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Advantage Lithium (TSX-V: AAL) CEO David Sidoo on Plans for a DFS at Cauchari in the First Half of 2019 & Consolidation in the Olaroz-Cauchari Basin

September 18, 2018

Gerardo Del Real: This is Gerardo Del Real with Resource Stock Digest. Joining me today is CEO and founder of Advantage Lithium (TSX-V: AAL)(OTC: AVLIF), Mr. David Sidoo. David, tough markets, how are you doing this morning?

David Sidoo: You know, Gerardo, if it was easy, everybody would do it, but this is part of the business we're in. There's ups and downs, and there's cycles that you have to go through, and this is one that's a little bit painful right now, but we're going to come out of it. As I mentioned to you early on, we completed a $12 million financing, we've got over $18 million in the bank. We're funded right through DFS, so we're going to stay the course, do the drill program that we've initiated, continue to build our resource, and I think this will pass in the next several months.

Gerardo Del Real: Let's talk a bit about the financing and what it will allow you to do. You referenced it right now. I'll be honest with you, when you first announced the financing, I wasn't a fan. I thought that the company was well on its way higher share price-wise. I've said that this is a top takeout target, and I didn't see the need for the dilution. In hindsight, you look like a smart guy, David, because with everything going on in Argentina with the export tax on metals that, right now, affects the producers, but it's trickled down, obviously, to Advantage Lithium.

I want to talk about the situation in Argentina and just how that tax affected the share price and how you think it affects the company, if at all. You mentioned that you're well cashed up and you're on your way to a DFS. So, let's talk about that.

David Sidoo: Sure. The financing was really strategic. It was done by our partner.  Orocobre maintained their pro-rata position of just over 30% in the company. So that's a strategic partner, not a retail guy that invested in our company. Then we added another nameplate institution into the scope of things, a $700 million fund out of Stockholm who took $5 million US, and then myself, my family, and associates took another $700,000. So, it was basically a three person deal. It funded our coffers, it maintained our pro-rata position. We brought in a nameplate institution that's not going to trade the stock but buy more.

So, we decided to do that at that time. What happened since that is the government of Argentina, the economy there is in peril. They had to make a serious decision. It surprised a lot of people in the market. It was a quick decision made by the Macri government to put an effective 10% tax on export of all metals out of the country. It affected all the producing companies, such as FMC and Orocobre in Argentina. It brought some of the other major companies, like Albemarle and SQM down a little bit, and it affected junior companies like Advantage and Millennial Lithium as well. You know, people looking at what's going to happen in Argentina long term.

Now, one of the main things that tax did talk about was that you're spending money in US dollars to develop your asset. You've got the peso at 4 right now, so the effective tax rate really is not 10%, it's 8%. You're spending US dollars in a devalued currency there, so you're gaining a little bit there, Gerardo, in terms of expenditures. This tax is a temporary tax. Macri's government has decided they're going to look at instituting it up until 2020. If they extend it beyond that, those decisions will be made based on how the economy responds. For some of your listeners, a similar situation that happened in Brazil a few years ago where they had high interest rates and inflation, and they needed to do something drastic there. They were in a recession for about two and a half, three years.

Most economists think that Argentina maybe will be in a recession for a couple years. Our production doesn't come out until 2021, which is good timing for us, and in that PEA we built in a small tax. We didn't mention that to the marketplace, but we did build in an effective tax that we thought might be coming in our net present value in that PEA still stated that we'd have an $800 million plus valuation on our asset. So, all in all, we're in pretty good shape in terms of the financing we did. The people who took the financing down, the quality institutional we raised, we've got enough capital now in the bank to go right through to DFS, which is up until March of 2019, we'll still have cash in the bank. I expect a lot of news coming from Advantage starting next week right through to the year end. We're just going to keep our head down and keep working.

Gerardo Del Real: Excellent. Let's talk about that PEA. You had an after tax net present value at 8% of US $827 million, an IRR of 24.3%. The market cap, obviously, is about 1/8th of that right now, if that. That's really the opportunity here. Right, Dave?

