More on LACDF
We’ve been Lithium Americas shareholders since mid-2013, with an average cost per share of C$0.24. The company continues to be undervalued based solely on its joint venture with SQM at the Cauchari-Olaroz Project. Until the company is fairly valued for its 50% stake in the JV, we will remain patient shareholders.
It’s been a significant year so far for the company. Management announced a financing agreement with Ganfeng Lithium on January 17th. The deal included a C$64m private placement at 85 cents – giving Ganfeng ownership of 19.9% of the company. In addition, Ganfeng agreed to a US$120m construction financing loan at a reasonable interest rate of between 8% and 9.5%. In exchange, Ganfeng secured the option to buy up to 70% of LAC’s share of Stage 1 production at the Cauchari-Olaroz Project. This deal closed on June 7th.
Also, in January, the company signed an agreement with Bangchak Petroleum. This deal entailed a C$42.5m private placement at 85 cents - giving Bangchak 16.4% of the company. Bangchak also agreed to a US$80m construction financing loan at similar interest rates to Ganfeng. In exchange, Bangchak has the option to buy up to 15% of LAC’s share of Stage 1 production. This deal closed on July 17th.
Upon the closing of these two deals, Lithium Americas has secured more than enough working capital to fund its share of the Stage 1 initial capex at Cauchari-Olaroz.
More recently, Lithium Americas’ President of South American Operations Gabriel Rubacha all but confirmed that construction had commenced at the project. After a July 7th meeting in Buenos Aires with Argentinean President Mauricio Macri and the Governor of Jujuy Province Geraldo Morales, Rubacha commented:
“We are receiving full support from the Federal and Provincial governments, and we are very pleased with the progress we are making on the development of the project. There are over 100 people on site today and the Minera Exar organization is growing with the recent recruitment of additional executive level personnel. Minera Exar is proceeding with the development of the project and progressing with the early construction activities following a timeline target of being in production by 2019."
Most importantly, on March 29th, Lithium Americas released the results of the long-awaited Cauchari-Olaroz feasibility study. In short, there were no major surprises. On a 100% equity basis and assuming a long-term lithium carbonate price of US$12,000, the headline numbers included:
• initial capex of US$425m versus an NPV of $803m (after-tax using a 10% discount rate)
• an after-tax IRR of 28.4%
• a payback period of 3.5 years
• average annual EBITDA of US$233m
There are two important points to keep in mind about the Feasibility Study: (1) Lithium Americas only owns 50% of Cauchari-Olaroz and (2) this only applies to Stage 1 Production of 25k tones per year.
The above numbers suggest that LAC is set to generate US$233m in annual EBITDA once Stage 2 production of 50k tpa is reached in 2022. Using a conservative 8x multiple (most of the lithium industry is using 15x), this results in a US$1.8b valuation for Lithium Americas’ share of the JV once Stage 2 production is achieved.
Of course, 50k tpa production is still four years away, and this forward valuation must be discounted accordingly. Generally, I’ll use a 50% discount for companies that have begun construction but aren’t yet in production.
Applying this discount results in a fair value of ~US$900m for LAC’s share of the project. When converted to Canadian dollars, this figure jumps to C$1.1b.
This compares to Lithium America’s fully diluted market cap of ~C$445m, which implies that the LAC share price would have to rise roughly 150% (to C$2.52) before the company is fairly valued for its share of Cauchari-Olaroz’s future production.
Please remember that any value creation from Lithium Americas’ Nevada-based operations only provide free upside. CTO David Deak has quietly assembled one of the smartest tech teams in the junior lithium space – with recent hires, including two engineers from Tesla and a Rockwood/ALB veteran whose past experience includes managing the Silver Peak lithium mine in Nevada. Management assures me that we’ll see more news flow out of Nevada later this year and next.
