixed long-term element to that, which is aligned with the likes of what you get from CRU, for example. And that's informing the cost of the feedstock. I think by way of guidance, if you stripped out the cost of the feedstock from the lithium hydroxide all-in sustaining cost, then it's about USD 4,000 per tonne.

Your next question comes from Adam Baker from Global Mining Research.

Your partner, Tianqi, has significant financial leverage. Just wondering how you make yourself comfortable with that risk? And can you confirm that you have the first right of refusal on Tianqi's interest in Lithium HoldCo?

So like, in the presentation there, we talked about how this -- the proceeds from this transaction effectively cornerstone a refinancing for Tianqi. So there's an immediate pay down of some of the debt. And then the maturity dates for the rest of the debt are pushed back to 2022 and 2024. And we've -- as part of our KYC work here, we've done a significant amount of work understanding Tianqi's refinancing plan, understanding the terms of that, understanding what their P&L and balance sheet looks like over time. And we were very comfortable having done that KYC and on the continuing solvency of Tianqi and the fact that they will be an enduring and financially well-resourced partner. We do have a mechanism in there such that if the business needs cash and our partner doesn't have the ability to provide its fair share of the cash, then there's an opportunity there for IGO to fund that share of the cash on behalf of the partner. And there's an equity return-based interest rate payable to IGO on that debt. The level of that interest rate is confidential, and I can't disclose it.

Adam, keep in mind as well, your question about the partner risk. So the $1.4 billion that will get paid to Tianqi, $1.2 billion of that will be used then to retire debt. They'd use some USD 100 million spend for themselves and $90 million then would go into the business to ensure then that the Lithium HoldCo remains fully funded.

So it's basically prepaying Tianqi's share of cash calls over the next 18 months or so, plus putting the money in the business with some of the Tianqi-only obligations arising from the transaction.

Your next question comes from Peter O'Connor from Shaw & Partners.

Congratulations, absolutely perfectly on message with your strategy and transformative comments for the last year, so congrats.

Thank you.

That said, trying to get to the compelling value component. Clearly, we'll need to work through this because it's not crystal clear. And in line with Daniel's questions about the cash flow process, I've got several things that concern me at the moment. One is the wording direct stake always worries me because you don't have direct control. Two, I picked up a footnote somewhere saying that the JV has a 20-year tenure. And three, just take us through that cash sweep process from the mine through to that level to the next level. I know you talk about quarterly and half yearly dividends. But it sounds like it's structured in a dividend way. And to that point, you never made a comment that this was cash flow accretive. You said it's NAV accretive and EPS accretive. So is it? And when is it cash flow accretive? First question.

Yes, sure. The transaction is cash flow accretive from 2024 financial year. And obviously, in those first couple of years, there's ongoing investment, which is funded by the vertically integrated lithium business, which causes that free cash flow per share dilution. But once that brownfields investment is progressed, this is highly cash flow per share accretive from 2024 financial year onwards.

Maybe a way to ask, is the accounting treatment that we will end up modeling that you'll present, how do we think about that?

Pete, I'll answer that one. So the USD 1.4 billion effectively goes on the balance sheet as investment, and we then have the USD 1.1 billion as debt and then the equity stands itself. Profits of the underlying business then get booked against the investment, and then ultimately, dividends that we could see would then be a reduction against that investment. That's probably the best way to think about that.

So the equity, is it JV accounting or equity accounting?

It's equity accounting.

So you're equity accounting 24.9 over mine and 50 of -- or 49 of the refinery?

[ 49 ] of processing plants.

Right. And so you'll be publishing the profit levels from each of those, and then we'll get the dividends net-offs against that?

That's correct, yes.

And the dividend, just to be clear, I think you said half yearly at the mine level and quarterly at refinery level?

That's correct.

And both effectively working as cash sweep mechanisms.

Great. And something that I've read in the pack as well about the Chairman required to -- working capital was it, or fund or bridge USD 117 million to the operation? Is there an ongoing concern with this operation until you've reached deal closure in June quarter '21? And what level of risk is that?

As part of the dialogue with the syndicate of banks, Tianqi's syndicate of banks, they sought the confidence on that cash position and availability of funds through to the closing of the transaction and the proceeds going to Tianqi and wanting to make it happen. The Chairman made those funds available.

