Recently covering the EV supply chain, I wanted to clue investors into what I believe is the most promising aspect of this sector. I believe that lithium juniors are a good way to increase the return on the growth in lithium demand by taking on a bit more risk than a more established lithium player. Of course, a healthy dose of diversification and risk management is always important, so other companies can't hurt, but I do find the juniors to be the most exciting. The fundamental idea is fairly simple, most are largely unknown and have the ability to compound their own operational growth with that of their market. I have completed a dedicated article on each of the companies that will be discussed here and recommend reading those if a company piques your interest. This article will serve as a conglomeration of my thoughts on the sector as a whole and a summarization of the key points made in each article. The below companies are not listed in any particular order, with the exception of Lithium Americas (LAC), which I have not covered for several months.
Outlook for Lithium Hydroxide
As you progress through the article, a pattern of emerging producers targeting lithium hydroxide will start to reveal itself. As such, I would like to clarify the outlook for the metal before we progress and provide an update on my outlook for the market. There are currently two major products in the lithium market, lithium carbonate, and lithium hydroxide. Lithium carbonate currently comprises around 60% of the total lithium market, with hydroxide coming in just below 20% of the total market. With such a clear bias towards carbonate, it seems ill-advised for these producers to be going, seemingly, all in on hydroxide. However, hydroxide use is on the rise.
Carbonate is currently favored for the greater stability, and therefore safety, that it provides compared to hydroxide, but battery producers are working to change this. Hydroxide is compatible with more energy dense chemistries, which is highly preferable for bringing down production costs and increasing range. While it may seem unwise to bank so hard on this, yet unproven, technology becoming mainstream, current development is rather promising. A host of battery producers plan on introducing a hydroxide-based chemistry this year or the next, and Tesla (TSLA) already utilizes one in their vehicles. As such, the transition to hydroxide is all but guaranteed and the metal is expected to account for 55% of the lithium market's total demand by 2025. In a market that is also expected to grow three-fold during the same period, hydroxide prices are positioned to strengthen through the near future. Therefore, I believe the production of hydroxide will ultimately prove to be a strong asset for each of these companies, with current EBITDA forecasts seemingly fairly conservative estimates of what will be seen in reality.
Terms and Phrases to Understand
Feel free to skip this section if you consider yourself somewhat well-versed in the lithium sector. There are two primary sources of lithium reserves, hard rock and brines. Brines contain a slurry of chemicals, lithium being one of them. The current standard for lithium extraction from these brines is to pump the brines from beneath the surface into large evaporation ponds, waiting for the water to leave behind the precious material as it slowly releases into the atmosphere. After a more concentrated brine is left behind, companies can then collect it and process as needed. Hardrock, or spodumene, is what is more typically associated with the word 'mining.' As the name suggests, this is the extraction of lithium contained in rock formations that must be mined and later processed to form the necessary chemicals.
Lithium hydroxide is currently produced by both of the aforementioned methods, both with different costs. When mining lithium carbonate, brine resources tend to run producers about half as much for operations as a spodumene mine would. However, when producing hydroxide, the two become a bit more competitive. Because spodumene allows for direct conversion to hydroxide, whereas brine extraction requires producers to produce carbonate that can then be converted into hydroxide, spodumene resources start to become a bit more appealing. Regardless, it can be obtained from either source or will vary from project to project.
Direct lithium extraction ("DLE") is a method by which a producer can extract lithium directly from their brine source. This bypasses the need for an evaporation pond as producers can simply pump the brine directly to their processing plant which can extract the lithium from the brine. While evaporation ponds usually take several months, even over a year, to yield their first results, DLE can drop this process down to mere days. There are a variety of methods to achieve this DLE process, some of which will be discussed later on in this article.
A pre-feasibility study ("PFS") is the first critical step in validating a company's prospective lithium operation. The PFS lays out the initial groundwork and operating projections for a mine under development. It examines a variety of possible operating procedures and hones in on one that presents itself as the most viable and/or lucrative. This step is required for the receival of permits to construct the mine in question. Within a year or two after the release of the PFS, most, if not all, major permits will be acquired by the company. If this isn't the case, the company will likely need to reevaluate their plans or abandon the project altogether.