To conclude, I’ve provided the company’s expected milestones over the coming months and years:
First revenue from TOLSA strategic partnership by end 2017
RheoMinerals cash flow positive by end 2017
PEA announced @ Lithium Nevada Project by end 2017
First production @ Delmon Plant in Saudi Arabia by end Q1 2018
Production rate of 25k tpa @ Cauchari-Olaroz JV by end 2019
Production rate of 50k tpa @ Cauchari-Olaroz JV by end 2021
First production @ Lithium Nevada Project by end 2022
As a final point, Chairman George Ireland and President John Kanellitsas both purchased 100k LAC shares within the past month. Prospective investors have an opportunity to get involved at similar levels as shares hover around C$1.
Disclosure: I am/we are long LACDF.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
*Lithium Americas Corp. (LACDF)
LACDF upgraded from the OTCQX to the S&P/TSX SmallCap Index
What this means: POTENTIAL FOR HUGE GAINS ! ! !
S&P Dow Jones Indices Announces Changes to the S&P/TSX Canadian Indices
BY CANADA NEWSWIRE — 09/08/2017
The Annual Review of the S&P/TSX SmallCap Index
TORONTO, Sept. 8, 2017 /CNW/ - S&P Dow Jones Canadian Index Services will make the following changes in the S&P/TSX SmallCap Index as the result of the annual review of the index. These changes will be effective prior to the open of trading on Monday, September 18, 2017.
ADDITIONS:
*Lithium Americas Corp. (LACDF)
LACDF upgraded from the OTCQX to the S&P/TSX SmallCap Index
More on LACDF
We’ve been Lithium Americas shareholders since mid-2013, with an average cost per share of C$0.24. The company continues to be undervalued based solely on its joint venture with SQM at the Cauchari-Olaroz Project. Until the company is fairly valued for its 50% stake in the JV, we will remain patient shareholders.
It’s been a significant year so far for the company. Management announced a financing agreement with Ganfeng Lithium on January 17th. The deal included a C$64m private placement at 85 cents – giving Ganfeng ownership of 19.9% of the company. In addition, Ganfeng agreed to a US$120m construction financing loan at a reasonable interest rate of between 8% and 9.5%. In exchange, Ganfeng secured the option to buy up to 70% of LAC’s share of Stage 1 production at the Cauchari-Olaroz Project. This deal closed on June 7th.
Also, in January, the company signed an agreement with Bangchak Petroleum. This deal entailed a C$42.5m private placement at 85 cents - giving Bangchak 16.4% of the company. Bangchak also agreed to a US$80m construction financing loan at similar interest rates to Ganfeng. In exchange, Bangchak has the option to buy up to 15% of LAC’s share of Stage 1 production. This deal closed on July 17th.
Upon the closing of these two deals, Lithium Americas has secured more than enough working capital to fund its share of the Stage 1 initial capex at Cauchari-Olaroz.
More recently, Lithium Americas’ President of South American Operations Gabriel Rubacha all but confirmed that construction had commenced at the project. After a July 7th meeting in Buenos Aires with Argentinean President Mauricio Macri and the Governor of Jujuy Province Geraldo Morales, Rubacha commented:
“We are receiving full support from the Federal and Provincial governments, and we are very pleased with the progress we are making on the development of the project. There are over 100 people on site today and the Minera Exar organization is growing with the recent recruitment of additional executive level personnel. Minera Exar is proceeding with the development of the project and progressing with the early construction activities following a timeline target of being in production by 2019."
Most importantly, on March 29th, Lithium Americas released the results of the long-awaited Cauchari-Olaroz feasibility study. In short, there were no major surprises. On a 100% equity basis and assuming a long-term lithium carbonate price of US$12,000, the headline numbers included:
• initial capex of US$425m versus an NPV of $803m (after-tax using a 10% discount rate)
• an after-tax IRR of 28.4%
• a payback period of 3.5 years
• average annual EBITDA of US$233m
There are two important points to keep in mind about the Feasibility Study: (1) Lithium Americas only owns 50% of Cauchari-Olaroz and (2) this only applies to Stage 1 Production of 25k tones per year.
The above numbers suggest that LAC is set to generate US$233m in annual EBITDA once Stage 2 production of 50k tpa is reached in 2022. Using a conservative 8x multiple (most of the lithium industry is using 15x), this results in a US$1.8b valuation for Lithium Americas’ share of the JV once Stage 2 production is achieved.
