Piedmont Lithium Making Progress In Albemarle's And Livent's Backyard

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About: Piedmont Lithium Limited (PDDTF), PLL, Includes: ALB, LTHM, NMKEF
by: Silver Coast Research
Summary

Piedmont Lithium ("Piedmont") revised upward the Mineral Resource estimate for its project in North Carolina.

The upgraded resource should boost the project's economics significantly.

The competitive advantages deriving from Piedmont’s location remain intact.

There is also some M&A potential: Piedmont Lithium has stated in the past that it would welcome strategic transactions with the likes of Albemarle and Livent.

Undeterred by the negativity around lithium explorers over the past 12 months, Piedmont Lithium (PLL, OTCPK:PDDTF) has been advancing its project located in North Carolina's Tin-Spodumene Belt. In earlier articles, I identified the limited size of the resource as Piedmont's main weakness. A number of new drilling results have since revealed a larger resource, culminating last week in a revised Mineral Resource estimate of 27.9 Mt @ 1.1% Li20, with further exploration potential.

Following this upward revision, I now consider that the project has a decent chance of getting the greenlight, and decided to buy some shares. In addition, there is a speculative side to this story as Piedmont has always made it clear that it would welcome a "strategic transaction" with Albemarle (ALB) or Livent (LTHM), which used to mine lithium nearby and still possess processing facilities in the area.

A Vastly Improved Resource

Piedmont's initial Scoping Study, released in July 2018, was based on a Mineral Resource estimate of 16 Mt @ 1.12% Li2O, a rather limited size compared with peers in Quebec or Western Australia. However, since then, Piedmont has been able to expand the resource meaningfully, both in its Core Property and in the more recent Central Property (see map below). Overall, the amount of material in the Inferred and Indicated category rose by more than 70% to 27.9 Mt @ 1.11% Li2O, as disclosed in the June 25 press release.

Piedmont lithium resource map Piedmont lithium upgraded mineral resource Source (map and table): company's press release

Further exploration will be needed for the Central Property to contribute to the economics of the project. However, the grade of 1.34% Li2O for that section is promising, and Piedmont will no doubt try to expand the land package in that area with a view to making it open pit-able.

While the average grade in the Core Property is not particularly high, operational efficiency should be enhanced, according to the company, by the shallow location of the resource and by its homogeneous spodumene nature (unlike deposits that contain multiple lithium-bearing minerals such as petalite, lepidolite, zinnwaldite as well as spodumene):

Importantly, 74% of the Core Mineral Resource is within 100m of surface and 97% is within 150m of surface. Approximately 50%; or 12.5 million tonnes of the Mineral Resource is classified in the Indicated Resource category. All of the Mineral Resource tonnes at both Core and Central properties are attributable to spodumene mineralization.

Source: company's press release

I had some reservations at the time of the initial Mineral Resource estimate of 16 Mt. Following the upgrade, the 25.1 Mt from the Core Property alone now provides a critical mass, and I expect a much improved Scoping Study in the next few months. The case could become even more compelling if Piedmont can keep increasing the resource, potentially challenging the likes of Nemaska Lithium's (OTCQX:NMKEF) Whabouchi project in Quebec (about 44 Mt @ 1.37%):

As we expand our land holdings and drill out other highly prospective targets, we are optimistic that we will ultimately identify North America’s largest spodumene ore body.

Keith D. Phillips, President and CEO, June 25 company's press release

Location, location, location

Meanwhile, the strengths of Piedmont's project resulting from its location near Charlotte, North Carolina are intact:

Piedmont lithium cost advantages Source: corporate presentation

The data above was compiled by the company, so there will always be an element of bias. However, there's no doubt that these are significant competitive advantages for Piedmont. Just think of mining projects in Australia, where labor is very expensive and mining companies need to fly in and fly out workers at a substantial cost. Transportation costs will also be greatly reduced if Piedmont serves U.S. customers (in this respect, Piedmont is a play on the development of the EV supply chain in the U.S).

As a result, Piedmont sees itself as a low-cost lithium hydroxide producer in the making:

Lithium hydroxide cost curve Source: corporate presentation

I would of course take the chart above with a pinch of salt as:

  • Capital costs are not included, and Piedmont's ability to absorb capital costs will depend on the size of the resource.
  • The Nemaska Lithium precedent shows that costs can be grossly underestimated.

