Neo Lithium Too Cheap To Ignore

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About: Neo Lithium Corp. (NTTHF)
by: Matt Bohlsen
Summary

The 3Q Project resource and a comparison with competitors show the project to be one of the most promising lithium brine projects in the world today.

The 3Q Project site is advancing well with good access and infrastructure, a 100 man camp, several filled evaporation ponds, and a new pilot plant.

Valuation is highly attractive, with a PFS due out in late Q1 2019.

Possible late 2021 or 2022 low-cost lithium brine producer if all goes well.

This article first appeared on Trend Investing on 19 February 2019; therefore, all data is as of this date.

Neo Lithium [TSX:NLC] [GR:NE2] (OTCQX:NTTHF) - Price = CAD 0.58, USD 0.43

Neo Lithium 5-year price chart

Neo Lithium 5 year price chart

Source: Bloomberg

For a background on Neo Lithium ("NLC"), my previous articles are linked below:

Note: NLC floated on July 20, 2016, at CAD 1.20 per share.

Neo Lithium 100% own (fully paid) the Tres Quebradas (the "3Q Project") lithium project in Argentina, with lithium rich brines hosted in salars and reservoirs covering 160Km2. The 3Q Project has a high-grade lithium brine with very low impurities (very low magnesium/lithium ratio).

Neo Lithium's world-class 3Q Project in Argentina

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The 3Q Project resource

Using a 400mg/L lithium cut-off, the combined measured & indicated [M&I] and inferred resource has a total contained lithium carbonate equivalent of 7 million tonnes, grading between 584mg/L and 614mg/L.

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The 3Q Project comparison with competitors

The chart below shows Neo Lithium's 3Q Project is the 5th largest brine project globally at 7 million tonnes contained lithium (total resource). Also, highly significant is the very low $10 EV/Resource (this is now even lower), making it by far the best value of the group. I find this very odd given they have high-grade, exceptionally low impurities, and control 100% of the salar.

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NLC's 3Q Project has the seventh highest grade globally

NLC's 3Q Project has extremely low impurities (very low Mg:Li ratio and SO4:Li ratio)

3Q Project has the lowest combined impurities (Mg, SO4) worldwide. This should mean a very low cost of production, as was confirmed in the PEA at an estimated USD 2,791/t LCE, which is easily in the lowest cost quartile globally.

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Neo Lithium expects to sit very low on the lithium cost curve

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Access, Infrastructure, and Permitting

Access is good with a recently upgraded project road. The Project is located 30 kms from the Chilean border with direct road to Pacific ports. There is also railroad access to Buenos Aires port from a nearby town.

Infrastructure at the 3Q Project site is good. The Company states: "Full infrastructure already built by the Company." A 100 man camp has been built, several pilot ponds, an onsite lab, and a new pilot plant.

There have been some negative discussions around environmental clearance and environmental permitting. CEO Perez has responded that he does not see these as a problem. On the plus side, the Company is fully environmentally permitted to full feasibility stage and there are no inhabitants or aboriginal communities in the area.

A pilot pond at the 3Q Project

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Preliminary Economic Assessment results

On October 30, 2017, NLC announced a positive Preliminary Economic Assessment [PEA] result for their 3Q Project. This PEA was later updated in December 2017 (the CapEx was lowered to US$490m). Highlights of the updated PEA are shown below and include an impressive post-tax NPV 8% of USD 1.2b (~CAD 1.6b), post-tax IRR of 27.9%. The PEA based on a production rate of 35,000 tonnes of lithium carbonate per year. Processing based on simple and proven solar evaporation technology. Expected mine life of 20 years with a 3-year ramp up period starting 2021. The PEA assumed an LCE selling price of US$11,760/t.

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Note: Neo Lithium states that, since the PEA, the resource has expanded and, therefore, the mine life, mine plan, and production capacity need to be re-evaluated. We have also discovered that less reagents and smaller ponds are required. This will mean that the upcoming PFS should improve on the PEA.

Neo Lithium 3Q Project in Argentina - Several evaporation ponds have been built

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Recent News

  • On February 14, 2019, Neo Lithium announced: "Arrival of its lithium carbonate pilot plant to site & receives renewal of its environmental licence for the 3Q Project." The plant is expected to be fully operational by late February.