Of course, 50k tpa production is still four years away, and this forward valuation must be discounted accordingly. Generally, I’ll use a 50% discount for companies that have begun construction but aren’t yet in production.
Applying this discount results in a fair value of ~US$900m for LAC’s share of the project. When converted to Canadian dollars, this figure jumps to C$1.1b.
This compares to Lithium America’s fully diluted market cap of ~C$445m, which implies that the LAC share price would have to rise roughly 150% (to C$2.52) before the company is fairly valued for its share of Cauchari-Olaroz’s future production.
Please remember that any value creation from Lithium Americas’ Nevada-based operations only provide free upside. CTO David Deak has quietly assembled one of the smartest tech teams in the junior lithium space – with recent hires, including two engineers from Tesla and a Rockwood/ALB veteran whose past experience includes managing the Silver Peak lithium mine in Nevada. Management assures me that we’ll see more news flow out of Nevada later this year and next.
To conclude, I’ve provided the company’s expected milestones over the coming months and years:
First revenue from TOLSA strategic partnership by end 2017
RheoMinerals cash flow positive by end 2017
PEA announced @ Lithium Nevada Project by end 2017
First production @ Delmon Plant in Saudi Arabia by end Q1 2018
Production rate of 25k tpa @ Cauchari-Olaroz JV by end 2019
Production rate of 50k tpa @ Cauchari-Olaroz JV by end 2021
First production @ Lithium Nevada Project by end 2022
As a final point, Chairman George Ireland and President John Kanellitsas both purchased 100k LAC shares within the past month. Prospective investors have an opportunity to get involved at similar levels as shares hover around C$1.
Disclosure: I am/we are long LACDF.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Lithium Americas (OTCQX: OTCQX:LACDF; TSX: LAC), formerly Western Lithium USA Corp, rose 50% last week on heavy volume, catapulted by its announcement on March 28 that it has formed a partnership with Chile's SQM, one of the "Big 3" in a concentrated and increasingly supply-constrained lithium market. I believe this re-rating has only just begun and LACDF has a lot more to run.
I have been following LAC for many years. I always believed that their large, high quality permitted brine, Cauchari-Olaroz, in the Lithium Triangle would be built into a high margin cash flow machine, similar to the low cost industry leader, SQM. I have observed that LAC's largest shareholder, Geologic Resource Partners, was an early investor in Talison, one of the great lithium success stories. Talison was sold first for $850M in 2013 after a bidding war in which China's Tianqi bested US specialty chemicals maker Rockwood before inviting Rockwood to buy 49% of Talison the following year at a stepped up $1B valuation. Valuation multiples for these deals were an eye-popping ~15X EBITDA.
This significant investment from an incumbent producer speaks volumes about how it sees the lithium market developing over the next decade. SQM, which has seen its market share erode from 35% to 27% over the last 3 years, is executing a strategy to extend their market leadership position, in part through substantial diversification of lithium production. I expect this news should be good for SQM, as lithium has been its only growth driver of late. 20,000 additional tons (SQM's 50% share of expected 40,000 JV tons), would represent an approximate 50% increase in SQM's current production.
I estimate that the market values SQM's current $220M-revenue, 51% gross margin, 68% EBITDA lithium business at approximately $1.5B of its total ~$6B market cap, or about 10X EBITDA. SQM's stock is currently depressed from some political uncertainty, and softness in its non-lithium businesses. Were SQM's lithium business spun off into a pure-play vehicle, I would anticipate the market might affix closer to a 15X multiple, in line with the Talison discussion above. This would value SQM's approximate $150M lithium EBITDA at $2.2B.
I anticipate that the SQM/Lithium Americas joint venture in Argentina will, in the next few years, look a great deal like SQM's current lithium business, albeit with a significantly higher realized price than the ~$5,700/ton average SQM achieved last year from its lithium products. In other words, once in production, the joint venture could be on a trajectory to generate $100-150M annual EBITDA net to LAC, which the market should value at $750M- 1.25B.
