Essential Metals (ESS:ASX)

Last update - 3 July 2023 By Shannon Rivkin

Essential Metals is a mining exploration company focused on finding and producing lithium and gold which are essential for a sustainable, low-carbon future.

Days Held108 days Gross Return4.21%Event TypeTakeover

Essential Metals, takeover and profit in roughly 3 months

ESS is an interesting investment whereby the original bid by TLEA for $0.50 that we bought in for was blocked late in the process by a blocking stake built up by lithium giant Mineral Resources (MIN). However, rather than sell the stock at a loss, we were confident there was a grander plan behind MIN’s actions, with a new deal ultimately signed with Develop Global (DVP), a company in which MIN was a major shareholder. As the new offer was scrip-based, and MIN was no longer a potential bidder, we decided to take the profit and sold at a price of $0.495, a profit of roughly 4.2% in roughly three months.



Events timeline:

Current advice: Closed.

Latest Recommendation: 3rd July 2023, 12:00 pm

Since Mineral Resources (MIN) blocked the deal between ESS and TLEA, we have been waiting on the expressions of interest process for offtake agreements from ESS’ Pioneer Dome project to play out. Our view was that this would prompt MIN to move sooner than it may otherwise want and would be a catalyst for a higher exit price either through a new takeover bid or an attractive offtake agreement that would underpin the value of the asset.

We got a shock this morning when ESS announced that it had signed a new binding scheme implementation agreement (SIA) – not with MIN, as we had anticipated, but with Develop Global (DVP). Additionally, MIN has stated that it will support the offer (and ultimately lose money on its foray into the battle for ESS), so we are quite confused by MIN’s game plan. MIN is a shareholder of DVP, so we might eventually see MIN make a move on DVP which would make the recent activity more understandable.

Having said that, it’s objectively good news to see a new deal signed. The offer from DVP is for a headline price of $0.56 per share; however, it needs to be noted that the offer is an all-share offer, so the value will fluctuate alongside movements in the DVP share price. With MIN committing to accept the offer, we have lost our most likely counterbidder. Original bidder TLEA may re-emerge with MIN now on the sidelines, but the price is more than 10% higher than TLEA’s first offer.

While there remains a chance of competing bids, we need to consider our options. If the DVP offer were all-cash, it would be an easy call to hold until the deal completes, or we see competing bids. In the knowledge that the offer price will fluctuate – and we typically don’t buy share-based takeover bids – we have decided that the most appropriate course of action is to sell. The stock is trading at a big discount to the value of the offer, which is expected given the volatility of DVP, but we remain happy sellers at this price because we have no cash offer to underpin our downside. We, therefore, recommend members sell ESS at around the current price of $0.495. At that price, all members will have made a profit of 4.2% or more from our entry price of $0.475 and below.

Update: 16th May 2023, 11:45 am

ESS released an update to the market last week, and the CEO provided some interesting information in an interview which likely points to recent strength in the stock. With the TLEA deal abandoned, ESS is revisiting the process to explore offtake and funding opportunities for the company. The CEO, Tim Spencer, stated that early-stage talks are demonstrating an urgency that wasn’t there in the latter months of 2022, and it sounds like the process will be relatively quick.

The scoping study completed in February suggested that it would cost ESS $293m to build a mine with a 7.3-year lifespan at Pioneer Dome. The project is expected to pay for itself within two years at a lithium price of $US1,500 per tonne, whereas lithium prices were trading at roughly $US4,000 per tonne last week.

Major shareholder Mineral Resources (MIN), which blocked the TLEA deal, has admitted that it has an interest in securing the product from Pioneer Dome which is located close to MIN’s Mount Marion project. Surprisingly, ESS has yet to engage with MIN about a potential offtake agreement, joint venture, or takeover bid, but the speed of the expressions of interest process may ultimately force MIN to engage sooner rather than later. While MIN’s stake was large enough to block a scheme of the arrangement, ESS will not need shareholder approval for an off-take agreement, and MIN risks missing out on Pioneer Dome altogether if it drags its feet.

