Lithium, gold stocks lift deal flow

Lithium stocks led by Pilbara Minerals and Galaxy Resources have seized the opportunities presented by the commodity’s surge.

Ardross and North Fremantle aren’t places normally associated with the head office of large and successful Western Australian companies.

Yet it’s a measure of how rapidly the lithium boom has taken hold that Galaxy Resources and Pilbara Minerals are headquartered in modest offices in those two suburbs.

These companies featured in two of the biggest corporate finance deals announced in the June quarter; not that they had a lot of competition, with the state’s corporate finance market remaining subdued.

In all, 225 capital raisings and M&A deals were announced in the June quarter, according to data compiled for the BNiQ search engine.

That’s up from 116 transactions announced in the March quarter, and indicates the market is likely to surpass the weak 2015 total of 470 announced transactions.

While the number of deals is higher, there continues to be a paucity of large transactions.

Only two Western Australian capital raisings and three M&A deals worth more than $100 million were announced in the June quarter.

That’s bad news for stockbrokers and corporate advisers, many of whom are unlikely to get an annual bonus.

Perth-based broking firms Hartleys, Euroz Securities and Argonaut were among the most active, though they continued to face keen competition from national and international firms.

Macquarie Capital worked on four of the biggest deals, including a $102 million capital raising by Perseus Mining (the largest for the quarter) and a $74 million raising by Gold Road Resources.

Canaccord Genuity, which has a small Perth office led by broker Paul Carter, had an active quarter, working on five capital raisings.

It also advised on the largest M&A deal during the quarter – Galaxy Resources’ $216 million acquisition of joint venture partner General Mining Corporation. 

Sydney-based Blue Ocean Equities, headed by veteran brokers Brent Potts and Richard Grainger, was lead manager on Pilbara Minerals’ $100 million placement.

Pilbara managing director Ken Brinsden said Blue Ocean had been following the company longer than most.

“They worked really hard, picked up our story early, and understood the potential in our business,” Mr Brinsden said.

Hartleys head of corporate finance Dale Bryan believes the firm has benefited from its long-term focus on the WA resources sector.

The firm had a lead role on 12 June quarter deals, and this month has completed several more raisings, including for Cardinal Resources and Burey Gold.

Mr Bryan said an added bonus was winning an Australian Stockbrokers’ Association best corporate deal award, for its successful raising for Gascoyne Resources.

It’s the second time Hartleys has won the award, after picking up a gong for a Sirius Resources deal.

The award is based on a peer review, rather than a nomination process.

A couple of oil and gas plays making countercyclical investments bolstered deal flow during the quarter.

Euroz and Canaccord Genuity led an $80 million placement for Sundance Energy, while Euroz was lead manager for Australis Oil & Gas’s initial public offering.

Australis is looking to raise $30 million through the IPO, on top of the $33.9 million it has raised privately through Euroz over the past six months.

Other deals with a WA flavour included some strongly placed companies making opportunistic acquisitions of underperforming businesses – namely Resource Capital Funds’ $154 million purchase of engineering firm Ausenco, and the $103 million Metals X takeover of copper miner Aditya Birla Minerals.

Among the corporate law firms in Perth, Gilbert + Tobin, Steinepreis Paganin and Jackson McDonald were among the most active advisers (see table).

Lithium outlook

The ability of Galaxy and Pilbara to pursue large deals in the June quarter is a measure of how rapidly they have attracted investor support.

Pilbara’s share price has jumped from 12 cents to 62 cents during past year, lifting its market value to more than $700 million.

Over the same period, Galaxy’s share price has soared from 3.6 cents to 50 cents, boosting its value to $615 million.

Once the General Mining merger is completed, Galaxy will be worth more than $800 million.

They are not alone in riding the lithium boom.

Nearly 20 WA-based lithium stocks have raised fresh capital this year, with most of that activity happening in the June quarter, according to deals recorded in BNiQ.

What’s different about Pilbara and Galaxy is they are currently ranked as top 20 WA stocks, which is remarkable as neither is yet in production.