A definitive feasibility study ("DFS") is the final step required before a company can begin final construction on their mine. The DFS further narrows down the results projected in the PFS and outlines a clear course of action. The release of a DFS is usually followed closely with the announcement of financing methods and sometimes the signing of an offtake agreement with an OEM, usually a battery manufacturer. Once the company has a fair idea of their operations, they are better able to negotiate such contracts. Lenders can get a better gauge on how quickly they can expect to recoup their investment, while OEMs can get a pretty good idea of the quality, and quantity, of lithium they should expect. With these few terms out of the way, I can now proceed.
Beginning this article with a discussion of lithium hydroxide likely created an expectation for a hydroxide-heavy list of lithium juniors, but Neo Lithium (OTCQX:NTTHF) swings differently. The company plans to produce 20,000 tons of lithium carbonate per year over the course of 35 years. Neo Lithium's PFS offers a fairly comprehensive look into the company's initial findings and provides the plans for initial operations. The next step is completing the DFS to solidify these results.
Located in Argentina, the 3Q project is one of the largest, and most pure, lithium brine resources in the world. The great size allows for the company to maximize revenues, while the higher purities allow for the maximization of profit margins -- in other words, the minimization of operating costs. Neo Lithium projects that the 3Q project will operate at a cost of $2,914 per ton of lithium, a staggeringly low figure. This also allows for a relatively low CAPEX, $319 million, and a payback period of under two years.
EBITDA is at the mercy of the ever-changing lithium market but is expected to average at $167 million per year. But this is all getting ahead of itself. Neo Lithium expects to release its DFS in August, or September, of this year (9:33). However, the company won't be alone in the development of the DFS. Recently, CATL, the world's largest battery producer, took an 8% stake in the company and will be assisting them in their DFS. CATL is now working closely with Neo Lithium to develop their lithium carbonate manufacturing process to ensure it will be top-grade for battery suppliers.
Before the company releases their DFS, it expects to announce a deal with CATL (20:56), which will likely include an off-take arrangement between the two companies. If the deal does in fact emerge before the release of the DFS, it will be a strong indication of positive results to come as the Chinese battery giant will know the results long before they are made public. With initial project construction targeted for the end of this year (9:42), the company is on target to reach their initial production goal of 2023. However, I would expect this to come at the end of the year and would not be surprised if this was then pushed into early 2024.
When it comes to the company's choice to target carbonate, I believe it is wise. While hydroxide and lithium metal production will be developed later on as the market continues to shift (17:10), carbonate may be more favorable in the short term. Carbonate is already entering a supply deficit and, with the vast majority of new production targeting hydroxide, this deficit is likely to grow.
With catalysts on the way, in the form of a deal with CATL, a positive DFS, and the start of construction all by the end of this year, it is a year of growth for the company. As such, I expect a price of $3.75 by the end of the year, though most of 2022 and 2023 will show growth stagnation. However, the company trading at a value near a quarter of their single asset's NPV, their mine, the ceiling is rather high for the company.
I titled my piece covering Standard Lithium (STLHF) "Standard Lithium: A De-Risked Lithium Junior" because there is one piece about this company that truly shines. As you are likely able to infer, that is the risk proposition provided by this unique company. Standard Lithium CEO, Robert Mintak, has been adamant about the fact that his company is not a materials or mining company, but rather a technology company. Not to be disregarded as typical CEO jargon, Mintak's words ring true through the company's planned operations.
Standard Lithium does not plan on "operating" any lithium mines. Standard Lithium plans to operate with partners, forming joint ventures at every site they look to develop. Currently, Standard Lithium is focused on bringing its flagship Arkansas project to production. While the company owns another plot in California, that project has taken the back seat for now and relatively little work has been done at that site to progress it. For that reason, I'll remain focused on the Arkansas project.