Okay. So back to Daniel's point about the escrow. So that USD 70 million deposit is not available to Tianqi at the moment until you complete?

No.

Right, okay. Pete, the Tropicana sale process, where are we at in that process? Are we at nonbinding bid stage? How advanced are we?

Yes, I would characterize it that we're in Stage 1 of a process to understand what the market's ready to pay for Tropicana. That leverage is off a significant amount of technical work that we did ourselves and to build a bottom-up life-of-mine plan and new operating strategy for Tropicana. And that first-stage process will be completed in the week leading up to Christmas. We then adjudicate those bids made around the table on Christmas Day or something like that. And then, going to a second stage of a process if the interest is compelling in January.

So you're receiving nonbinding indicative bids the week of Christmas.

Or the week leading up to, yes.

The week leading up to Christmas and you review and go to stage after that, okay.

Correct.

Okay. And just, look, lastly, your nickel investment, this may be getting way too long dated for me, but you've got 6/7 years life left at what is arguably one of the best nickel mines in the world. It's a great deal today. Sale of the gold asset, fine. We still come a lot of CapEx. Is that the way I should think about nickel as a separate side of this equation in the medium term?

No. We're, I think, at an over level where $20-odd million of sustaining CapEx this year, and that falls to about $10 million next financial year. So I would characterize this as being low CapEx on the Nova side of the business. We're sort of post CapEx on Boston Shaker underground at Tropicana. And subject to the approval of any additional underground mines there, we're sort of relatively light from a CapEx perspective at Tropicana. But having said that, we note that we're going through a cut date this year. And so therefore, the waste stripping component of the all-in sustaining cost at Tropicana is elevated this year.

So maybe I was thinking you're a bit too long dated, but I'm thinking if Tropicana ends at a finite point, that $20 million doesn't get past that. So you'll still come large CapEx for tonnes in nickel. Is that a fair call?

No, no. Like if we look at Nova, current reserve, we're about $20 million, and we are getting into the leads here, but about $20 million is our financial year sustaining CapEx. And I haven't got the number in front of me, so shooting from the hip. And then beyond that, we're about $10 million a year going forward, and that would decline as we get to the end of reserve life. The only thing that would change that profile would be the -- that we make a discovery into Nova 2.0, deliver that next several billion dollars' worth of value at Nova and step-change mine life. And at that point, we'd be happy to recast our CapEx profiles.

And last one for me, thanks for that feedback. Page 1 of the presentation -- not the presentation, the release, Footnote 2, the vehicle is in place for a minimum of 20 years. What exactly does that -- wrap some thoughts around that for me.

Let me just quickly have a look.

The Footnote 2 relates to the Lithium HoldCo will become an exclusive vehicle, blah, blah, blah and…

I think what that means is the 20 years is connected to the reserve life at Greenbushes. And obviously, there's a resource beyond the reserves. And if you incorporated that reserves into the mine plan, then you'd change the 20 number to a 27.

Okay. So this deal, this JV is not a 3-year lease. It's actually for life of mine.

It connects to the -- it's just connecting it to the mine life.

Okay. Is there any detail on that life of mine deal in here or is it…

There's no tenement cutoff here, if that's what you're asking.

Okay. So it's the life of the mine resource reserve inferred, indicated, whatever.

The reserve life, not resources. Resource lives would take it out to about 27 years based on current information and any exploration upside would be beyond that.

And that resource life assumes the full ramp-up at Greenbushes including train, including processing plant #2 and the processing plant #3.

Okay. You said reserve or resource?

Reserve.

20 years reserve?

Correct. And indicatively, 7 years resource on top.

Your next question comes from Sophie Spartalis of Bank -- sorry, from Bank of America.

Just wanted to ask about further growth in lithium and whether IGO has an appetite around further growth in other EV metals?

Aspirationally, longer term, yes. I think the next few months, we'll be digesting this.

Okay. So there is certainly growth further along the path that you're going in terms of that pivot towards EV.