So, while we have said timing around a move by MIN has become an unknown, there are good reasons to assume that MIN will act sooner rather than later. It may not necessarily be a takeover and could come in the form of an off-take agreement or joint venture, but either way, it seems likely that MIN won’t be silent for long. Therefore, we continue to recommend that members hold ESS on the expectation of future corporate activity.


Update: 27th April 2023, 10:15 am

Further to our recent update on ESS after Mineral Resources (MIN) blocked the $0.50 deal and bidder TLEA walked away, the stock has been soft as arbitrage funds head for the exits. TLEA’s retreat has made timing around a future move from MIN far less certain, and MIN will now feel no urgency especially while it has its own operational problems. MIN yesterday downgraded production estimates from its Mount Marion project because of labor shortages, so the company has a lot on its plate right now.

The good news is that MIN also clarified its interest in ESS and stated that it sees value in eventually trucking lithium feedstock from ESS’ Pioneer Dome project to Mount Marion, which it owns with Chinese battery metal company Ganfeng. ESS is back to the drawing board in navigating the best path for the project, so will be looking for off-take agreements or joint venture partners, so MIN can’t afford to stay on the sidelines for long. Therefore, despite the timing being unknown, we remain content with continuing to hold ESS as a high-risk event-driven investment.


Update: 21st April 2023, 10:00 am

Further to yesterday’s update, ESS announced this morning that the scheme with TLEA has now been terminated. With Mineral Resources (MIN) sitting on a 19.55% stake, TLEA was always going to be the unlikely victor in the war for ESS, so we understand the decision. However, there are creative ways TLEA could have minimized the influence the MIN stake had, so we’re frustrated with how easily TLEA was beaten.

Where to from here? Well, it’s pretty clear MIN is the last man standing. ESS has stated that it will reopen talks with interested parties about offtake agreements or whole-of-company options, but MIN really has its destiny in its own hands. It can either bid now and pay a small premium above $0.50 or bide its time and bid in the future. The risk in doing so is that it could ultimately end up paying a far higher price, but the converse is true as well. Given MIN’s size, trying to time a circa $150m purchase seems pointless when the bigger expenditure will be on developing ESS’s Pioneer Dome project. Having said that, MIN boss Chris Ellison is a shrewd operator and won’t be rushed into a high-priced offer if he thinks he can get it cheaper by waiting. However, it seems highly unlikely the board will support an offer below $0.50 in the short term after the TLEA offer was rejected by so many shareholders (well and above the MIN shareholding).

So, for today we are disappointed and, without the $0.50 offer on the table underpinning the trading price, ESS may very well trade lower today. Our initial entry into ESS was a high-risk investment, and we still feel the odds are high that a takeover eventuates in the near term.  We are therefore going to continue to recommend members hold the stock, at least until we get some clarity on MIN’s intentions.


Update: 20th April 2023, 12:15 pm

Today marks the scheme meeting for the $0.50 acquisition of ESS by TLEA. Given Mineral Resources (MIN) has bought 19.55% at prices well above the $0.50 offer, today’s scheme is all but certain to fail. There are a few outcomes that could occur from here:

  • TLEA decides it is willing to pay no higher than $0.50 and walks away. In the meantime, MIN could either bid shortly after or decide to bide its time, knowing its substantial stake has left it in pole position.
  • TLEA could restructure its offer as a takeover conditional on 50% acceptances, likely forcing MIN to come to the table with its own offer.
  • Finally, both TLEA walks away, and MIN decides to do nothing, keeping its options open for a later date. In this scenario, we will likely see the stock trade below our entry price. This seems unlikely and MIN risks paying more in the future but can’t be ruled out as a possibility.

We will update members further after the scheme meeting results are released.