Standard Lithium plans to enter into a joint venture agreement with local bromine producer Lanxess (OTCPK:LNXSF) in which the latter will own 70% of the project. While Standard Lithium will be provided with options to increase their stake to 40%, Lanxess will remain the primary owner for the life of the mine. Lanxess will also be responsible for the daily operations of the mine and 100% of the facility's initial offtake. While this joint venture has not yet been signed, which is important to note, Robert Mintak has expressed these base conditions as fairly certain.
This is where Mintak's claim of being a "tech company" begins to lend some credibility. The company is currently developing its DLE technology which is the basis for the mine's operations. Fortunately, the company's process has been producing promising results at a full test-scale project. In Arkansas, there is currently a prevalent bromine industry that discards lithium in their brine as they extract the bromine, Standard Lithium looks to target this waste brine. This will keep initial costs down and is the basis for the partnership with Lanxess.
The company will begin with producing carbonate at the facility, but has plans to develop hydroxide and eventually lithium metal as well in order to keep up with evolving battery technology. With Lanxess' experience running brine operations around the world, Standard Lithium believes that their technology will allow for the smooth operation of the plant. However, the company has aspirations to expand their production, which will see annual production of 20,900 tons of lithium carbonate upon the completion of all three stages of construction.
Once the company is generating positive cash flows, they can focus on expanding and targeting brine that contains greater concentrations of lithium. With their partner structure, the expansions will come with reduced financial burden and risk. Utilizing the current industry experts as operators of the facility makes sense for the junior company that has no experience in the field. This decision made by the company's management is one of a few that leads me to view it as the single best team on this list.
While there is still much unknown about the company, more so than with others due to their unconventional approach, the company maintains probably the lowest risk profile of any other junior. Most of the unknowns have to do with the unsigned joint venture deal, which will be able to lend more specifics towards the company's operations. As such, it is difficult for me to create a long-term price target but have set a target of $3.75 per share by the end of the year. The long-term potential, as with other juniors, remains the best play.
Cypress Development (OTCQX:CYDVF) is an undervalued lithium junior. "Yes," you might be saying, "That's the whole premise of this article. 'Lithium juniors are largely undervalued.'" But Cypress offers a more compelling offering than most. The company aims to produce 27,400 tons of lithium carbonate equivalent ("LCE") per year, targeting hydroxide for their production. In the company's PFS, they target a price of $9,500 per ton, which reflected poor lithium prices at the time the study was released. However, with the company's DFS, which is expected later this year, the figure will likely be amended to around $12,000 per ton.
Another thing to be amended for the company's DFS is their extraction method. The company will not be extracting lithium from either spodumene or brine, instead mining clay deposits in rural Nevada. This means that the company has to bring a new extraction method to the table to successfully produce lithium at the site. To do this, most other companies exploring similar resources have adopted a sulfate-based leaching process. In their PFS, Cypress indicated that they would be doing the same but, since then, the company has indicated otherwise.
The company is currently developing a chloride-based leaching process that they expect to offer more efficient extraction in terms of both costs and time. While I do maintain confidence in this new process, it is worth noting that they will have the sulfate-based extraction process to fall back on in case development doesn't pan out as hoped. With this sulfate-based leaching process, Cypress guided for operating costs of $3,329 per ton, though this doesn't include the potential for by-product sales later down the line.
I do also strongly believe in the company's management. Falling second only to Standard Lithium, I believe that Cypress's management is the most technically capable team in their sector. They fall under Standard Lithium's team due to their weaker strategic management which, as a junior lithium company, is a rather important component of the overall management outlook. I believe that this has contributed, partially, to the company's extreme value discount relative to peers as the company remains largely under the radar.
While most lithium juniors trade at a level between 30% and 50% of their projects' NPV, Cypress trades at a mere 5.2% of their project's NPV (as of April 4). Lithium Americas, which will be covered later in the article, shares many similarities with Cypress. The greatest of these similarities is the company's clay-based lithium deposit, which they will use sulfate-based leaching to extract lithium from. I include this detail to demonstrate that the risk associated with clay extraction is not, on its own, great enough to warrant the extreme discount. Lithium Americas trades at a value just under 60% of their projects' NPV. The graphic above does an excellent job portraying this discrepancy, with the shaded portion of each bar representing each company's value relative to its projects' NPV, the entire bar.