Upcoming Catalysts

  • End Q1, 2019 - Preliminary Feasibility Study [PFS] results due. Strategic partner expected to be selected.
  • End Q2, 2019 - Environmental Impact Assessment and approval expected.
  • Late 2021 or 2022 - Potential to start production.
  • 2024 - Potential to reach full production of 35ktpa LCE.

Valuation update

Neo Lithium has a current market cap of CAD 50m (my estimate of an EV of ~C$15-30m), with 117m shares outstanding (128.5m fully diluted). As of September 30, 2018, the Company had C$45 million in cash and no debt.

Insider ownership currently stands at 16% and institutional ownership at a massive 45% and includes many big names such as Blackrock, JPMorgan, Mackenzie, Sprott, and others. Insider ownership at 16% is also a good sign.

My price target is CAD 5.74 (9.9x higher) for the end of 2024. It assumes a US$12,000/t LCE selling price and a cost price of US$2,791, and reaching 35ktpa LCE production. CapEx of USD 490m. It also allows for royalties, dilution, current cash levels, and currency etc. Note there may be some further upside if production volumes are higher.

Note: At an LCE selling price of USD 8,000/t, my target price reduces to CAD 3.06 (5.3x higher) for the end of 2024.

Basing on a current valuation of about 20% of the NPV in the PEA, the stock should trade on a market cap of ~C$320m (20% x C$1.6b) (based on the PEA assumed LCE selling price of US$11,760/t).

Analysts' consensus estimates is an outperform with a 1-year price target of CAD 2.45 representing 322% upside.

Broker price targets include GMP (C$3.25), Cormark (C$3.25), VIII Capital (C$3.00), Beacon (C$2.20), Canaccord (C$2.00), and Macquarie (C$1.60).

Based on several measures, Neo Lithium is just too cheap to ignore. The current valuation of an enterprise value of only ~CAD 15-30m (my estimate) for one of the very best global lithium brine projects is very difficult to understand, especially when the project has already spent $30m to date and is advancing well. One can argue this is in part due to the early stage and the time and difficulty to reach production. My other thought is that the market is currently irrational after the 2018 beating down of lithium stocks, especially the juniors.

Risks

  • Lithium prices falling. Neo Lithium is well protected here with an extremely low forecast cost of production.
  • The usual mining risks - Exploration risks, funding risks (the main risk for Neo Lithium), permitting risks, production risks, project delays.
  • Management and currency risks. Management is very well regarded and highly experienced led by CEO Waldo Perez.
  • Sovereign risk - Argentina has improved under President Macri.
  • Stock market risks - Dilution, lack of liquidity (best to buy on local exchange), market sentiment.

Investors can view the latest company presentation here.

Conclusion

Neo Lithium's 3Q Project is, without doubt, a world-class project. Their 100% owned salar, with a large size resource (7mt of lithium), high lithium grade (584mg/L and 614mg/L), and very low impurities make for exceptional economics. The PEA result of a post-tax NPV of USD 1.2b and an industry low USD 2,791/t LCE production cost estimate have already shown this and the upcoming PFS should improve on this further. CapEx of USD 490m is the only challenge, but given the quality of the project, this should be achievable with the right partner.

Near-term catalysts are the PFS due out in late Q1, 2019, and any project or equity partner announcements.

Valuation is still highly attractive to the point of being ridiculous, but currently, not uncommon among the lithium juniors due to oversupply fears and poor sentiment. Extremely high level of institutional ownership, solid insider ownership, and with a strong management team.

Risks remain due to the early-stage permitting, project funding etc. and with some sovereign risk (Argentina).

My view remains that Neo Lithium is the highest quality lithium junior out there. As is often the case, the PFS being released and lithium samples from the pilot plant should encourage off-take or equity partners to commit. Once the market sees signs that this project will be funded and proceed, then a very significant stock re-rating should occur.

As usual, all comments are welcome.

Disclosure: I am/we are long NEO LITHIUM CORP (TSXV:NLC). 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.

Additional disclosure: The information in this article is general in nature and should not be relied upon as personal financial advice.