Yes. Yes. Like our longer-term posture, we don't see that changing. We would continue to pursue parallel options for both organic and inorganic growth, and continue our exploration and discovery programs to find those mines of the future and then be on the lookout for additional assets, which align with strategy in the clean energy metals space and which have the sort of quality, scale and mine life metrics of the existing portfolio.

Okay. So this Lithium HoldCo, where you're saying, again, on the front page of the announcement, saying it'll be the exclusive vehicle for all lithium-related investments. Is that, to be clear, only for lithium and not other related EV metals?

Absolutely. Only lithium.

Okay. And then I guess in terms of the deal, what does this mean now for the nickel side of the business? As we know, short mine life at Nova. What does it mean for your exploration efforts in nickel? Will you now pull back on the exploration budget for the coming years?

We don't expect to change our guidance and what we might do in the next couple of years around Nova. I think that everyone understands that the discovery of Nova 2.0 would be transformational for the Nova asset and delivering step change in mine life. And so we would continue that work, and the journey to unlock discovery is only partway through. Having done the transaction, there's a need to relook at the rest of the exploration story, and we may need to cut our clock for what we're able to afford over the coming year or so.

Okay. And then just finally, a quick update on where we are or where you are in the Tropicana process?

Yes, so just to sort of circle back to the response I gave earlier, we have done a technical review, full bottom-up, recast the life of mine with better planning assumptions and/or more current planning assumptions. And we are currently testing the market, first stage of a process with Stage 1 bids due just before Christmas. We'll then look at those. If they're compelling, then we potentially go to a second stage with a smaller group of participants. See you on Friday at your conference.

So your next question comes from Matthew Frydman from Goldman Sachs.

Yes, congratulations on the transaction.

Thank you.

I've got a few questions, please. Firstly, on the Greenbushes expansions. You talked about the current off-take structure at Greenbushes and how it feeds into Kwinana and also offshore. Looking forward, I'm just wondering what, in your view, will drive the rollout of the CGP 3 and CGP 4 expansions, I guess, from your perspective? And any discussions you've had with the other partners in the asset? Would the JV be interested in selling that expanded spodumene capacity into the third-party concentrate market if market prices were supportive? Or is any further spodumene expansion going to be contingent on further downstream expansions from the JV partners? That's the first part of the question.

Yes. No conversations yet either with us -- between ourselves and Tianqi on that and no conversations with Albemarle, and that would be a conversation for the future.

From your perspective as an equity owner in the asset, what would your preference be in terms of striking the best value out of Greenbushes as an asset? Would you like to see spodumene capacity expansions tied to further downstream expansion?

It's going to rely on a combination of factors. One's going to be the rate of the continued growth of lithium demand. And sort of most people have that sort of running at about a 18%, 19% CAGR over the next 10 years. And obviously, against that backdrop, there's going to be an increasing demand for spodumene and also lithium hydroxide. Demand for battery-grade lithium hydroxide skyrockets over the next 10 years. And if we see that realized in the next few years, then I would think that would motivate decision-making around Trains 3 and 4 at Kwinana. And against that backdrop, we'd be wanting to maximize production of spodumene chemical grade from Greenbushes to our account.

Sure. And then still on Greenbushes, the tailings retreatment project, the TRP. You mentioned there's limited CapEx remaining on that project. Just wondering what the driver there is to finish that project and turn it on again. Is it tied to the -- I guess, the ramp-up at Kwinana, or does Tianqi have sufficient offshore capacity to soak up that additional spodumene?

It's a market-driven decision to recommence construction. Certainly, the market pulled back, back in 2020. So Greenbushes did the pragmatic thing and scaled back production but also curtailed our CapEx spend. And as the market picks up, as all of the early signs indicate, now is the right time, going into 2021, to recommence that construction activity and be ready for increased demand and better price.

Sure. Do you have an idea of how much construction remains in terms of time line?

The USD 40 million remain...

Sure, sorry, and time line in terms of months remaining to complete that project?

We've provided guidance around a 2022 commissioning in the deck.

Sure. And then switching to Kwinana. You touched earlier on some of the issues that the construction process there has faced. Just wondering, has any actual product been produced to date? And if so, has any progress been made in terms of qualifying that product as a battery-grade product with customers?