Cypress recently raised C$20 million, announcing plans for the creation of a pilot plant just three days later. This is an important step towards the creation of a DFS, as the operations at the plant are required for the DFS plan to be validated. The pilot plant confirms that the company will be moving forward with its chloride-based leaching process. This is incredibly positive news for the company, which will now be utilizing a far more environmentally-friendly extraction process. While this in of itself is positive, it will also reduce initial CAPEX by around a third (according to the expected cost of the sulfuric acid plant). With higher lithium prices as well, the company's DFS, expected by the end of this year, is looking to be highly positive for the company.
With this in mind, while I set a price target of $2 per share by the end of this year, this company has the most upside potential of any other company covered in this article. With increased attention to the company as they get closer to production, this discrepancy relative to peers is likely to diminish as the company grows at a faster rate than peers. It's also worth noting that the company is currently only developing a fourth of their resource, leaving strong potential for expansion. Of course, as with every other company covered here, this assumes a successful operation.
My article covering Piedmont (PLL) highlights how the company has seen its value skyrocket due to a deal with Tesla. Piedmont has plans to produce lithium hydroxide via two separate plants, an integrated project and a merchant project. An integrated project consists of both a mine and a processing facility while a merchant project consists only of a processing facility. The processing facility takes the raw material extracted from the ground, spodumene, and converts it into lithium hydroxide. Therefore, the merchant plant will be purchasing spodumene from other producers and then converting into lithium hydroxide. Currently, all conversion from raw material to lithium hydroxide or carbonate takes place in China, making the diversification into other countries, especially domestically, integral for strengthening the lithium supply chain.
At the integrated plant, Piedmont expects to generate an annual EBITDA of $218 million, producing 22,720 tons of lithium hydroxide for 25 years at an operating cost of $3,712 per ton. The company's merchant plant is geared to handle the same volume, 22,720 tons of lithium hydroxide per year, but will operate with a lower annual EBITDA of $149 million following the far greater operating costs of $6,689. The company hopes to begin operations in late 2022 but may see this slip into 2023.
Now, to cover the aforementioned deal with Tesla, the EV titan has signed for a third of the initial production coming from Piedmont's integrated plant at a fixed cost. This deal is over the course of five years with the possibility of a five-year extension upon expiry. The price that Tesla will be paying for their offtake rights is, unsurprisingly, unknown at this stage.
As with most junior lithium companies, the risk revolves around future operational uncertainties and securing financing. The company will need to expend a combined $922 million to bring both projects online. While securing a customer for a third of their integrated project's output is a solid start to encourage financiers, the figure is just too high for the company to pull off without turning to equity. As such, I believe that shareholders will face dilution as the company issues more shares and perhaps sells equity in its project as well.
Securing an offtake purchaser de-risks a company, as it secures future revenues and demonstrates strong confidence in a developer's project. Since these companies negotiate with information that is unavailable to the public, the fact that Tesla, too, has faith in the project is a good sign. However, signing this deal with Tesla had some adverse effects. Part of the pull of lithium juniors is that they largely go unnoticed by investors, even those focused on the lithium sector. Piedmont, thanks to Tesla, no longer fits that description.
As such, growth for the company is far more subdued than its peers. I would cap growth at 10% for this year, with a bullish price target of $90 per share by the time production begins. Both of these projections are on the optimistic side and I would not feel too strongly about either one of them being overshoots. However, I would be rather surprised to see either of these surpassed. The company is overvalued in its current state and offers an extremely poor risk/reward profile.
This article contains my thorough analysis of the company that holds Europe's largest known lithium deposit. European Metals (OTCQX:EMHLF) plans to produce 25,267 tons of lithium hydroxide annually for 21 years, according to the company's PFS. The low-cost operation is expected to produce each ton of lithium for just $3,435, one of the lowest in the world. The company's sale of by-products is one component of these low costs. While by-products can sometimes be difficult to sell, tin, the company's major by-product, is expected to continue its recent supply shortage through the foreseeable future. Additionally, the metal trades with a unit price similar to gold which, as CEO Keith Coughlan explained, makes selling the metal far easier. The project is also home to one of the largest tin deposits in the world, a business that they are likely to explore more in the future.
