Sigma Lithium Board of Directors & Chairperson Ana Cabral,
I am writing as a former shareholder who as of the last couple days once again is a shareholder of Sigma Lithium.
When I met Ana in London during LME week in October, I was a shareholder curious as to why there had been such an untraditional news release about a strategic review process including a guided date to a conclusion (before year end). While M&A processes can be fluid, and not all are the same, such a news release that took away deal tension, urgency, and leverage from Sigma Lithium struck me as bizarre.
After our meeting I contemplated our discussion, and came to a very simple conclusion – you may or may not have a deal but you definitely didn’t have a deal to announce before the end of the year. Why you voluntarily put all your credibility on the line with your public investors, I still do not understand.
Whether you have been receiving poor counsel from your current board and advisors or refusing to listen to the counsel given, it makes no difference to the situation Sigma finds itself in today from a non-insider perspective. Because four months since our meeting, while the spot price in lithium has not helped, the market has come to the same conclusion I did.
While you and Calvin had a brilliant vision to found and create Sigma Lithium and the stubborn tenacity to deliver on that vision with Phase I through multiple cycles in a commodity as volatile as lithium, that stubbornness has today become a problem.
At the close of September 12, 2023, Sigma Lithium closed at $32.13/share (all figures USD). The next morning the Company announced it had received multiple proposals for the listed entity, the Brazilian OpCo, and the project itself.
We are almost five months to the day since that news release, for context US Steel received a public unsolicited proposal from Cleveland-Cliffs in the middle of August 2023 and only four months later in December 2023 announced a proposed takeover by Nippon Steel. While Sigma Lithium is a single asset/operation entity, US Steel is company with multiple iron ore mines, blast furnaces, electric arc furnaces, OCTG operations all in the United States and a steel mill in Europe.
The due diligence is burden for a potential acquiror is not the same. In fact, it’s orders of magnitude different which makes the ongoing duration to announcement even more confusing.
Further, Nippon - US Steel is subject to antitrust and other regulatory approvals. Those are not reasons to not agree to a deal and announce it. Like shareholder approvals, they are par for the course in any M&A transaction like this.
And at the same time, there were multiple media reports before September 13, 2023 regarding interest in Sigma. While I do not expect you to acknowledge when indications of interest or non-binding proposals were first presented to you and the board of Sigma, it seems clear from a non-insider perspective you have had ongoing M&A dialogues for close to a year at this point. I base that conclusion on the Bloomberg article February 17, 2023 reporting that Tesla was considering a bid for Sigma Lithium.
So here we are today and as I write this, Sigma Lithium trades below $13.00/share USD. And in your conference call last week on February 1st, 2024 to discuss the updated resource, you refused to discuss the strategic review at all when back on the third quarter call in November 2023 the strategic review conclusion was “imminent” to the point you couldn’t stress it enough.
I don’t know if that change in tactic is due to new advice being taken or some change in the status of the review but either way it has clearly shaken both existing and potential investors in Sigma Lithium.
While I have not had as an illustrious career on Wall Street or as monetarily rewarding as you have, I have in the past sat on the board of a metals & mining company. A board where I had tough conversations and shared advice/views the CEO did not always want to hear. But it led to better decisions being made and while personal egos got deflated, it served the interests of all stakeholders.
With that in mind, I suggest to you as a fellow shareholder and stakeholder a few steps to restore credibility and faith in Sigma Lithium for investors.
First around the strategic review:
1) If you do have a bid for greater than $32.13/share (unaffected closing price September 12, 2023), then sign and announce the deal immediately with clear communication that it requires regulatory approvals. Like Nippon-US Steel takeover or the pending Solaris Resources-Zijin Mining minority equity investment, you can announce deals pending regulatory approval. It is not uncommon to agree to a deal and announce it pending regulatory approval and various conditions precedent.
2) If you do not have a bid for greater than the unaffected price, cancel publicly the strategic review process. You publicly disclosed it when the stock was >$32.00/share. Whether bids have been reduced or retracted, you will have some explaining to do if the board accepts a bid less than $32.00/share based on the disclosure pattern since September. It’s a distraction at this point.
