Advantage Lithium (CVE:AAL) (OTCQX:AVLIF)
I make favorable mention to Advantage Lithium in my other articles, High Risk/High Reward Lithium Mining Companies To Invest In, and 4 Lithium miner stocks that Could Explode. Though I make good points in those articles, Advantage warrants a more thorough analysis.
Advantage Lithium is a micro-cap stock. Micro-cap stocks have market capitalizations between 50 and 300 million. The big risks with Micro-cap stocks is the lack of information available, possible bankruptcy, and low liquidity. It is possible that you will lose your investment on these stocks. However, I believe the risk is minimal with Advantage Lithium.
After reviewing many other lithium exploration and producing companies, Advantage Lithium stands out. They provide the highest possible returns at low risk. At this time, I believe they are the number 1 lithium company to invest in. The analysis below is how I justify my reasoning.
Why is Advantage Lithium the number 1 lithium stock?
Near term 3x-5x gains
An updated resource estimate and PEA (Preliminary Economic Assessment) is due Q1 2018. Updates with drill results are also expected every few weeks through early 2018. These catalysts will be good for the stock price. Advantage Lithium's resource is now estimated at .47MT LCE, and I see that resource estimate increasing a minimum of 7X, to 3.4MT. Please see the analysis later in this article on how this was calculated.
Partnership With Orocobre (OTCPK:OROCF), 997m au market cap
Orocobre has a fully operational lithium brine operation bordering Advantage Lithium's property to the north. Orocobre owns a 35% stake in Advantage Lithium and is assisting in the development of their property.
Advantage's board includes the CEO of Orocobre, Richard Seville, who brought Orocobre from a lithium exploration company to a fully operational lithium producer. Orocobre's exploration manager Miguel Peral is also on Advantage's board. He explored the resource at salar Olaroz, which Orocobre now is producing from.
Advantage CEO, David Sidoo explained the importance of this partnership in a recent interview:
Through our relationship with Orocobre we also have access to all the information they have about Cauchari as they have had a drilling presence there...Their technical knowledge is very important for us when it comes to deciding where we’re going to drill, what drilling contractor we use and other such things. That’s invaluable. Their knowledge in community relations and the technical knowhow for sourcing the brine and obtaining the lithium carbonate equivalent of 99.9 percent is very important. These guys have done it all before, and that background knowledge is invaluable when you’re looking at investing in a company that wants to be a new producer of lithium.
Because the lithium brine on Advantage's property is of similar makeup to its neighbors, Advantage has the option to connect to Orocobre's facility at Oraloz with a pipeline to start producing. The same should be possible with the Lithium Americas facility that is now in development, and also borders Advantage's property. What this means is Advantage may not need to build their own production facility to become profitable; the biggest hurtle to overcome for a lithium exploration company. Instead of 400 million and 5 years to make a profit, they can spend 5 million and make a profit in 2019.
They have 20m ca in cash. This is a substantial amount for a micro-cap lithium company. It is rare for a lithium exploration company to have funding in place for years of operation. Advantage plans to expend approximately 17m (CA) dollars though 2019 to execute their development plan.
Advantage's property is part of the basin shared with Orocobre and Lithium Americas (OTCPK:LACDF) which have resource estimates of 6.4MT LCE and 11.8MT LCE, respectively. Advantage has a great lithium resource, it only needs to be defined with drilling.
And the drill results that will be used to define the new resource are almost complete.
Off-take partner possibilities
Orocobre is the most logical off-take partner. They are expanding their operation to meet the high lithium demand caused by the EV Revolution. They will likely want to use Advantage's resource in the expansion.
Orocobre has Toyota as a partner. With Toyota wanting to secure lithium for the upcoming automotive transition to EVs, they will be very interested in Advantage's progress. In reference to Orocobre, Toyota's website states:
Toyota Tsusho has acquired 100% sales rights to the lithium carbonate produced at the plant and aims to build a complete lithium supply chain，extending from upstream to downstream processes, in order to meet the expected growth in demand from Japan and other countries around the world. Shipments of lithium carbonate from the plant to Japan are expected to begin in January 2015.
The next logical lithium company for Toyota to partner with would be Advantage.
Analysis driving my resources estimates
In recent news releases dated 9/25/17 and 10/24/17, Advantage announced great drill results from their rotary drill program. CAU10 was drilled to 340M, and reported an average lithium grade of 682mg/L. CAU09 was drilled to 400M, and reported an average lithium grade of 662mg/L. Their current resource is based on an average grade of 380 mg/l lithium, so this is a very substantial increase.
Source: Advantage CAU09 Results
With help from the NI43-101 report and recent drill results, I am able provide a fairly accurate updated resource estimate for Advantage Lithium.
