Nemaska Lithium cost overruns hit share price

Eight months after the start of construction of its Whabouchi project in Quebec, Nemaska Lithium (TSX: NMX; US-OTC: NMKEF) says it will cost an additional $375 million to complete the spodumene hard rock mine and electrochemical plant - a 34% increase over estimates in a feasibility study in January 2018.

The announcement on Feb. 13 sent the company's shares plunging 35.6%, or 19.5 ?, to 35.5 ? apiece on 39.6 million shares traded. The stock sunk a further 9.9%, or 3.5 ?, to 32 ? on Feb. 14 with 9.4 million shares traded.

The news comes less than a year after Nemaska Lithium unveiled a $1.1 billion financing package on May 30, 2018.

The additional $375 million will be necessary to complete construction and meet the drawdown conditions provided in the streaming agreement with Orion Mine Finance and the senior secured bonds closed on April 12 and May 30, 2018, respectively, the company states.

The additional funding is largely related to installation and indirect costs, the company explains, which were determined as a result of a detailed review and deeper knowledge of all project components, including detailed engineering work, revised site geotechnical data, and updated equipment and installation costs.

"We now have a better view of the remaining scope of the project budget and current market conditions," president and CEO Guy Bourassa told the 150 people tuned into a conference call. "The revised project numbers benefit from over eight months of construction, much higher level of detailed engineering, firm bids and contracts recently awarded. Having said that, the project construction is on time, in spite of its inherent complexity, and I confirm that we have the right team in place to deliver construction of the project."

The mine in Whabouchi is expected to produce 213,000 tonnes of spodumene concentrate containing 6.25% lithium oxide (Li20) per year on average, over a 33-year mine life. The electrochemical plant at Shawnigan, which uses a membrane electrolysis process, will then convert the spodumene concentrate into about 23,000 tonnes of lithium hydroxide and 11,000 tonnes of lithium carbonate a year. The lithium salts are destined for the lithium-ion battery market for the electric vehicle market.

Bourassa noted that over the past few years the company had "developed a strong shareholder base as well as major partnerships and partners" and that management "are already working to identify a variety of funding solutions" that "include non-dilutive options as well as trade and strategic investments."

Nemaska Lithium's 610-tonne-per-year trial hydrometallurgical plant in Shawinigan, Quebec, where it processed a 1,050-tonne bulk sample of above 6% spodumene concentrate. Credit: Nemaska Lithium.

He also said that as the company moves ahead with its construction schedule, it continues to deliver a high-quality lithium hydroxide product from its phase one plant, including lithium hydroxide monohydrate "that is not really getting a lot of international attention."

"The fact is that we have installed and commissioned and started producing lithium hydroxide monohydrate this quarter so that we can enlarge the base of end-users that have requested, and to whom we're sending, qualification samples."

When asked during the question and answer session to elaborate on the factors behind the rise in costs and what had caught the company off guard, Bourassa said it was largely related to installation and indirect costs. These included higher manpower costs in Shawnigan, where it is building its processing plant, changes to the type and grade of steel that will be required in some of the pipes and larger tanks in the process plant, following additional metallurgical test-work, and civil works including earth removal costs that were higher than expected.

Bourassa ranked manpower costs as the main factor, as the company discovered unexpectedly that it had to plan for having to provide housing to about 50% of its workforce at Shawnigan.

"Shawnigan is in the middle of the industrial region of Quebec, with a basin of about 250 good workers and people, and we assumed and took for granted and budgeted that there would be no cost for room and board, since everybody was going to come from the region," he said.

But by the time the company was ready to hire workers, many had been drawn to work elsewhere on other projects, he explained. "So now we have to plan for about 50% of the manpower to be added to the cost of coming and staying in the region during the construction period."

