ABOUT THE COMPANY:
Formed prior to 2010, Talga Resources started life as Talga Gold, a gold exploration company. Over the past ten years, it transformed into an aspiring natural graphite anode and graphine producer.
Talga Gold commenced its transition to a graphite anode / graphine producer in 2012, when it acquired the graphite deposits in Northern Sweden, and changed its name to Tagla Resources at the end of 2012. At the time, the deposits were under surveyed, yet were known as the highest grade graphite deposit in the world, however, the petrographic and metallurgical characteristics of the graphite deposit were untested.
In 2014, University of Adelaide testing of the graphite from the Sweden deposit revealed the graphite had potentially unique characteristics that allowed the graphite ore to be processed into high grade graphite suitable for Lithium-Ion batteries at a very low cost.
Talga Resources began divesting its gold businesses in 2015, to focus on the Swedish mining opportunity. At this stage, it remained a mining business. This changed in 2017, when Talga Resources began testing its Lithium-Ion anode product.
THE OPPORTUNITY
Talga Group are focused on supplying the European Lithium Ion battery market, which is predicted to rapidly grow over the next 10 years due to the electrification of transport in Europe. Some notable European policies driving this transformation include:
Norway has banned new diesel and petrol engine vehicles from 2025.
Netherlands has banned new diesel and petrol engine vehicles from 2030.
France has banned new diesel and petrol engine vehicles from 2030.
Sweden has banned new diesel and petrol engine vehicles from 2030.
Ireland has banned new diesel and petrol engine vehicles from 2030.
UK has banned new diesel and petrol engine vehicles from 2040.
Spain has banned new diesel and petrol engine vehicles from 2040.
The above policy changes are expected to ‘drive’ a 700% increase in annual EV sales by 2030. This change will need a lot more battery production capacity. An additional 275 GWHr of annual battery production is planned to come online over the next 5 years to supply the batteries for this transformation. For perspective, Tesla’s Nevada Gigafactory has an annual production capacity of 35 GWHr per annum. The volume of anode material required to produce 275 GWHr of batteries is approximately 275 000 tonnes of anode material.
Global supply and demand of Li-ion batteries today and in the future and the European share in manufacturing. Source: JRC
The majority of anode used in Lithium Ion batteries produced in Europe is sourced from China, who provide 69% of the worlds natural graphite. A European Commission Report, “Report on Implementation of the Strategic Plan on Batteries: Building a Strategic Battery Value Chain in Europe” April 4, 2019), identified natural graphite as a critical raw material and of high economic importance, with the supply being chain currently vulnerable to disruption. It also highlighted there is no anode production capacity in Europe at the time of the report. The Commission is working with the European Investment Bank (EIB), key industrial actors, and Member States to address this gap in the value chain.
Supply dependency of materials along the value chain for electric vehicles’ batteries. Source: JRC
Further European legislation is proposed for “battery passports”, to regulate emissions and the sustainability of the sourcing, transport, and manufacture of batteries. This initiative is being driven by Global Battery Alliance Members VW Group, Volvo, LG Chem, Renault group, among others.
THE TALGA COMPETITIVE ADVANTAGES
The key competitive advantages that Talga Group have are as outlined below:
Strategic Location
The European Commission and the Swedish Government have identified the development of anode manufacturing of strategic importance. The current EV supply chain risks to Europe’s automotive manufacturing industry have been identified as significant, and a priority to address.
Talga Group’s proposed production facilities and mine development address the supply chain risks identified to the European automotive industry, and the development of this asset is strategically critical for the European automotive industry.
Graphites Ain’t Graphites - Highest Yielding Graphite Resource
The Vittangi – Niska Graphite Resource graphite flake characteristics are uniquely suited to battery anode production, resulting in the highest anode recovery rates in the industry.
Highest Grade & Largest Scale Graphite Resource in Europe. Source: Talga Group
Highest Anode Material Recovery Rate. Source: Talga Group
Most Sustainable & Lowest Cost Producer
High yields, along with a production facility operating on 100% Hydro-electric electricity, results in a significantly lower carbon footprint in comparison to competitors, which is important to Global Battery Alliance Members.
Carbon Footprint in Comparison to Competing Producers. Source: Talga Group
Attractive Performance Characteristics
Talga Group have reported encouraging performance test results, which is backed up by customer expressions of interest for 80 000 Tonnes of anode product annually (Talga Announcement, une 24, 2020).
Talga Group’s core product is Talnode-C, which a 100% graphite anode material. It has demonstrated excellent capacity retention, even at low temperatures, an important criteria for European applications.
Capacity Retention at Low Temperatures. Source: Talga Group
Talga Group have also accelerated development of Talnode -Si, an anode product with Silicon additive. Silicon has significantly higher energy density, however, has poor capacity retention, and is added to graphite anodes to increase their energy density. Their 9% Si anode performance is outlined below, and shows an increase of around 22% in energy density, with minimal loss of capacity retention.
Talnode-Si Cycle Life Test Results. Source: Talga Group
MANAGEMENT TEAM & OWNERSHIP
Management
I am quite certain Mark Thompson would never imagined he would be the CEO of what may well be Europe’s largest anode producer back in 2010, particularly given its gold exploration origins. However, Mark’s mission and purpose has evolved over the past 10 years and he is now a passionate advocate for the shift to a more sustainable world. In my observations of Mark’s presentations and interviews, he is passionate about making battery production more cost effective, and more sustainable. I also see this passion in company employees during their presentations, and it gives me the impression that Talga Group is run with it’s mission and purpose at the front of mind. In my experience, this is critical in high performing enterprises.