3) If you have a bid but for less than the unaffected price, and want to accept it, do so immediately (see point #1) but be prepared to explain why it is below the unaffected price. This third pathway would surprise me but if the board believes this is the best pathway forward then take it. The shareholders will vote how they see fit.
In the event you cancel the strategic review and Sigma remains independent:
1) Announce your intention to resign as CEO and hire an experienced operator as CEO but remain Executive Chairperson. Sigma would not be where it is today without your vision, leadership and financial support. But an operator CEO who can maximize Phase I free cash flow while delivering Phase 2/3 expansions needs to put in place to give the market confidence around the operation. Especially if Sigma will be remaining an independent single operation company to extract full value from this resource due to lack of strategic interest reflecting full and fair value to existing shareholders. You would still be very involved but the tangible commitment to prioritize operational excellence in single operation independent company would be welcomed
2) Bring real independent directors and advisors into Sigma Lithium. Like I stated above, I am not sure if you are being poorly advised or refusing to listen to advice. But as a >40% shareholder who I doubt is willing to fully step aside (and I empathize with that desire after the journey you have been on so far with Sigma), if you are not changeable, then the people advising you must be in the hopes that changing the advice may result in better outcomes
3) Solve the question of how you will finance Phase 2/3 capex. Besides a loss of faith in management and questions about the true cost structure of Sigma Lithium, the weakening spot spodumene prices have forced investors to ask how will you finance the expansion to Phase 2 & 3 which hopefully will dilute the EBITDA breakeven level per tonne.
4) Start under-promising and over-delivering. I don’t know why you used a $400/t hypothetical cost on the geology conference call February 1st, but couldn’t you have just used the illustrative Phase I EBITDA breakeven (which would be ~$640/t if we use Phase I nameplate capacity and 3Q23 real cash costs) versus a number that when people look at the current operations and financial statements they struggle to reconcile?
5) Build an internal marketing team. While you have loved to talk about how the offtake is unencumbered and how that makes Sigma a strategic asset in the market place, the fact you have to rely upon Glencore to market your product is an offtake by another name
Having read all this you probably wonder, despite my skepticism about your ability to navigate this stage of Sigma Lithium’s journey since October 2023, why I have decided to invest in Sigma Lithium again.
At a macro level I do believe the lithium sector is bottoming in the first half 2024 and we will all look back in 12 months at these price levels and be happy to be back a more normal/mid-cycle price level. Many marginal lithium operations will close or idle now at these current prices and they will not come back unless prices are materially higher.
In the 3Q23 Sigma sold 37.9kt of “Green Lithium” that accounted for C$127MM out of C$129MM of revenue. The cost of goods sold (C$46MM), depreciation (C$4.4MM) and G&A (C$16MM) combined to imply an approximately $1,140/t Green Lithium breakeven EBITDA level
If C$58MM is the established quarterly breakeven EBITDA threshold for Phase I, and you achieve 270kt nameplate capacity (67.5kt per quarter), I calculate an implied EBITDA breakeven of $640/t “Green Lithium” using actual costs for 3Q23.
Sigma will survive to see the recovery to sanity in lithium prices at those EBITDA breakeven levels while Phase I is the only portion of the operation. Hopefully the market understands that once it sees the fourth quarter 2023 financial results (provided the operation has delivered to plan in the fourth quarter, if it hasn’t I do not envy you on that results day).
A financing plan to fund the Phase 2/3 expansion will also give relief to current and potential investors about the pathway to recognizing the full value of Sigma Lithium.
At this valuation, it doesn’t really matter deal or no deal. It just matters that the operations are run properly and profitably so the benefits to all stakeholders are maximized including to shareholders. There is no shame in just delivering Phase 2/3 and then returning cash to shareholders via dividends and buybacks if the strategic interest you said was there in September is no longer there at a fair valuation to shareholders.
I was one of the first say I didn’t believe you had a deal back in September and October, and now I’d like to be one the first to say you can and you will turn this around, but you need to start listening to the consul of your advisors, stakeholders, and shareholders.
And while I was right there was no deal by the end of the year, nothing would make me happier than to be proven wrong that there was no deal at all, especially above the unaffected price.
Best Regards From The Eucalyptus Tree,
The Koala
Do you believe the bottom
Is in for litium? (The commodity)? Looks like
it chartswise
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