Nemaska Lithium Inc fka NMKEF

[HowardHughs]

Jun 1 2018 "Nemaska Lithium Finally Out Of The Gate" David Monus



https://seekingalpha.com/article/4178816-nemaska-lithium-finally-gate

Excerpts:
Summary

Nemaska completes US$849M (C$1.1B) financing package.

Spodumene sales start Q4-2019.

Electrochemical Plant starts commercial operation mid-2020.

Forecastannualized operating cash flow, and free cash flow (FCF) in first full year ofcommercial operation of US$293.7M.

The remainder of this report will utilize the 2018 PFS and recently completed financing in order to develop a valuation for the company.

2018 PFS Summary
NMX released its 2018 PFS on January 9th, 2018. This document would form the basis for NMXs financing requirements. This was an update of the prior 2016 PFS.

The table below provides a summary of the key figures from the 2018 PFS highlighted in NMX's most recent corporate presentation (May 2018).

Cash Flow Projection – Base Case
The next step in this analysis is to prepare a base case cash flow projection for NMX when both the mine and Electrochemical Plant are fully operational (approximately second half of 2020). The remainder of this analysis is based on ANNUALIZED production volumes and cash flows for the first FULL year of operations.

The table below summarizes the operating cash flow projection for the first full-year of operations using base case assumptions, is US$293.7M or US$0.31/share.

In terms of production volume sensitivities, the table below provides the operating cash flow projections assuming incremental capacity expansion. This analysis assumes the base case average revenue of US$13,000/t and the average operating cost of US$3,100/t (but does not include incremental capex in the mine and in additional electrolysis cells - which could be funded with free cash flow assumed in the PFS base case).

Share Price Projections and Sensitivities
The analysis immediately above provided operating cash flow projections for various production volumes and product market prices separately. Now, share price projections are calculated for various combinations of future product price assumptions and production volumes and cash flow multiples of: 7.5x, 10x and 12.5x. Note that the following share price projections are assumed to be at the point in time when Nemaska is in full operation (mid-2020).

Conclusions
This analysis indicates that NMX’s operating cash flow will be running at an ANNUALIZED rate of US$293.7M/year, or US$0.31/share, when operating at full capacity in late 2020. Assuming a 10x cash flow multiple, this translates into a future share price of US$3.10/share. Some investors may wish to discount this future estimated share price, at say a discount rate of 10%/year, which translates into a present value of US$2.44/share.

Long-term investors should focus on a company’s FCF generation capabilities since FCF permits management the flexibility to do all or any of the following shareholder friendly activities: share buybacks, repurchase debt, paying a dividend, funding capex, and finding acquisitions.

Investors should note that the operating cash flow will approximate FCF (since sustaining capital needs are forecast to be very low in the first few years, and the combination of tax loss carry-forwards and currently low income tax rates for mining companies in the province of Quebec, will lead to minimal cash income tax payments in the first few years).

Accordingly, with its first full year operating cash flow, NMX could repurchase up to US$293.7M, or 84% of its outstanding bonds! Practically speaking, NMX could be essentially debt-free by the end of its second year of full operations.

In addition, it is noteworthy to mention that NMX has announced the sale of 100,000-140,000 tonnes of spodumene concentrate starting in Q4-2019 at a formula-driven market price. The table below provides the calculation of the operating cash flow resulting from this sale.

This translates into an operating cash flow of approximately US$95M. Since NMX’s financial forecast and financing did not incorporate the cash flow generated by the sale of the spodumene concentrate, these funds could also be used to pay down the outstanding debt.

Note this analysis did not include two other potential sources of revenue for NMX. First, if it expands beyond its 33,000 t/y plant capacity, it could have spare capacity to contract mill spodumene for competitors. Second, due to its favourable operating costs, NMX may have the opportunity to license its patented electrochemical process to competitors.

In conclusion, NMX looks well positioned to participate in the growing demand for battery-grade lithium carbonate and lithium hydroxide. For a start-up mining enterprise it fortunately has several attractive features, including: fully-funded through to production, proven patented low-cost manufacturing, mining and milling assets located in of the most mining friendly jurisdictions in the world, vertical integration, very large high-quality 2P reserves, excellent transportation infrastructure, access to some of the lowest-cost electricity in the world, support from the Province of Quebec (both direct equity and debt), as well as off-take agreements for more than 75% of its planned production.

Investors should not underestimate that the company will be free cash flow positive before its first full year of operations, which is very remarkable for a commodity-based start-up. Base case economics indicate that the stock is attractively priced and offers incremental attractive upside potential should the company add capacity in the future and/or lithium hydroxide and lithium carbonate market prices prevail above the US$13,000 assumed in base case.

Disclosure: I am/we are long NMKEF.