Lithium Americas (OTCQX:LACDF) ("LAC")
Featured In: January 2014
Partnership Average Cost per Share: C$0.24
Current Market Price (February 9, 2017): C$1.00
We've been Lithium Americas shareholders since mid-2013, with an average cost per share of C$0.24. Over the years, management has executed upon milestones time and time again, yet the company continues to be undervalued based on its stake in the Cauchari-Olaroz JV alone. Until the company is fairly valued for its share of the JV, we will remain patient shareholders.
Before we discuss the fair value of the Cauchari-Olaroz JV, let's consider the developments we've seen over the past six months:
1. In late August, the company announced that nameplate production at Cauchari-Olaroz would actually be 50k tonnes per annum - a 25% increase from original plans. This speaks to both the immense size of the project and the strength of future lithium demand.
2. A subsequent November announcement provided details on timing, stating that the joint venture was pursuing "an accelerated path to production, with a target for commencement of construction in early 2017 and stage one production in 2019." I've confirmed with management that, if all goes to plan, full production of 50k tpa should be reached by the end of 2021.
3. The biggest knock against the LAC story is that the company must produce approximately US$250m within the upcoming year to fund their share of stage one initial capex. The worry was that, due to this near-term cash call, the company would be strong armed by SQM and either (1) lose its stake in the Cauchari-Olaroz JV or (2) face massive equity dilution.
In mid-January, the company negated these concerns by signing back-to-back financing agreements (with Genfeng Lithium and Bangchak Petroleum, respectively) for a grand total of US$286m. Only 29% of this total raise was equity, an impressive feat that minimizes dilution for LAC shareholders. The two entities also agreed to purchase up to 85% of LAC's share of stage one production at market prices. This was a massive win for the company, and frankly I'm surprised there wasn't a larger share price increase in the weeks following the news.
What is the fair value of Lithium Americas' share of the JV? At full 50k tpa production and a US$10,000 lithium price, the company is set to generate roughly C$210m in EBITDA by 2022. Using a conservative 8x multiple, this results in a C$1.7b valuation for Lithium Americas' share of the JV when full production is reached.
Of course, full production is still five 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. While LAC is now in a position to fund the Cauchari-Olaroz's initial capex, construction at the project won't begin for another 4-5 months - so let's increase this discount to 60% out of conservatism.
Applying this discount results in a fair value of ~C$680m for LAC's share of the project. This compares to a fully diluted market cap of ~C$460m. In other words, the LAC share price would have to rise roughly 50% (to C$1.50) before the company is fairly valued for its stake in the Cauchari-Olraoz JV.
Remember that any value creation from Lithium Americas' other operations provides free upside. To conclude, I've included the company's expected milestones over the coming months and years:
SQM releases Feasibility Study @ Cauchari-Olaroz JV by end February 2017
First revenue from TOLSA strategic partnership by end Q1 2017
Construction of stage one commences @ Cauchari-Olaroz JV by end Q2 2017
RheoMinerals becomes cash flow positive by end 2017
PEA released @ 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
You'll note that a feasibility study is expected from SQM within the next few weeks. The study will confirm Cauchari-Olaroz's exceptional economics and there should be no negative surprises. This gives investors a small window to consolidate shares between C$1-1.10. I expect another significant share price move upon release of the feasibility study.
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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