Source: European Metals
The Czech-based lithium deposit is located at an incredibly ideal spot, with easy access to major roads and a rail line. Additionally, Europe is now the largest market for EVs in the world, making its goal to secure 80% of battery metals domestically a high ask for producers. This will provide the company with a favorable standing when negotiating supply contracts and looking to secure permits. However, the company still needs to worry about funding its mine.
With an expected CAPEX of $482.6 million to bring the mine into production, the company needs to raise some significant capital. While the projected EBITDA of $266.946 million will allow for a payback period of just 1.8 years, providing financing to a company with no current revenue is a clear risk. Additionally, the company's 49% share in the project, while cutting into total profits, will allow for greater ease securing necessary funds. The fact the company looks to finance the majority, if not all, of their mine will not help in diminishing this burden but is the favorable alternative for shareholders as they avoid dilution. The company is also likely to announce an off-take agreement this year, which will aid in making their financing prospect more appealing as they secure future sales.
While the 25,267 tons of lithium hydroxide to be produced each year is certainly solid, the PFS only covered 9.3% of the total indicated reserves. This means that there is the potential to expand production by over 10x. Though it is unlikely that the company will be able to account for this entire potential, it does mean that significant expansion at the sire is highly likely in the future. With the DFS expected to be released this year, the company is finally able to set their eyes on production. I expect this to begin in the first half of 2023.
Three major catalysts, the securing of major permits, the release of the DFS, and the announcement of an offtake agreement, are likely to set the stock up by 150% by the year's end. However, the greatest potential remains with the long-term investment, as shares are likely to reach $10 by the time production starts. After then, the value is subject to a host of different outcomes, relating to potential expansions or changes in operations, making an accurate forecast impossible. However, I believe that the growth to be seen will far exceed the $10 target. The company is currently listed on the NASDAQ International but is rumored to be listing onto the domestic exchange later this year.
All information discussed can be found in this article covering the company. E3 Metals (OTCQX:EEMMF) is currently in the exploration stage of their first project, located in Alberta, Canada. The site in question is a brine-based lithium resource, for which the company is developing a proprietary ion-exchange DLE. Ion-exchange involves the use of a special sorbent in order to attract lithium out of the brine and avoid bringing other elements along with it. E3's sorbent has an incredibly strong affinity for lithium, allowing it to reduce the extraction time to just ten minutes in lab settings. This process will allow E3 to convert their, relatively impure lithium source, to one capable of producing battery-grade lithium products at a rate of 20,000 tons per year. The company also expects that this will allow them to keep operating costs fairly low, citing an expense of just $3,656 per ton of lithium hydroxide.
However, the process is not yet verified as a viable extraction method for a large-scale lithium operation. If this extraction process proves to be unsuccessful, E3 may as well pack up their bags and go home because they no longer have an economically viable operation. While I do believe that the process will be validated, it should be a concern for investors moving forward.
The company currently expects a CAPEX of $602 million to bring their mine into production. With the aim to fund this purely through debt financing and "potentially" some offtake agreements, the company's financial situation will be a tricky one to navigate. Though the payback period for the mine is expected to be just 3.4 years, incurring such a massive amount of debt as a company with no current sales is, not to understate anything, a bit of a risk.
My price target for the company is $8.55 by the end of 2024. While this demonstrates strong growth from the company's current trading level, it does not represent the ceiling for the company. I left my target at 2024 not for lack of potential past then, but rather lack of information. Instead, I believe that the growth after 2024 will dwarf that of what will be seen up to that point. The company's mine has the potential to expand production up to 150,000 tons per year. This is rather staggering growth and makes one wonder why it is not mentioned in the earlier reports. A fair question to have, though it is one with a simple answer. While incurring $602 million of debt is certainly not something to belittle, the debt that would have to be incurred to reach this level of production upon the start of production would be simply unbearable. Statements released by the company regarding the future operations of the mine cover only what is currently planned. Since this expansion is not yet part of the company's plans, it isn't a part of their technical reports.