Mark has built a highly capable management team, which is outlined below:
Talga Group Management Team
Martin Phillips joined Talga Group in 2016. Martin Studied Chemical Engineering, and has had roles as a Metallurgist (Glencore), Project Manager Iluka Resources) , and Managing Director (Bulletin Resources)
Dr Claudio Capiglia joined Talga Group in 2018. Claudio has Doctorates in Engineering and Chemistry, and has over 15 years of experience in lithium-ion battery research.
Dr Anna Motta joined Talga Group in 2018. Anna has a doctorate in Inoragnic Chemistry, and had over 15 years of experience in graphene research. It is important to note that graphene has many applications, but it is a critical component of the Talnode-Si product.
Investors
Founder Mark Thompson retains a holding of approximately 9% of shareholding, with the remainder of the board holding relatively less than 1% of the company.
Of note is the largest shareholder, Smevdig Family Office, which holds approximately 10% of shareholding. Smedvig Family Office is a Norwegian family business, which owns and operates a range of enterprises in property and private equity. Occasionally, Smedvig invests in early stage businesses that are disruptive, and can change society for the better. Smedvig have 11 special investments, and Talga Group is one such investment.
(Update: Smedvig divested their holdings in Talga Group at the time of the most recent capital raise. The reasons behind their sale are unknown at this time). While their exit is a concern, it is possible they considered Talga Group no longer fitting into their definition of an early stage start-up business, which is a criteria for their special investments.)
FINANCIAL OPPORTUNITY
On December 7, 2020, Talga Group released the scoping study for the Niska expansion. This follows on from the Feasibility study released on August 5, 2020.
The Niska Study outlined that increasing anode production capacity to 100 000 Tonnes per annum was feasible, delivering an internal rate of return of 47%. Base case free operating cashflow was estimated to be $690 M USD under steady state operation, over a 14 year mine life, in addition to the Vittangi (Stage 1 ) project.
However, the capital cost for the Niska stage of the project is estimated to be $1 246 M USD. This is in addition to the $174 M USD capital cost of the Vittangi (Stage 1) project. Talga Group have sufficient funding to develop the pilot plant and continue operations for the next 12 months. However, how the funding of the anode facility is raised remains in question. Currently, Talga Group have signed a non-binding letter of intent with Mitsu Corporation and Swedish state-owned LKAB. The LOI outlines the intent enter into binding co-development agreements with Talga Group to develop the Vittangi & Niska anode projects, with an expiry date of June 30, 2021.
Given the strategic importance of this project, I expect Talga Group will be able to negotiate good terms for the development, and I would expect the worst case scenario being Talga Group will need to raise capital and debt to fund the project development.
Assuming Talga Group will be able to raise 70% of capital through debt financing, they will need to raise sufficient capital to fund 30% of the project costs, and company sustainment costs through to 2024, at which time, Talga Group Stage 1 will be generating cashflow. Talga Group will need to raise $70 million AUD to develop Stage 1 by July 2021. Assuming this capital will be raised at a 10% discount to today’s share price of $1.80 per share, would result in a share dilution of 16%.
Looking ahead to 2024, Stage 1 should be at full production capacity, with Talga Group will be generating $198 AUD EBITDA, or, NPAT of, say $100 M AUD. Assuming a PER of 13, gives a Talga Group share price of $3.80 in 2024.
At this time, Talga Group will be proceeding with Stage 2, which will require $498 million in capital. Assuming $100 million will be generated from Stage 1 cashflow, Talga Group will need to raise $400 million AUD. Assuming a capital raise at a 10% discount from our assumed share price of $3.80, the capital raise will result in a share dilution of 34%.
With Stage 2 completed and in full production, Talga Group NPAT in 2027 could be $535 M AUD. Based on 460 million shares, a PER of 8, the share price will be $9.30 in 2027. There is a high degree of uncertainty in the sale price of anode and graphene products, uncertainty in capital / operating / production costs. Given the uncertainties, one would expect a high return for accepting such risk. We consider an acceptable return for such risk to be a 20% return on our capital. Discounting our forecast share price to present value, we estimate Talga Group to have a valuation of $2.60 per share. Allowing for a 15% margin of safety, brings our valuation to $2.20.
OPTIONALITY
Furthermore, Talga Group have a number of opportunities to increase the size and profitability of the business as follows:
Mine & Resource Expansion. Niska remains open along strike and depth, and there is opportunity to expand production capacity in the second half of the decade.
Battery technology development, with Talnode-X (ultra-fast charging product), and Talnode-E (solid state battery) products under development.
Graphene products. Talga Group's, Technologies & Advanced Materials team has been developing graphene products for a range of markets, which represent significant opportunities to growth.
RISKS AND WHEN WE’D SELL
We would consider selling if:
Talga is unable to negotiate partnership deals or financing to commence Stage 1 anode production by July 2021.
Talga is unable to secure customer offtake agreements by the December 2021.
Niska mine not approved by 2023.
Global oversupply of anode materials or competitive pressure on anode pricing.
Disruption to Lithium Ion battery technology.
Unexplained CEO, or key person departure.
Development cost overruns or delays to production commissioning.
SUMMARY
We believe Talga Group has a number of competitive advantages in terms, including:
Most sustainable anode material on the market.
Lowest cost producer.
Low supply chain risk.
Superior anode performance.
The four competitive advantages outlined above are difficult to replicate, and we consider this will provide a strong moat against competition, in a market that will experience unprecedented growth and demand. Furthermore, the strategic importance of anode material to the European manufacturing sector will ensure strong support for the success of Talga Group, and we expect Talga Group will be able to negotiate favourable terms with its partners, which provides potential upside from our valuation.
There are significant risks in investing at this stage, given the uncertainty that comes with the development of a complex project, and the negotiation of agreements in a competitive automotive market. However, we consider the potential returns and opportunities justify including Talga Group in Luke's Fund.
Luke’s Fund has held TLG since September 2020.
Regards,
Sean