As such, the joint venture is proving to be substantial news for LAC's stock, as a high profile, pure-play, near-term lithium producer. As described by LAC's CEO Tom Hodgson on a recent conference call, which attracted substantial attention from the institutional investment community:
"What's this deal about? The deal is about a path to production and a path to cash flow and critically as important minimizing execution risk. Building a lithium mine is not a trivial undertaking and there are quite a number of examples over the last five years of parties that have tried and who either failed or have experienced significant delays and startup problems. In our discussions with various parties, we're really focused on trying to minimize that execution risk. And I don't believe we could have found a better partner anywhere in the world in that respect than SQM. They are the largest producer of lithium from brine in the world. Their project in Atacama is a couple of 100 miles away from ours, it's very physically approximate and they've got 20-some years of experience on the ground producing lithium carbonate from a resource that is somewhat similar to ours certainly we use similar processes and we think that they are truly an exceptional partner and were very, very pleased to consider them the joint venture partner. I think it's fair to say that they are familiar with most of the lithium brine source in the world and did intensive due diligence on ours before we entered into the documentation stage of our deal and came to the conclusion that this was a project that could support production of 40,000 tonnes a year. That makes it a very major project and obviously it will take some time to get to that level of production but it will be a big project and our 50% continuing ownership stake in it would be a very, very valuable asset for our shareholders".
LAC, at ~USD175M market cap at time of this post, remains significantly undervalued. I believe the stock should continue to re-rate now that it has secured a definitive, de-risked, path toward production and substantial cash flow in what I expect should be late 2018/early 2019. With SQM, the world's best lithium brine operator, LAC's stock has moved from a speculation to an institutional quality, de-risked, near-term lithium producer.
Which means it is ready for traditional mutual fund powerhouses like Fidelity, Capital Group, T Rowe Price, Royce and Oppenheimer Funds, who are current shareholders in SQM and Orocobre, and will look at LAC with a 3-4 year, $1B market cap expectation. I believe we have started to see some of this last week with immense trading volumes and large block buys.
How Much of a Re-rating?
I believe LACDF could nearly triple from today's $0.59 to $1.5-1.75, or CAD 2.00 on the TSX exchange in relatively short order. This would equate to about USD 480-560M market cap, based on 320M fully diluted shares outstanding. At that valuation, LAC will be at an approximate 50% discount to the $1 - 1.25B I expect it should rise to once in production in 3-4 years.
This 50% discount is a standard, if not conservative, market convention for natural resource developers that have definitive paths to production, but still await final financing and construction, which in LAC's case is expected to be by year-end 2016/Q1 2017. And this USD 480-560M excludes about USD35M cash from SQM and expected exercise of outstanding option and warrants, as well as LAC's Nevada Lithium Project and Hectatone businesses, which at the time of LAC's merger last year with Western Lithium were valued at USD75M.
From 2017 through production at end 2018/2019, I would expect LACDF to rise more slowly, but still double to $3 - 3.50, as they hit construction milestones and first production begins and is ramped up. Supporting these timelines are comments from CEO Tom Hodgson and President John Kanellitsas in their recent conference call.
…" over the course of the rest of this calendar year, we would expect to update that definitive feasibility study and to agree a detailed business plan with SQM…
...So as soon as the feasibility study and the work plan is complete, we have our business plan settled and let's assume the end of 2016, we could update permits and begin construction immediately…
…I think if you are focusing on late 2018, early 2019 that's probably a sensible focus for getting into production…"
Lithium Americas' Comparables
My USD 480-560M near-term market cap expectation for LAC is on par with Orocobre (Ticker: OTCQX: OTCPK:OROCF; ASX/TSX: ORE), which trades currently at AUD 626M market cap. I think this is justified as LAC's share of lithium production will be 20,000 tons, nearly twice Orocobre's 11,600 net lithium production tons. Orocobre is a very relevant comp for LAC as its lithium deposit is in the same salar brine in Argentina. However, the appropriate market valuation of Orocobre is a big question mark as it has continued to disappoint in terms of production levels and product quality. Orocobre may currently be undervalued or overvalued depending on if it finally gets things right, or if it needs to tap the equity markets yet again for working capital and debt repayment.