David Sidoo: I agree with you, Gerardo. You know when you talk about a knee jerk reaction in the market when this tax came out, or when Morgan Stanley said there might be oversupply, or Citibank mentioned six months ago that there might be oversupply, if you look at the lithium world and you look at some of the top projects in the world, there are not very many. There's some in Australia, the Kidman mine being one. There's the Atacama in Chile and then there's Cauchari. You know, you've got LAC, Ganfeng, Orocobre, and Advantage Lithium spending half a billion dollars in that basin. You've got 12 to, you know, anywhere from 18 to 20 million tonnes and growing all the time with all the drilling that we're doing. So there's not a lot of good assets out there in the brine sector, okay?

So that's good. We've got a quality asset. Whether the market's up or down, supply is going to be required. Demand is going to continue. So we're sitting in a very good position. I don't see any other great projects coming out into the marketplace. The other thing is our technical staff has taken a resource from 500,000 tonnes to 3 million in less than a year. So that's a testament to the quality of staff that we have, technical guys that understand how to bring a project to the marketplace. Because to produce lithium, Gerardo, is not an easy thing to do. You need technical people that understand the product and these guys have built assets before for other companies. So we're sitting in a good position. We've got a good asset. Demand is going to continue to grow. We're fully funded through to DFS.

I think by year end we're going to be in serious discussions with some off-takers, and it'll be a premium to wherever the market trades. Our market cap right now does not reflect the value we have in the ground. I know that's been said by CEOs 100 times before, whether it's mining, oil and gas, technology, my company's not worth what it should be. But if that transaction goes through with Galaxy and POSCO where POSCO's buying Galaxy's 2.5 million tonnes in Catamarca for, I think, it's $280 million or $100 to $110 US a tonne, that's going to put a metric in the ground. With 3 million tonnes in the ground, somebody's going to have to pay us $100 bucks a tonne at some point.

Gerardo Del Real: Now you've engaged Goldman Sachs to evaluate strategic partnerships and financing alternatives. You talked about potential off-takes. You also have a real estate package that begs to be consolidated. You're dead smack in the middle of two producers. Can you talk about that a bit? 

David Sidoo: Sure. I think that's the main reason Goldman Sachs engaged with us, Gerardo, not only because of my relationship with them and past deals that I've done, American Oil & Gas and Gasco and some of the other projects. I think they see this as a world-class basin with Orocobre, LAC, Ganfeng, and Advantage and consolidating that basin and doing this $2.5, $3 billion deal. They've got connections all over the world. Their hands are in every IPO that's been done in China, CATL, Ganfeng. Those are all multi-billion dollar IPOs they're involved in. Those are all battery makers. They're all looking for lithium supply.

So we strategically partnered with Goldman to build the relationships with those companies and discussions have started already with them. Goldman's coming down for a site visit at the end of September, actually October 2nd, 3rd, and 4th. They're coming down. They populated our data room, they've got all of the data arranged, the pump tests, all our drill results. So they'll be supplying that under an NDA to their clients to start reviewing. So we're hitting the ground running. I think by the end of the year we'll be in some serious discussions and after our DFS is completed in 2019, we'll probably have some type of an off-take agreement deal.

Gerardo Del Real: Well, I know that Goldman's been onsite. They were on the site visit that I was lucky enough to attend last year. I ended up having to wait a couple of hours for them to get to site, but hopefully now they can make up for it that now that you've engaged them to kind of act as a third party here to help develop some of those strategic partnerships that you're looking for, David.

David Sidoo: Exactly. And they eat what they kill. They do not get a massive fee. There's some people thinking why did Goldman engage with $150 million market cap company when they are always looking at half a billion to a billion dollars. It's because of the quality of the asset and the potential to consolidate the Cauchari basin, which Goldman I believe sees that there's two opportunities for them as an investment banker to either, A, consolidate the basin, Gerardo, with the companies that are there now, including ourselves with one of their big contacts that they have, and/or find us an off-take strategic partner that will take an equity position in Advantage at a premium so we don't have too much dilution, maybe 9.9 to 19.9%, and provide Advantage with the project funding, which is up to $400 million to build our own processing facility that we announced in the PEA which is 20,000 tonnes a year with a 25-year mine life. And payback on that for an off-taker, if they do a debt funding with us which is what we would prefer, would be 3.5 years from the start of production. And what they would get from it is an equity ownership in Advantage and an off-take of 20,000 tonnes a year with no liability. That's the two transactions I think Goldman's interested in doing with us.

