Nemaska Lithium attracts financing for Whabouchi

Nemaska Lithium (TSX: NMX; US-OTC: NMKEF) has landed two big financing deals in as many weeks with Japanese multinational conglomerate SoftBank Group Corp. and private equity firm Orion Mine Finance.

The two companies agreed this April to put their shoulders to the wheel and help Nemaska turn its spodumene lithium hard-rock deposit in Quebec into a mine, along with a processing plant that will transform the mine’s spodumene concentrate into lithium hydroxide and lithium carbonate for use in the lithium battery market.

The SoftBank Group — a global technology player with a portfolio of companies in advanced telecoms, Internet services, robotics and clean energy — is taking up to a 9.9% stake in Nemaska Lithium’s outstanding common shares at a price of $1.12 each for gross proceeds of up to $99.08 million.

If after the private placement SoftBank holds less than 9.9%, it will be entitled to buy more shares on the same terms to keep its holdings at that level. As long as SoftBank holds at least 5% of Nemaska Lithium’s shares, it has the right of first refusal to acquire up to 20% of the company’s lithium hydroxide and carbonate. The Japanese conglomerate can also nominate one person to Nemaska’s board of directors, and, as long as its equity holding is 5%, has a preemptive right to participate in any future equity offerings.

Guy Bourassa, Nemaska’s president and CEO, says SoftBank “has the same mindset as us about electrification, green energy and storage,” and makes “a very good partner.

“They came across us while they were studying the chain of supply — it’s not worth investing millions of dollars into storage if you don’t have batteries, and you can’t build batteries if you don’t have lithium,” Bourassa says, noting that the deal took just six months to negotiate.

In March, SoftBank announced a US$200-billion investment to build the world’s largest solar power project in Saudi Arabia. The investment was made through the company’s Vision Fund private equity arm, and SoftBank says the solar farm could generate up to 200 gigawatts of energy by 2030. The Japanese company also looks to turn one of its portfolio companies, Ola — a cab-hailing and ride-sharing app popular in India — into an electric carmaker.

The second financing — a US$150-million streaming deal with Orion Mine Finance, a mining-focused investment business with US$4.5 billion under management — forms another block of funding. The funds will be released in two tranches and the agreement “limits shareholder dilution, lowers Nemaska Lithium’s cost of capital, and is under terms that are both competitive and flexible,” Bourassa says.

“The investment from Orion is big, because obviously, that’s one of the best names around, as far as mining funds around the world are concerned,” Bourassa says. “I don’t believe anyone else has done a streaming in the lithium space.

“It’s much more complex than gold or other minerals, because you don’t have a market, so it’s very difficult to really assess, or assume, the price deck for the evaluation of the return of the stream agreement. So it was challenging for everyone to come up with that structure.”

Under the agreement, Nemaska will give Orion 14.5% of the revenues at a 60% discount of all lithium hydroxide and lithium carbonate produced at its processing plant and sold to third parties. This works out to about 8.7% of overall sales.

“It’s for the life of the mine, but we have the right to purchase back 50% for a nominal amount of money,” Bourassa says. “So, I would say that after maybe half the mine life, we’ll reduce that stream by 50%.”

In addition to the two financing deals in early April, Nemaska announced on April 20 a senior-secured, callable bond offering on a private-placement basis for proceeds of US$300 to US$350 million.

Nemaska describes its Whabouchi project as one of the richest lithium spodumene deposits in the world, both in volume and grade.

The company has built and commissioned the first phase of its hydromet plant in Shawnigan, Que., and produced more than 1,050 tonnes of above 6% spodumene concentrate from a bulk sample at Whabouchi. Earlier this year, it delivered 2 tonnes of lithium hydroxide solution made from its spodumene concentrate to customers, bringing the total it has delivered to customers to 3 tonnes.

In January, the company announced that an updated resource block model after the 2016 and 2017 drilling campaign had increased Whabouchi’s mine life from 26 years to 33 years, and reported the results of its 2018 feasibility study, which updated a study completed in 2016.

