Western Lithium Company (January 2016 Update)

| About: Lithium Americas (LACDF)

Summary

Non-Binding JV Agreement With POSCO Announced In August.

Argentina Is An Attractive Mining Jurisdiction Again.

First Production at Cauchari-Olaroz Expected In H1 2017.

Western Lithium Company (WLCDF)

Featured In: January 2014

Partnership Average Cost per Share: $0.24 CAD

Current Market Price (January 15, 2016): $0.32 CAD

Western Lithium was the Partnership's featured investment in January 2014. When I last provided an update on WLC in July, the company was trading at approximately $0.60 a share. Since then, despite the skyrocketing lithium price (see chart below) and significant internal progress, the WLC share price has suffered a nearly 50% decline! This presents an excellent buying opportunity for investors that don't want to miss out on the lithium boom.

Click to enlarge

Before getting into WLC specifics, it's important to address the dramatic movement that we've recently seen in the lithium carbonate spot price. Make no mistake, price spikes like these ALWAYS END for one of the following reasons: (1) increased supply as higher cost projects become economic, (2) demand destruction due to substitution, or (3) a combination of 1 and 2.

It is in the best interest of the lithium industry to ensure that this "lithium carbonate bubble" ends for reason 1, and NOT reason 2. If prices continue to rise and new supply is not adequately brought online, there will be serious long-term consequences regarding large-scale adoption of lithium ion batteries. In other words, there will be massive demand destruction if prices stay too high for too long. (While the parallels aren't perfect, look at what happened to rare earth demand after the bubble earlier this decade.) It is in the lithium industry's best interest to bring 2-3 new lithium projects online as quickly as possible to avoid this fate.

With this pretext, I am confident that Western Lithium (and their Cauchari-Olaroz lithium brine project in Argentina) will be one of the next 2-3 large-scale lithium projects to reach production. Here are the key reasons:

1. There aren't many late stage competitors, with only Galaxy Resources (Sal de Vida project), Nemaska Lithium (Whabouchi project), and Neometals (Mount Marion project) coming to mind. Remember that it can take up to 10 years to bring a newly discovered mineral deposit to production. Early stage lithium plays have seen substantial share price gains over the past few quarters, but I don't think the market understands how much work has to be done for these new deposits to ultimately reach production. Western Lithium's Cauchari-Olaroz project has a massive lead over these upstarts - it's been in development since 2010, has released an economic Feasibility Study, and has already received mining permits. The company projects that first production will begin in H1 2017.

2. The company has already released a positive Feasibility Study in 2012 with the following headline numbers: an initial capex of $269m USD, a post-tax NPV of $464m USD, a post-tax IRR of 19.9%, and a post-tax payback of 5 years. While the report has likely lost some accuracy in the 3 years since its release, it does provide a decent ballpark figure for what Cauchari-Olaroz is worth. The kicker is that the price of lithium used in this study was a mere $6,000 USD per tonne. Take a look at where we are now - current prices are more than double that assumption! This gives me certainty that Cauchari-Olaroz would be a very robust operation at current lithium prices.

3. The third reason is that Western Lithium has already found a provider of project financing for Cauchari-Olaroz. This party is the $12B South Korean-conglomerate POSCO, with which the WLC reached a "Heads of Agreement ('HOA') regarding the commercialization of the company's Cauchari-Olaroz lithium project" in August 2015. This is a huge stamp of approval for the project as a whole. The only negative is that since this announcement the two parties have been locked in negotiations regarding the project's financing terms. This delay is hurting both parties, but I expect a binding JV agreement to be signed by the end of Q1 2016. This agreement is the single biggest outstanding catalyst for WLC shares at current. Hopefully the spiking lithium price instills urgency in both parties.

4. With the recent election of right-leaning Mauricio Macri as president, Argentina is an attractive place to build a mine again. This should see foreign direct investments into Argentina spike over the following 12 months - Macri himself expects $20B of FDI into Argentina in 2016. In January alone, we saw Coca-Cola (NYSE:KO) announce a $1b investment and Renault-Nissan pledge $600m shortly thereafter. Indirectly, this change in the political landscape gives WLC leverage over POSCO, who seem to be stalling for a more attractive deal. If this posturing continues for too long, WLC should be able to attract plenty of alternative financing options for Cauchari-Olaroz (either on a project or company level).

In light of the above information, I believe that WLC shares provide attractive relative value at current levels. Out of conservatism, let's use the post-tax NPV number of $464m USD as the company's "fair value". This is very conservative because (1) this NPV number was obtained using lithium carbonate prices that are less than half of current spot prices and (2) this "fair value" ignores any potential upside from Kings Valley's lithium/organoclay operations. Given the company's stage (FS released, mining permit received, project financing nearly secured, construction to begin imminently), this fair value should be discounted by approximately 60% to represent outstanding risks for the project. The result is an expected value of $185m USD, which is roughly 3x greater than Western Lithium's net enterprise value at current share prices.

The two biggest milestones for WLC shareholders to look for this year are the signing of a definitive JV agreement with POSCO and the commencement of construction at Cauchari-Olaroz. These should occur in the immediate term - I would be disappointed if both of these weren't completed in H1 of this year. Looking farther ahead, I'd like to see the following two events fall into place by year end: (1) WLC's hectatone operations become cash flow positive and (2) more ambitiously, the release of a FS for lithium production at King's Valley.

In short, Western Lithium looks attractive right now. Even with conservative assumptions (and ignoring any value from the Nevada operations), the current WLC share price seems to offer substantial relative value. Meanwhile the company has sufficient working capital to survive the next year without an equity raise, plus has some major catalysts in store for 2016.

Disclosure: I am/we are long WLCDF.

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.

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