Lithium Americas Corp (OTCQX:LACDF)
Featured In: January 2014
Partnership Average Cost per Share: $0.24 CAD
Current Market Price (July 29, 2016): $0.96 CAD
Lithium Americas (formerly named Western Lithium) was the Partnership's featured investment in January 2014. When I last provided an update on LAC in January, the company was trading at approximately $0.40 CAD.
The company's fortunes have shifted significantly over the past 6 months, and shareholders have been rewarded with a 140% YTD gain. While increasing buzz around the lithium space hasn't hurt matters, the catalyst for this move was the transformative joint venture deal that Lithium Americas reached with $7b lithium heavyweight SQM. This JV deal, which was announced on March 28th, will be the focus of this update.
The announcement of the SQM joint venture was a surprise to most market participants, considering Lithium Americas had just signed a "Heads of Agreement" with industrial conglomerate POSCO in August 2015. POSCO however had its chance to lock up the Cauchari-Olaroz project, but spent the remainder of 2015 bickering over terms with Lithium Americas management.
Once the HOA's exclusivity clause expired in January 2016 and no deal had been reached, Lithium Americas began to once again consider third party offers. This is when SQM stepped up to the plate, with the following deal announced after 2-3 months of negotiations:
The Joint Venture will go into effect following a capital contribution of US$25 million by SQM in exchange for a 50% ownership stake in Minera Exar S.A. ("Minera Exar"), a wholly owned subsidiary of LAC. SQM's contribution includes US$15 million to repay intercompany loans between Minera Exar and LAC; the remaining US$10 million will be allocated to project development. SQM and LAC intend to immediately advance a work and engineering plan, which contemplates completion of an updated definitive feasibility study based on an existing study for Cauchari that was completed by Minera Exar in 2012. The updated study will evaluate economic feasibility for a project with a nameplate production capacity of approximately 40,000 metric tons per year of lithium carbonate equivalent. Depending on the results of the study, the project may be executed in stages.
The key takeaways here include:
1. SQM pays Lithium Americas $25m for 50% of Cauchari-Olaroz
2. Lithium America's remaining 50% stake in the JV is NOT free carried (meaning that the company will have to pay for their fair share of feasibility-related costs and the project's initial capex)
3. A feasibility study will be released by year-end demonstrating the economics of a 40,000 ton per year operation. This is twice the nameplate capacity that previous economic studies had envisioned.
John Kanellitsas, who is Vice Chairman of Lithium Americas, commented:
"Lithium Americas' board has determined that SQM represents the premier partner in the world for our project. Their understanding of brine chemistries, pond and chemical plant construction, knowledge of all end-user product specifications and the collaborative approach with our team were important criteria in our selection process. We believe that SQM is the world's largest and lowest cost producer of lithium from brines and our board has determined that a joint venture with SQM in which we pursue a production path utilizing a proven, low-cost brine evaporation process represents the optimal course to maximize long term value for Lithium Americas' shareholders."
Market reaction to the deal was at first muted, as some believed that Lithium Americas had not received sufficient compensation for 50% of the project. However, LAC's share price started climbing once the sheer magnitude of the operation (and the significance of SQM's involvement) began to sink in.
In a May 4th news release, SQM assured the market of their intentions to fast-track Cauchari-Olaroz to production:
"In March of this year, SQM and Lithium Americas announced a joint venture to develop the Caucharí-Olaroz lithium project in the Jujuy province of Argentina. The project's production capacity is targeted at 40,000 tons per year of lithium carbonate equivalent. Under the current project timeline, the companies expect to begin plant commissioning and production by 2019. Total capital expenditures for the project are estimated to range between US$500 million and US$600 million, depending on final design criteria and project staging.
SQM has been diligently working on this project since the beginning of April 2016 and hopes to be able to start construction by the first half of 2017. SQM is committed to successfully developing the Minera Exar project in order to meet the world's lithium needs, complementing its existing lithium operations in Chile."
Another recent development demonstrates the tremendous excitement surrounding the company. In a May 2nd news release, Lithium Americas announced the appointment of David Deak as the company's CTO.
Lithium Americas CEO Tom Hodgson commented:
"David is widely respected throughout the global lithium supply chain. He has the technical insight, commercial experience, and industry relationships required to advance the Lithium America's mission, including the Nevada clay project. We expect to benefit from David's leadership in his role as the corporate CTO and contributions to our recently-announced Joint Venture with SQM for the Cauchari-Olaroz project in Argentina. We have also asked David to lead the development efforts for our Nevada-based project, which represents one of the largest lithium resources in North America, and remains an important corporate priority."
David was previously a high-ranking officer at Tesla working on raw material procurement for the gigafactory. To accept the CTO position, he had to turn down an offer from Apple - presumably to work in their secretive car division, dubbed "Project Titan". David's involvement is further validation for the significance of the Cauchari-Olaroz project.
What is the project worth to LAC shareholders? This is a tough question, particularly as the 40,000 tpy Feasibility Study is still in progress. Additionally, there is much controversy about the appropriate long-term lithium carbonate price.
Assuming an initial capex of $500m USD and long-term lithium carbonate prices of $9000 USD per ton, my internal model spits out an after-tax NPV @ 10% discount rate of $1.1b USD (or $1.45b CAD).
Lithium America's share of this NPV would 50%, or $700m CAD. We will now discount this number by another 50%, to reflect the fact that Cauchari-Olaroz is not yet a producing mine (and, even in a best case scenario, won't be producing lithium until 2019). This results in a $350m CAD present value for LAC's stake in the joint venture, or $1.05 CAD per fully diluted share.
This indicates that Lithium Americas is undervalued for their stake in the Cauchari-Olaroz JV alone. This ignores the company's two additional operations: the Lithium Nevada Project and the company's Hectatone division. We may see the market begin to assign value to each of these operations in Q4 this year, which would be unexpected upside for current LAC shareholders.
In the case of the Lithium Nevada Project, management expects to release a Pre-Feasibility Study on the property by the end of this year. This is a massive milestone and will provide updated economic projections for the first time since January 2012.
Meanwhile, the company's Hectatone division hasn't performed up to expectations since reaching production in 2014. Management expects, however, that by the end of the year Hecatone will be cash flow positive. A positive announcement here would be well received by the market - a cash flow positive Hectatone division would allow the company to develop the Lithium Nevada Project with minimal share dilution.
At current, my fair value for LAC shares is $1.40 CAD. This is roughly 45% above the current share price. Once we see results of the Cauchari-Olaroz Feasibility Study and Lithium Nevada Project Pre-Feasibility Study, we can make adjustments to this number. Below I've provided below the expected LAC milestones over the coming 24-36 months:
Project Update at Cauchari-Olaroz by end Q3 2016
Feasibility Study Released at Cauchari-Olaroz by end 2016
Pre-Feasibility Study Released at Lithium Nevada Project by end 2016
Hectatone Division is cash flow positive by end 2016
Construction begins at Cauchari-Olaroz by end Q1 2017
Feasibility Study Released at Lithium Nevada by end 2017
First Production at Cauchari-Olaroz by end 2018
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.
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