Gerardo Del Real: David, you've seen these markets before. Let's talk about past successes. You mentioned American Oil & Gas. Can you talk a bit about the cyclicality of that play and how that worked out? You were in a similar situation there.

David Sidoo: Yeah. You know, I was just mentioning to you, I was looking at the chart in 2008 when we had the market crash event, American Oil & Gas went from $8 to $0.50 and everybody was jumping off the bridges, and it was a quality asset. We were drilling wells, having production, but nobody cared about oil and gas and then in late 2009, things started turning around in the market and the stock went from $0.50 to $10.50 and we got taken over in late 2010, early 2011, at $10.30 a share.

I've seen it before. Stuff happens, it's cyclical. I believe that the lithium market is going to continue to stay strong, demand's going to stay strong, and even if we look at the lowest cost estimates by analysts, long-term lithium prices could drop to $10,000 a tonne and in our PEA, we've got a $3,500 to $3,600 a tonne cost base. 10,000 tonnes is 6,000 to 7,000 tonnes, on 20,000 tonnes a year is $140 million profit. You know, that's still a good business model, Gerardo. And lithium prices are not at $10,000 right now. That's the low end of the curve that everyone's talking about long-term.

You look at the UK, you look at Germany, you look at Norway, look at China, Japan, Korea, the infrastructures, the money they're spending for electric vehicles, for plugin stations and the money they're spending, they are serious about it. The governments are serious about implementing clean energy, electric vehicles all across the board. You look at General Motors, Mercedes Benz, Volkswagen, Mitsubishi, all making announcements. Part of the reason I think why Elon Musk is going crazy, saying he's pulling all his cars off the road, he's going to take his company private. You see all these major car companies, they're catching up and there's going to be a major, I think, a supply shortage by 2021 when Advantage comes into the marketplace to start producing. So if we could just hang in there and weather the storm just like we did at American Oil & Gas I think we'll be coming out of this thing pretty good.

Gerardo Del Real: Excellent, well put. David, what can we expect the rest of the year? I know that the resource is open down at depth for sure and to the south as well, if I'm not mistaken. What can we expect on that front?

David Sidoo: We've initiated a 4,000-meter drill program. We have four drill rigs going right now, Gerardo. We're taking that resource that we have from inferred to measured and indicated and we're pump testing all three of our wells right now. So what we want to do by year end is take the 3 million tonnes to perhaps 4 million, and take the 3 million that we announced and take it from inferred to measured and indicated and do two or three 30-day pump tests to validate the hydrology and complete our DFS by the first quarter and early second quarter of 2019. We're fully funded for that.

Starting next week we're going to start announcing our drill results. We're going to start announcing the NI 43-101 on the PEA and we're going to announce some new hires to validate the fact that we're serious about building out our own project and news right through to the end of the year on our drill results and moving our resource from the inferred category to measured and indicated. That's what you're going to get paid on. You're going to get paid on measured and indicated. We're furiously getting that done with our new drill program that we have initiated right now. And we're fully funded, so no need to panic.

We don't need to go back to the marketplace. We don't have any outstanding overhang of warrants any longer. We’re sitting in a good position right now, Gerardo, and I think if we can stay patient and keep bringing the results in, which you'll start to see next week, I think we're in a good position here.

Gerardo Del Real: Fantastic. David, thank you very much for that thorough update. I'm looking forward to news you said starting next week, so hopefully we can chat again soon.

David Sidoo: Alright, I'll talk to you next week, Gerardo.

Gerardo Del Real: Thank you, David.

David Sidoo: Okay, buddy. Take care.

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