Gravity and audiomagnetotelluric (AMT) surveys were performed as part of the analysis in the NI43-101 technical report. The red/yellow lines represent where the surveys were performed. I modified this map with the drill holes and generalized projection of the survey results.
As described in the report:
The objective of the gravity survey was to obtain first order estimates of the geometry and depth of the basin, and if possible, to establish the main sedimentary sequences within the basin.
This picture represents the gravity survey of the upper most horizontal red/yellow line. The location of this survey is perfectly suited for holes 8-11.
As also described in the report:
The objective for the AMT surveys was to define the limits of the brine body hosted in the basin sediments, and to define the brine-fresh water interface.
These surveys help to show the continuity in the salar aquifer. With this information, drill holes 8 - 11, and likely 7 will all tap into the same aquifer and yield similar lithium and porosity values. The north AMT survey shows the original holes 1-6 that defined Advantage's inferred resource of .47MT LCE.
I believe the positive results of drill hole 9 and 10 confirm the validity of the Gravity and AMT surveys for locating brine. It can then be assumed that the brine saturated basin (generally) continues along my traced trajectory to the north and south based upon the AMT data.
This means the rotary drill holes 8 and 11 that are still in process will also reveal excellent lithium results for the resource update due Q1 2018. The NW 24km area should also yield great drilling results, but its distance from the AMT and Gravity survey line make it a more uncertain estimate.
The original lithium resource estimate from the NI43-101 report
These are the depths of the rotary drill holes that are completed or currently in progress at Cauchari:
In the eastern area where the inferred resource is defined, the northern portion's average thickness is 370m, which is the average of the depths of drill holes 9 and 10. Since this has been confirmed with drilling, this value will not change in my estimates. The southern portion's average thickness is the average of the depths of drill holes 8 and 11, which is 400m. For the low and medium estimates, I reduce the maximum depth by 100m and 50m, respectively, in the case the basement of the basin is more shallow there.
The 24km2 north western area is believed to have barren gravel near the surface. This gravel is thought to extend to a depth of 150m in the north and 50m in the south. This reduces the brine thickness of drill hole 7 to 250m. I use 200m as the average thickness of the entire 24km2 area in all my estimates, as there is more uncertainty in my model for the NW property. That being said, drill hole 7 is currently encountering sandy material, which is seen as a good sign given Orocobre's best wells have been of a similar consistency.
Mean Specific Yield
6.1% from the original estimate was used as my low case for all target areas. I believe this is justified because the most porous zones have been discovered at depth at Cauchari. The low yields in the resource estimate are because the drills only reached 50m and 170m depth. Based upon the Gravity and AMT surveys, brine will be found all the way down to the basin basement, which is greater than 400m deep as recent drill results indicate.
A mean specific yield of 9.6% is used for my middle estimate, as this was Orocobre's yield in their updated resource definition at Oraloz. The high estimate uses 13%, which is the maximum yield used in the exploration target estimates on page 137 of the NI43-101 report.
Lithium and Potassium concentrations
The average lithium concentration from holes 9 and 10 is 672mg/L. I use this value for each estimate. As the AMT and Gravity surveys have shown, the same brine aquifer should be present under Advantage Lithium's NW and Eastern properties, therefore providing similar lithium values. The potassium levels were left unchanged from the resource estimate.
Low Resource Estimate
When the resource definition is sent out in Q1 2018, this is the minimum I expect to see. When the NW target is added to the total, we have 3.4MT LCE, a 7x resource increase.
Medium Resource Estimate
The Oraloz mean specific yield data is likely close to what we will ultimately achieve at Cauchari. The brine aquifer is thought to be continuous from Advantage's properties up to Oraloz, which should yield similar lithium brine grades and porosity. I expect the 2018 Q1 resource estimate to be around this value, at 5.5MT LCE, a 11x resource increase.
High Resource Estimate
The high case would give us a resource of 7.7MT LCE, a 16x resource increase.
Advantage's market cap is at 110m CA, or 85m US. Their current share price is at .82 CA. This broker recommends Advantage as a buy with a target of 1.90. This is how they justified their recommendation:
With my analysis, 5.5MT LCE is the likely scenario, which puts us at the highest target. This broker also assumes 559Li mg/L as the high case, and drill results have averaged 672Li mg/L so far. 3.80 per share would be about a 5x increase from today's share price.
Advantage is low risk because they have the 20m in cash, a great partner in Orocobre, great property, and near term catalysts that will drive the share price up, up, and up.
Lets not forget, that once Advantage has defined a world class resource of this size, there will likely be an immediate offtake agreement, which will add further gains. Toyota and Orocobre will be first in line.
For more promising lithium miners, see my blog posts and other articles.
Disclosure: I am/we are long AVLIF, DMNXF, LXENF, NRGMF, ASX:NLI, ASX:LKE. 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.
Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.