The second issue was the data it had related to the location and installation of the concentrator. "We had enough geotechnical data available," he said, but "as a coincidence, and it is a bad coincidence but is the reality, all of the soil sampling gave us the tops, but not the downs of the rock, and therefore we had a lot more blasting to do and a lot, lot more quantities of earth to remove, so that has a direct impact also on the execution."

Finally, the company discovered through the operation of its pilot plant, that "there was an issue with some of the solutions created by the ore that would have an impact on the tanks if we kept the same quality of steel that was designed and budgeted initially."

He added that it was a credit to the engineers working on the project that they discovered the problem and "we were able to catch it before building it ... It's certainly much better than finding that out after all of the tanks are ordered and installed and you need to replace them. It could not have been seen before and without the benefit of the phase one plant."

Ground works at the Whabouchi hard-rock lithium project in Quebec. Credit: Nemaska Lithium.

When pressed by an aggravated shareholder about how the company could have been so far off on its estimates, Bourassa said that like any 43-101 budget, companies make assumptions on costs and base their budgets on quotes received from equipment suppliers, and external engineers among others, who make their estimates based on their databases and other projects they have been involved with, and the assumptions are based on the knowledge at the time.

"There is no detailed engineering - or very little detailed engineering - when you finish a 43-101 on a project, usually," he said. "And the assumptions that we used were correct at the time." How could the company have known, he added, that there would not be enough pipe fitters and other types of skilled workers "because some other contracts came in in-between and at the time where we need to install these people are simply not available."

He also said the detailed geological soil analysis at the mine "was done according to standards and nobody can question that."

"I would just like to remind everybody on the line that this 43-101 is signed by about 12 QPs from two international firms," he added. "What they used as the basis, at the time, for establishing their budget, we had no reason to question. Now reality is facing us and we have to live with it ..."

"You've got 12 QPs that signed under a 43-101," he continued. "Of course, we also had people in-house that were working on the budget and it seems that everybody, including maybe five other firms around the world that were involved in the last round of financing that did a very thorough due diligence review for months on the budget, line by line, questioning, visiting, talking with independent engineers. So it's not only one person that did overlook. You're talking about, I would say, at least ten, fifteen, international firms that overlooked our budget and would have all been incompetent in not seeing these things. There were absolutely no obvious things to be seen in the 43-101 budget. The assumptions were checked, discussed, challenged at the time by us with the QPs, but also with the QPs from the investors, the bondholders, the streamers, etcetera... and on top of this, we also had due diligence by very reputable firms, while we were discussing other financing options with other types of investors."

In terms of the breakdown of where the additional funds will be required, Bourassa estimated that about one-third of the $375 million required will be spent on building the mine, and two-thirds on the processing plant. "So to complete the mine you'll need about $250 million," Bourassa estimated, adding," but don't quote me on these numbers, we'll be giving more detailed information at the end of February."

Bourassa emphasized that the main objective was not to deviate from the construction schedule, which targets completion of the mine in October.

To finance the gap in funds required, the mining executive said the company was working on a number of alternatives.

"We are obviously discussing with the main shareholders of the company, the main suppliers of capital that are involved, be it with the stream, be it with the bonds, be it with the large shareholders and other strategic investors that we've been continuing to have ongoing discussions with over the past year, year and a half," he says. "So we have multiple options on the table we need to weigh them and decide which one we can close in a timely manner that will not affect the schedule."

At the end of December 2018, the company has spent $138.4 million on the mine and another $67.3 million on the electrochemical plant, covering mainly engineering, site and civil works.

As of Feb. 8, Nemaska Lithium had $335 million on hand in unrestricted cash and equivalents.

The company says it is also currently evaluating the opportunity to increase the lithium hydroxide versus carbonate sales ratio to better meet the growing demand of hydroxide globally.

At press time in Toronto, Nemaska Lithium was trading at 32 ? per share within a 52-week trading range of 27 ? (Feb. 13, 2019) and $1.74 (Feb. 21, 2018).

The junior has 271 million common shares outstanding for a market cap of $846 million.