The latest study took into account Nemaska’s operating experience and current offtake contracts. Compared with the earlier study, the company increased the overall capacity of the commercial project by 20% and added flexibility to the hydromet plant. It also boosted lithium carbonate production capacity up to 16,000 tonnes per year, while producing up to 100% of lithium hydroxide.

The 2018 feasibility study was based on an average sales price of US$14,000 per tonne for lithium hydroxide throughout the mine life, and an average selling price for lithium carbonate of US$9,500 per tonne for the first five years and US$12,000 per tonne thereafter, for the rest of the mine life.

Production costs in the first 24 years (as an open pit) were estimated at US$2,811 per tonne for lithium hydroxide and US$3,403 per tonne for lithium carbonate. (Whabouchi will be a combined open-pit and underground operation.)

Capex for the mine, concentrator and plant (as of the beginning of 2018) is $801 million (US$616 million), excluding the $74 million Nemaska has already spent. In the earlier 2016 feasibility study capex was an estimated $549 million (US$439 million).

Life-of-mine revenue came in at US$14.8 billion, up from the US$7.4 billion in the 2016 feasibility study, while the after-tax net present value at an 8% discount rate reached US$1.8 billion, twice the amount of the previous study. The post-tax internal rate of return was 30.5%, compared with 30.3%.

During the first 23.6 years, production will be from an open pit to 224 metres deep. During the last 9.4 years, production will come from underground, with an average 55-metre depth below the bottom of the pit. The underground mining will use longhole stoping, with the crown pillar below the pit recovered at the end of the mine life.

Bourassa notes that the decision to update the feasibility study — which was taken in second-half 2017 — delayed many of its talks with banks and other debt providers.

“It stalled everything,” Bourassa says. “It was difficult to keep everyone interested, and it meant that all the technical due diligence the lenders did had to be updated, and in some cases had to be redone.”

What’s appealing about Nemaska’s project, Bourassa notes, and its technology to convert spodumene concentrate to lithium hydroxide and carbonate, is that it opens up new revenue streams for the company.

“People are starting to realize that we have a lot of assets, not just the Whabouchi mine, but the Shawnigan plant and the process of converting the spodumene concentrate into salts, so obviously that can be deployed anywhere else — whether it be joint ventures or licensing deals.”

He points out that the Shawnigan plant can be expanded and that down the road, Nemaska could buy spodumene from other North American producers to feed its plant.

“We would not be a tolling facility,” he says. “We would be an alternative to China.”

“If you’re a spodumene concentrate producer in North America you’re in competition with all the spodumene producers in Australia, so there are different transportation costs, and you would be losing a portion of your benefit. But if you have the alternative to sell it to a converter in Quebec, it would be more economic, so we could be a buyer to feed our plant.”

There is also the possibility of setting up joint ventures with other companies that produce spodumene concentrate and want to convert it into lithium hydroxide and carbonate themselves, Bourassa says.

“We can team up with them and install at their facility our process of making lithium hydroxide,” he says. “That’s why we found that the stream deal with Orion was an interesting avenue to prevent more dilution. The stream doesn’t share in any of that, or will not share in that, so for actual shareholders, and for those that are going to come into the equity portion of the project financing, it will be more interesting in the mid- to long-term that there was $150 million less dilution in the capital structure.”

To get banks interested in debt financing wasn’t easy because they want five-year take-or-pay commitments, he says, but because the company had set up a phase-one plant to make product that it has already sold to customers, it has validated their process and pushed them further ahead on the financing front.

“They need someone with a credible balance sheet to support a contract … and you need to have a qualified product to get a take-or-pay agreement,” he says. “That’s easy to do with a spodumene concentrate, but it’s very difficult, if not impossible, to get that with lithium hydroxide and lithium carbonate, because you need quantities of samples and it takes time to qualify the product. That’s what we did, and we were able to have discussions with real offtakers.