Implications of the Tawana Alliance Merger

April 5, 2018

Tawana Resources announced that they are merging with their JV partner, Alliance Mineral Assets.  According to the announcement, it will be a 50/50 split in the merged entity for shareholders of each company.  We’ve been saying for quite some time that we believe consolidation activity will be a major theme for 2018 as interest heats up in the lithium mining space.  As such, let’s take a moment to assess the implications of this merger for lithium investors.

Increased Efficiency- Streamlining the project to have only one parent will increase efficiencies as all parties will now share the same common goals.  It could also lead to decreased management headcount, extracting extra profits for shareholders.

Investor awareness- The combined entity will have a market cap of close to AUD 500m, and potentially increased liquidity as well.  While no shareholder value is created by just putting them together, having a larger market cap will help put them on the radar for larger and more sophisticated investors.  Many institutions stay away from smaller cap names either by choice or mandate, so the merger will definitely help Tawana get in front of those eyeballs compared to their smaller cap/earlier stage lithium miner peers.  If successful in attracting institutional money, this would be a big catalyst behind the stock, and potentially lead to higher valuation multiples as well. 

Access to capital- Combining the two companies should make it easier for them to raise money.  Prior to the merger, each owned a 50% stake in the Bald hill project, with each having to conduct small raises to fund the project.  Now, they can go to investors with 100% ownership of an operating lithium project, and raise any capital needed. Having full ownership allows the company to show larger cash flows and a stronger balance sheet, while also confidently conveying full operational flexibility over the Bald Hill project.

Further consolidation?- As we mentioned, this move streamlines the project management structure.  If Tawana and Alliance are looking to be acquired by a larger company, the merger is definitely a logical move.  They can now take the combined entity to a strategic buyer and offer 100% ownership of the Bald Hill lithium project, which beats having to come in as an acquirer and deal with a 50% JV partner that they have no history of working with.

With that being said, there’s the obvious overhang of the offtake partner for the next five years which might impede acquisition talks from other parties.  But let’s focus on that offtake partner for a second. Burwill Holdings was already a shareholder in Alliance Mineral Assets. So its not a stretch to assume they will presumably have a stake in the combined entity to go along with their offtake agreement.  Should they decide to explore locking up guaranteed supply by acquiring the new company, they already have a tremendous amount of knowledge on the project, management team, and challenges facing lithium production at the site.

Looking beyond the offtaker- until the project expands production capacity enough to interest major new customers (which is likely as they continue exploring and gearing towards stage 2 of the operation) the company will likely have to wait a bit to enter into serious discussions with interested suitors looking to secure lithium supply via acquisition.  However, it wouldn’t be shocking to see the company start speaking with potential acquirers as the race to secure lithium through long term contracts continues to heat up.   Thus, we’re very interested to see how the story continues to unfold on this front, and will keep you posted along the way!

Finally, we’ll leave you with the words of CEO Mark Calderwood, who said the deal will make the new company “a more attractive takeover target as corporate interest in lithium is intensifying.”

With activity heating up in the lithium and electric vehicle sectors, stay tuned to The Lithium Spot via twitter and email to get our investment analysis as it hits the tape!

Edits: A previous version of this post incorrectly stated that the offtake agreement for Bald Hill lithium offtake was for two years.