Therefore, the revised Scoping Study, and, down the road, the Feasibility Study, will be needed to shed more light on the project's economics. However, the improved resource coupled with the competitive advantages look highly promising.

The latest developments have also been very supportive:

  • Lithium is one of the critical minerals identified by the American Mineral Security Act. This law will be a tailwind for lithium projects in the U.S., which can expect support at the permitting stage.
  • Lithium hydroxide has become the preferred material of many battery manufacturers, which has boosted the appeal of spodumene projects in comparison to brine extraction. Spodumene projects can produce hydroxide directly while brine projects usually require 2 steps (carbonate, then hydroxide). This goes a long way toward negating brine projects' cost advantage.

Lithium carbonate and hydroxide demand Source: Livent presentation

Only prices have been a headwind over the last few months. However, the current $14-15 /kg for lithium hydroxide is in line with the base case in Piedmont's initial Scoping Study.

Potential Transaction with Albemarle or Livent

I would be surprised if the project had gone unnoticed by the likes of Albemarle and Livent. In fact, it probably hasn't, given that Piedmont has "engaged in numerous preliminary off-take, financing and strategic conversations, including companies from the lithium, mining, chemicals, battery, automotive and private equity sectors", according to the company's Q1 '19 report.

Since the beginning of the project, Piedmont's management, who owns about 11.6% of the shares, has made no mystery that they would welcome a transaction:

Obviously, our focus is on maximizing shareholder value. And at the end of the day, if a strategic transaction comes in then that’s wonderful.

Source: TheLithiumSpot.com

From Albemarle's and Livent's perspective, restarting production in the North Carolina Tin-Spodumene Belt could make sense. Why bother with the requirements of Chile and others when you can find U.S. sourced production, only a few miles away from your headquarters? Albemarle has previously stated that it might reopen its Kings Mountain mine, though the idea was to do it after 2025, with other projects currently on the front burner:

Albemarle's pipeline lithium projects

Source: Albemarle presentation

However, if Piedmont can come up with a sizable, shovel-ready project, that complements Kings Mountain and provides more scale, Albemarle might want to bring forward this development.

With regard to Livent, spun off from FMC Corporation (FMC) in 2018, the company used to operate the Hallman-Beam mine in close vicinity of Piedmont's property. In my opinion, Piedmont's project could be of interest to Livent, which intends to "Grow lithium hydroxide capacity to meet customer shift to high nickel cathode chemistry", as per this recent presentation.

Valuation

The revised Scoping Study will be necessary to assess the project's value. But in all likelihood, it will show improved economics from the initial Scoping Study below:

Piedmont Lithium scoping study Source: Piedmont Lithium's Scoping Study

The current market capitalization is around $75m, meaning that the shares currently trade at one tenth of the project's initial NPV@8%. The next steps, as indicated by the company, will be:

  • Permitting
  • Reserve declaration
  • Definitive Feasibility Study
  • Offtake/Partnering
  • Project financing

Piedmont had US$7m in net cash as at March 31, 2019, which may not be sufficient to both expand the land package and complete the feasibility study. A capital increase, or a strategic partnership, could soon be required to advance the project.

Piedmont lithium balance sheet Source: corporate presentation

Takeaways

I find the Piedmont Lithium story increasingly compelling. Following the recent upgrade to the Mineral Resource, I think the project has a realistic chance of coming to life. Thanks to its location in North Carolina, the project ticks a lot of boxes, especially if future drilling results keep expanding the resource.

The easiest way forward for the company - and its shareholders - would probably be a strategic transaction, be it a partnership or an outright sale. An off-take agreement with a North America-based battery manufacturer would help too.

There are many risks, both at the company's level, and industry-wide. For instance, new technologies could (and will at some point) disrupt the currently popular lithium-ion chemistry. And breakthroughs could happen that enable fast and cheap lithium extraction from brine. But given the recent progress, I'm happy to take a chance on Piedmont Lithium, with money I can afford to lose.

Disclosure: I am/we are long PLL. 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 opinions and views expressed in this article are for information purposes only and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation to buy, sell or hold any security, investment strategy or market sector.

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