I believe this concern explains Orocobre's stock relative underperformance in the past few weeks, despite receiving a nearly 40% increase in target price from AUD 3.05 to AUD 4.20 from its lead analyst and banker in Australia. Orocobre no longer has scarcity value in the Australian stock market. In the last year, a number of ASX-listed, Australia-based, higher cost spodumene developers and re-starts have come on the scene responding to Chinese off-takers' open wallets desperate for supply.
Pilbara Minerals (ASX: PLS) this week just raised AUD100M in a heavily oversubscribed offering and sports a market cap of AUD 520M. Galaxy Resources (ASX: GXY; OTCQX: OTCPK:GALXF) is at AUD 404M, Neometals (ASX: NMT) is at AUD 223M, and Altura Mining (ASX: AJM) is at AUD 218M.
On the Shanghai exchange, China's Sichuan Tianqi (Shanghai: 002466, USD 6.7B market cap) is trading at a 258X P/E ratio and Jianxi Ganfeng Lithium (Shanghai: 002460, USD 3.4B) is trading at a 192X P/E ratio.
A large arbitrage has existed for many months between LAC and these ASX/Chinese peers, in particular Orocobre, Pilbara Minerals and Galaxy Resources. This gap narrowed a bit last week, but has a lot more room to go in both absolute and relative terms as LAC re-rates within a market that has continued to raise these peers' valuations. There is a mad Australia/China lithium rush going on with several companies up more than 1000% over the past year.
Tap to see the table
Arbitrage with ASX Won't Last Long - LAC Has Scarcity Value
I believe this arbitrage exists in part due to a sleepier TSX market compared to the more dynamic ASX. But I don't expect LAC's undervaluation to last long - global markets just don't let that happen when there's such a strong fundamental story. I believe LAC actually may start to trade at a premium due to its scarcity value as the only advanced stage lithium project exclusively on the TSX that has a credible path to near-term production and cash flow.
On that point, I note Nemaska (OTCQX: OTCQX:NMKEF, TSX: NMX) has also been rising sharply, as they published an updated pre-feasibility study with attractive looking numbers, largely based on using higher lithium hydroxide prices in their model. I've tried to study Nemaska many times and always find it difficult to understand. It seems a bit of a science project to me. I believe most investors tend to prefer simple stories with proven technologies and partners, like LAC/SQM, to complex ones like Nemaska, that are hard to explain.
I follow Mr. Lithium Joe Lowry's regular LinkedIn posts and agree with his question "Does the world need Nemaska Lithium?". I also note the many train wrecks I have seen over the years from Quebec-based stories in niche metals with new technologies (eg, Argex, Orbite, Canada Lithium/RB Energy) and am therefore very cautious when a new one comes around.
Nemaska is a high capex project using untested technology. Its recently announced financing has come not from institutional investors, but largely from the Quebec government and local stakeholders, who subscribed recently to a placement at a huge discount to market price. Their MOU with key vendor Johnson Mathey stipulates that when/if they eventually fund, Johnson Mathey will receive fees for services to Nemaska in line with their invested dollars.
Nemaska's market cap of CAD212M is just shy of LAC's market cap. I would expect LAC to soon leap ahead of Nemaska as I believe this company is highly speculative and will struggle to find the institutional shareholder support LAC is now attracting.
The Canadian market is beginning to play catch up on the lithium scene, with Cormark and Dundee recently publishing on LAC. I've seen long-term follower David Talbot of Dundee's note last week,who upgraded LAC to CAD1.60. Cormark's new analyst Alec Miekle also rolled out new coverage on LAC, Nemaska and Orocobre, which I found well written, but in my view uses an overly conservative methodology to arrive at a CAD1.00 LAC target.
Finally, SQM brings something unique to LAC from a capital markets perspective. SQM has been a highly successful NYSE listed stock for some 20 years, with a large following among emerging market and specialty chemicals investors. LAC's partnership with SQM should enable LAC to tap into the very large US and European shareholders who own SQM stock as well as the 15+ sell-side analysts who research it. SQM analysts from the likes of Morgan Stanley and BTG Pactual asked questions on LAC's recent conference call and have started publishing supportive notes.
Disclosure: I am/we are long LACDF.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