Yes, each of the unit processes have had various stages of commissioning, whether it be dry commissioning or, in some cases, wet commissioning. It's not yet been used in [ Anga ] and that will start in the March quarter.

Sure. Fantastic. And then just finally, you touched on this footnote around a 20-year life or minimum 20-year life for the vehicle. And I think the explanation was that that's related to the life at Greenbushes. How does that apply to Kwinana? Do you cease to have an interest in Kwinana past the end of the mine life, whether that's 20 years or 27 years based on the wording of that footnote? How should we think about that?

Obviously, the joint venture had no feedstock of its own. There's a global market there where you could compete for feedstock and use that third-party feedstock to feed Kwinana. Given that Kwinana is at the bottom end of the cost curve based on a feedstock pricing assumption at market prices from Greenbushes, one would have to think that it's going to be economic to compete in the market to get that third-party stock. And then there's always the potential to extend life at Greenbushes. We talked to the 7 years of resource life at Kapanga. And then given the extremely long mine life at Greenbushes, there's -- it's unlikely that people have put their mind to doing some serious exploration for more pegmatites for some time.

Yes, fully agree with the economics of feeding Kwinana, but just wondering how that applies to the actual vehicle that you have, that you own a stake in, with respect to that footnote saying that the vehicle is only in place for a minimum of 20 years. So let's say, Greenbushes ceases to provide feedstock...

There's no sunset on the vehicle -- there's no contractual or legal sunset on the vehicle. I'd say we've probably done a poor job of crafting the footnote.

And your final question today comes from Harsh Bardia from Citi.

Just on Kwinana off-take by Tianqi. Can you give some color, like, is there any long-term contract, nature of contract, pricing mechanism for those off-takes with Tianqi conversion facility?

We talked to the off-take agreements earlier in the call with 2 contracted and 2 under our final contractual discussions. And obviously, we can't talk or give visibility on those while those discussions are in place. This lithium hydroxide is of premium quality. It goes into the premium-quality customers in South Korea and Europe, which customarily attract a premium price relative to benchmark lithium hydroxide pricing. And we've used those assumptions to guide our longer-term pricing models.

Okay. Yes, because one of the partners, Albemarle, they usually talk about like long-term nature of the contracts. That was the sort of reference point. Now on this hydroxide pricing, in Chinese market, there have been a bit of a reversal of trend in terms of LFPs and a slower take-up of 811 as of now, and hydroxide capacity is building. So do you see a scenario where the Chinese player aggressively competes against product in the international market as well? And what's the scenario around that for like hydroxide price and premium that you mentioned?

Yes, sure, good question. I touched on earlier how the demand for battery-grade lithium hydroxide is increasing dramatically. And if you look at where all of the demand growth is for lithium products, the one that sort of expands the most in the next 10 years is that battery-grade lithium hydroxide. So there is a requirement for more refineries and more lithium hydroxide to be produced. And the -- and that's just required to satisfy the market. The product that's produced from Kwinana benefits from the premium quality of the Greenbushes spodumene and also benefits from the IP that Tianqi has developed over many years. So we will be delivering a very high-quality product that goes into the most discerning battery markets. And we also benefit from the fact that we're producing this lithium hydroxide in Australia and we're able to guarantee that prominence, which many, many of the end users hold in high regard, and we're producing the product to very high ESG and sustainability standards, again, which is very desirable and sought after by the end users. So that gives us, we believe, from a quality and an ESG perspective and a prominence perspective, a competitive advantage.

Yes, absolutely. I agree on that ESG theme. Most of my other questions are already answered.

Okay. Thank you very much.

Thank you, Harsh. And that was our last question for today. I will now hand back to Mr. Bradford for closing remarks.

Yes. Thank you, Ben, and thank you, everyone, for persevering through the call. I know the presentation was long. But as I said, there was not a lot of visibility on the assets historically and a degree of complexity with the structure, so we needed to step through that methodically. I thank all the analysts for their questions, which helped us to peel back some more layers of the detail around the transaction structure and the assets, and look forward to talking to -- or updating the market further as we progress the equity fundraising and as we progress the conditions precedent to close this transaction, in -- by the June 2021 quarter. Thanks, everyone. Bye.