Galaxy is targeting the first shipment of concentrate from its Mt Cattlin project near Ravensthorpe in September.

Pilbara is due to complete a bankable feasibility study on it Pilgangoora project next month, with production targeted for 2018.

Its $100 million placement ensured the company has plenty of funds to complete the feasibility study and start work on its mine.

The development of Pilgangoora is expected to cost about $185 million, judging by the results of a pre-feasibility study, but the company has no plans to go back to the market to raise more equity.

Funding will be a mix of cash in the bank, contributions from customers, such as recently announced Chinese offtake partner General Lithium, and a small proportion of project finance.

“I would say the board is going to take a relatively conservative approach to debt,” Mr Brinsden said.

The mine will process 2 million tonnes of ore per year to produce about 330,000 tonnes of spodumene concentrate – an intermediate product used to manufacture lithium concentrate.

Mr Brinsden, who left struggling iron ore miner Atlas Iron last year before taking up his current role in January, said the starting point for him was the size and quality of the Pilgangoora resource.

He believes it will rival the privately owned Greenbushes mine, which has been a major global supplier.

“Nothing else compared to it, in terms of hard-rock lithium, until Pilgangoora,” Mr Brinsden said.

“Pilgangoora is a really important resource from the global lithium market because it carries many of the same characteristics as Greenbushes.”

Its attributes include a large, high-grade resource, and a good location close to port and road infrastructure.

“There is no shortage of lithium in the ground but where there is a shortage is lithium that’s accessible and at the right cost,” Mr Brinsden said.

“That’s where Pilgangoora has a distinct advantage.”

The high-grade resource will allow the production of chemical-grade spodumene for the batteries market, technical-grade spodumene for the specialist glass and ceramics market, and tantalum concentrate as a by-product.

“All of those things contribute to our view Pilgangoora will be one of the lowest-cost hard-rock lithium operations globally,” Mr Brinsden said.

“That sets us up well for longevity and sustainability.”

He said Pilbara’s partnerships with Lithium Australia, which is pursuing commercial development of its ‘sileach’ process, and Chinese producer General Lithium, signalled its intention to move into downstream processing.

Pilbara also expects to lift mining volumes beyond the initial 2mtpa.

“Our objective is to match the capacity of the mine with what our customers want,” Mr Brinsden said.

“We suspect that is going to mean more tonnes over time, in which case it is likely there will be subsequent expansions.”

Growing demand

Mr Brinsden believes the market has failed to appreciate the likely growth in lithium demand, driven primarily by the prospect of lithium ion becoming the dominant battery technology.

“People are picking up on the hype around (electric car manufacturer) Tesla’s business, and that is exciting, but actually it’s only a small proportion of what’s going on globally,” he said.

“In the Western world, the other car manufacturers are rapidly following suit.

“That’s great and being well publicised, but what’s not being well publicised is what’s happening in China.

“In our view, China has the potential to dwarf what everybody else is doing.”

Mr Brinsden sees growth across the production chain, from cathodes, electrolytes and cells through to their use in electric scooters, cars and other vehicles, along with batteries for energy storage.

This was being driven by two factors – a government push for cleaner energy, and Chinese industry’s pursuit of new opportunities.

“Most of what’s happening there, in terms of capacity expansion, particularly at the sharp end, is being understated by the Western analysts,” Mr Brinsden told Business News.

Mr Brinsden said there were some parallels to the steel market over the past decade, when the capacity of Chinese producers to lift production far outstripped the Western world’s ability to comprehend it.

“I think the same thing is going to happen in lithium ion,” he said.

Future deals

The strength in gold and lithium markets ensures these sectors will continue to be closely watched by dealmakers.

Outside of these areas, there is a handful of other opportunities, albeit fewer than many had been anticipating.

In the oil and gas sector, Origin Energy has mandated UBS to run a sale process for its Perth Basin assets.

Local company TranServ Energy has flagged its interest in these assets, which include the Waitsia field.

The privatisation windfall many advisers had been hoping for is looking unlikely, with Premier Colin Barnett indicating  last week Utah Point was the only sale likely to be completed this year.