Nemaska Lithium: Another One Dead And Gone
- Nemaska Lithium went bust, the assets have been transferred, the stock doesn't trade, there's nothing left here.
- There is a mild interest in that a new form of bankruptcy reorganisation was used under Canadian law to take care of the problem.
- More importantly, for us, it's another proof that just being in the right, sexy, sector is no guarantee of success at all - even lithium and EVs.
Everything lithium is a go, right?
It's easy enough to think that booming demand for a material or a sector means that everyone in the sector is going to do well. That's not quite how markets work and Nemaska Lithium (OTC:NMKEF) is a useful example for us.
(Nemaska Lithium from Seeking Alpha)
The reason the chart isn't available is that Nemaska has gone bust and there's no trade in the stock. Anyone holding the old equity has nothing but a tax write off to look forward to.
The lithium market
Sure, we can all agree that electric vehicles are where it's at right now. Varied countries – the UK and the EU for example – have already announced that internal combustion engine vehicles may not be sold in those places after a certain cut off date. 2030 for straight ICE for the UK, 2035 for hybrids, just as an example. No other technology than battery powered is going to be ready for prime time by then is my best guess. Fuel cells have their benefits but I don't see the hydrogen infrastructure as being in place by then. Nor is it likely, to my mind, that a battery technology other than lithium will be ready for mass manufacture by then – it is, after all, only 9 years away. Product development to mass manufacturing can and does take a long time.
So, yes, there's going to be a boom in the use of lithium. Quantities to be used will rise. We don't have to believe that paragraph above, that fuel cells and other batteries won't be available, to know that lithium use is going to rise, it's obvious that it will whatever.
That lithium use will rise does not mean, necessarily, that lithium prices will rise. Price is dependent not upon demand alone but on the interaction of supply and demand. It's entirely possible to find charts showing that price just, must, rise. I'm of the opinion that supply is going to be more elastic than most currently think. But that is an opinion, however informed it might be by having worked in markets for weird metals.
Markets and specific actors
Even if we agree that both lithium volumes and also prices are going to rise significantly this does not mean that any specific lithium project is a goer. Firstly, it does rather matter how well the people running the project do so. It's entirely possible, as we've seen with Altura, to have an operating mine, with customers and sales, even to be mostly covering or even exceeding operating costs with revenues and still go bust. Another way to make much the same point is that while mining a material may work that's not really the point. In order to make a return for shareholders, it must be possible to cover the development costs as well as the operating ones. This is, as the perceptive will note, more difficult.
So, what happened at Nemaska?
The precise details aren't quite the point here. We just need to note that those development costs were higher than they had financing for. Higher than anyone was willing to finance once they became clear. So, the money that had already been spent was gone, the company went into bankruptcy. Canadian law isn't exactly like the US, but roughly the Chapter 11 process.
There was and will be no recovery for shareholders:
Nemaska Lithium Inc. (“Nemaska Lithium” or the “Corporation”) announces that the Corporation completed today its previously announced sale (the “Transaction”) to a group made up of Investissement Québec (“IQ”), and The Pallinghurst Group, acting through an entity named Quebec Lithium Partners (“Pallinghurst” and, together with IQ, the “Purchasers”), together with Orion Mine Finance (“Orion”), structured as a credit bid. Details of the Transaction were previously provided in press releases issued on August 24, 2020, and October 15, 2020.
Pursuant to the Transaction, the Purchasers acquired, on a 50-50 basis, all of the issued and outstanding shares of an entity resulting from the amalgamation of the Corporation, its subsidiaries and entities controlled by Orion, to form a new resulting entity that will operate the business of the Corporation (“New Nemaska Lithium”). As a successor to the Corporation, New Nemaska Lithium has applied to the Canadian securities regulatory authorities to cease to be a reporting issuer under applicable Canadian securities laws.
We might wonder, or even hope that holders of the old equity will get a look in there. But no, that's not how it worked at all:
Nemaska Lithium Inc. (“Nemaska Lithium” or the “Corporation”) announces today that it has completed the previously announced exchange of its common shares, on a one-for-one basis, for common shares of NMX Residual Liabilities Inc. (“Residual Nemaska Lithium”), resulting in Residual Nemaska Lithium having become a successor reporting issuer under applicable Canadian securities laws (the “Exchange”).