Update: 17th April 2023, 11:45 am

The mystery buyer of ESS stock was revealed on Friday night as Mineral Resources (MIN) announced that it had bought 19.55% of the company. This morning, ESS announced that it has not engaged with MIN and is unsure of the motive behind the buying. However, with the scheme meeting set for Thursday, it is highly likely that MIN will use its stake to block the bid. The question, of course, is whether it makes a bid itself, and for now, we are in the dark.

Logically, ESS is hardly the sort of strategic asset that a company like MIN would move heaven and earth to keep out of the hands of a competitor, so aggressive buying is likely a prelude to a bid. Additionally, there is always the chance that TLEA (the bidder at $0.50) changes the structure of the offer to get around the blocking stake. This could be achieved by launching a takeover bid conditional on only 50.1% acceptances, knowing that MIN won’t want to be a minority shareholder in a company controlled by TLEA. And if TLEA was to do just that, it is not going to make any progress with a $0.50 offer now that MIN is in the picture.

So, while we know very little today, the odds of an increased bid by either MIN or TLEA are pretty high. We are therefore content to abstain from voting at the upcoming scheme meeting (which may be postponed anyway). We will update members further as events unfold.


Update: 14th April 2023, 10:45 am

The scheme meeting for shareholders to approve the $0.50 acquisition of ESS is due to be held in roughly one week, and we were set to provide voting instructions yesterday. However, the situation has changed as some very large and suspicious buying has emerged in the stock, with three straight days of elevated trading volumes and a close of $0.55 yesterday, 10% above the offer from TLEA.

Frustratingly, there has been no ‘substantial shareholder’ notice released yet so we remain in the dark, but it must be assumed that someone is building a stake in the company. The potential motives behind the stake are many:

  • Perhaps a competing bidder is building a stake before announcing an offer above $0.50 per share
  • An institutional shareholder could be building a stake to put pressure on TLEA to increase its offer as we have seen recently with Pushpay (PPH)
  • Finally, we could see a strategic buyer attempting to block the deal for TLEA

Two of the three above scenarios would likely result in higher offers for ESS, whereas the third option could potentially lead to the deal falling over. So, while we should be pleased to see the stock trading well above $0.50, the situation is not without risk.

If we had recommended ESS as a low-risk investment, we would likely be recommending selling some stock to account for the higher risk at these levels. However, as we have recommended ESS as a high-risk investment, we are prepared to hold in the hope that we see either of the first two scenarios unfold.

Members will still need to get votes in for the $0.50 offer by Tuesday, so we will provide further advice on Monday. Hopefully, we will be armed with more information by then.


Latest Recommendation: 17th March 2023, 9:35 am

We have been mulling over whether to formally recommend ESS with its size (only $125m market cap) and limited liquidity keeping us on the sidelines to date. With the weakness in the market in recent weeks, the stock has started to trade on better volumes and at lower prices, so we are now comfortable recommending the stock.

On 9 January, ESS signed a scheme implementation agreement with Tianqi Lithium Energy Australia (TLEA), the joint venture owned by ASX-listed IGO Ltd (IGO) and Tianqi Lithium Corp which is the major shareholder in one of the world’s best lithium projects in WA’s Greenbushes mine. The offer is for cash of $0.50 per share which represents a 44% premium to the pre-bid closing price.

Scheme booklets are due out this month, with payment expected in May. The stock had traded above $0.50 earlier on as there was speculation mounted that ESS would attract competing bids, but cooling lithium prices have taken the heat out of the price, and the stock now looks very attractive as an arbitrage opportunity. At $0.475, members would stand to return 5.3% in roughly two months, an annualized return of over 30%!

Importantly, the conditions of the contract are standard and there are no out-clauses based on falling lithium prices or stock markets. And while we have not seen a counterbid to date, one cannot be ruled out. As liquidity remains our main concern, we will classify ESS as a high-risk investment and suggest members allocate capital accordingly. In summary, members are recommended to buy ESS for a short-term, high-risk arbitrage opportunity.

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