These shares in the residual company are worth nothing at all and are not quoted either. The only value here is whatever tax deduction one might be able to gain as a result of a failed investment.
As to what happened, in detail, that's explained here. It's the first time this specific swerve has been applied to a Canadian company in Chapter 11. Sounds terribly sensible to me too.
A mine is a collection of permissions
At this stage of a mine's life – at some point during development – it is really a collection of permits, permissions and licences. Including in Canada – as here with the Cree – agreements with First Nations and so on. It is that whole collection of being able to do something on a specific piece of land, with water rights, disposal, royalty agreements if any and so on which constitute the thing of value. So, the company goes bust, into something like Chapter 11. If it progresses to Chapter 7 (again, Canadian law is a little different but the processes are analogous), liquidation, then the value of that collection diminishes considerably by not being a collection anymore.
The usual manner of dealing with insolvency is to put the productive assets, shorn of all debt and liabilities, into a new company and leave the debts in the old one. With a mine in development, this doesn't really work. Because every agreement and permit must now be redone in the new company's name. So, here, and for the first time, this has been done in reverse. All of the debts and liabilities are put into the new company – the residual, the one the old equity owns – and the mine, permits, permissions and so on remain in the now clean and shorn of problems old one.
It's just that the old equity keeps all the problems and gains none of the value of the assets. Which is as it should be in bankruptcy anyway. That they've reached this end goal by a different route might be of more interest to lawyers than anyone else but that's what they've done.
The old equity in Nemaska Lithium is now in that residual company and is worth nothing. The mine, the permits and so on, are off with the new investors.
Nemaska lithium as a project (as opposed to Nemaska Lithium the quoted company) still exists and may or may not come to fruition in the fullness of time.
The lithium market again
So, we've now proof from Nemaska (and again from Altura) that even in these times of a wondrous lithium market it is not true that lithium mines are a good investment. Or, perhaps, not all lithium mines. This is something useful to keep in mind as we observe fashions in markets. Even rising demand, even rising prices, doesn't make every miner a good bet or investment.
I would also take this a step further. Specifically, with lithium, we've two main methods of extraction. From brines and so called “hard rock” methods. I take it to be axiomatic that brines are going to be the cheaper source.
Yes, I know, material from spodumene (one of the hard rock methods) is preferred for batteries because of different iron contents. But even so, I take it that the brines, being simpler, are going to have lower costs. This matters over time because of the way I think the market is going to develop.
As up at the top I agree that lithium demand and usage are going to rise. But I do think that lithium supply is going to rise faster. This is what happened the last time we all got excited lithium 5 or so years ago, it is what happened with rare earths after 2010, it's a common event in minor metals. Demand rises, interest rises, supply rises more than so prices, over time, actually decline, not rise.
When that does happen it's the higher cost miners who get it in the neck of course. Because they are the marginal producers, being the higher cost ones, so as prices fall as a result of the rise in supply it is they who fall out of the market first. With lithium, again as above, I take it that hard rock mining – spodumene being well known but this point makes me exceedingly wary of European Metals and their zinnwaldite as well – is higher cost than brines and so that's where the market shakeout is going to take place.
I also, as purely a matter of opinion and no more, think that the varied methods of extraction by filtration and extraction other than by evaporation from brines are going to be more successful than most think.
My view of Nemaska is of course obvious. They tried, they failed, oh well, that's junior mining companies for us. But there's that lesson for us about the sector in more general terms as well. Just being in the right and fashionable sector provides no certainty of making money, not even of continued existence.
The investor view
Again, specifically, the view has to be well, they tried and Oh Dear. But the larger lesson is that we have to be more selective than just looking at fashion and excitement in a sector. Specific projects can do well in bad times, others can go entirely bust in seemingly good markets.
With respect to lithium well, as I say above, this is opinion not proven fact. But I think the brine operations – including some of the more innovative ones going beyond evaporation as a technique – look a better bet than the hard rock miners. As with Altura and Nemaska, both spodumene miners, the higher cost producers are always the marginal ones.
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