However, even without this expansion, the years after 2024 bring with them the greatest growth. I expect the DFS to be released either late 2024 or early 2025. The release of the company's DFS will eliminate all issues of uncertainty regarding operations and as financiers are sought out, funding concerns will start to be reduced as well. As the company reaches its projected annual EBITDA of $208.6 million, as I expect production to begin in 2026, it seems unlikely that the $420 million valuation at the end of 2024 will remain fitting. As such, E3 has strong growth potential, with the possibility to raise initial production targets by 7.5x.
The most recent company I covered in this series is ioneer (OTCPK:GSCCF). ioneer fully owns its Rhyolite Ridge project and released their DFS of the project in the second quarter of last year. The study laid out the company's planned operations, which includes a lifetime of 26 years. However, production will vary. During the first three years of its life, it will produce 22,340 tons of lithium carbonate per year, but production will then shift towards 21,951 tons of lithium hydroxide per year for the remainder of the project. Throughout all of this, however, the project will be producing something else -- boron. The project will produce 174,378 tons of boric acid per year in order to help offset their operating costs.
The high boron content is a distinguishing factor of the company's mine, allowing it to operate with industry-leading costs of just $2,510 per ton of LCE. The image below demonstrates exactly how impressive these operating costs are, but also doesn't provide the full picture. Before the sale of boric acid, the company's operating costs are closer to $5,500 per ton of LCE. This doesn't take into account the additional costs of extracting the boron itself but demonstrates the importance of the sale of boronic acid to maintain this advantage. Source: ioneer
While the market for the chemical is far more stable than that for lithium, this is still something to be wary of. ioneer has also reached an offtake agreement with Dalian Jinma Boron Technology to secure 61.8% of the company's production which goes a long way to mitigate the risk. Dalian Jinma will also assist in the company's sales efforts for their remaining boric acid production.
The company's impressive margin will allow them to operate with an EBTIDA of $288 million, which they can begin working towards in mid to late 2023 when production is expected to start. Following the receival of final permits, expected late this year, the company will be clear of regulatory hurdles to potentially stunt its growth. Additionally, the security of their DFS helps minimize the concern around the clay recourse that will require sulfate-based extraction to operate.
Unfortunately, while the DFS may provide some operational confidence, the company still needs to raise $785 million to bring their mine to production. The company recently raised $80 million AUD via equity financing, about $60 million AUD, or $46.5 million USD, of which is going towards the project construction CAPEX. However, the company plans to obtain the remaining funds through debt financing and value-added strategic partners. With a payback period of 5.2 years from the start production, ioneer surprisingly has a far less attractive offering than its peers.
I believe that the company will likely end up selling a portion of its mine to a partner in order to bring it to production. While this should be mitigated to a 33% sale at the very most, it does reduce the future profitability of the company. However, this shouldn't be looked at inherently as a negative as I'd rather see the company lose some control than spiral into bankruptcy.
Something else that investors should be aware of is the presence of a rare strain of buckwheat on the site. Only known to grow in a small plot within the planned site of operations, if the company were to proceed, they would potentially eradicate the species. The plant has a strong affinity for boron and lithium-rich soil, making the uniqueness of the plot that I touted earlier as an asset, a potential detriment as finding a place to transplant it may prove rather difficult. There will be a hearing later this year that will determine if it is placed on the endangered species list which, if deemed an endangered species, could create a major roadblock for the junior lithium company. I am of the opinion that this will ultimately prove to be a non-issue, but this additional uncertainty is certainly cause for concern.
ioneer has some valuable catalysts approaching, with plans to announce an offtake agreement in the next month or two and, more importantly, a strategic partner at the end of the quarter. Both of these will provide incredible security for investors and provide a far clearer picture into how the company plans to operate moving forward. As such, I expect the company to reach a value of $.65 per share by the end of the year, with the potential to reach $1.00 by the time production starts. This is all heavily reliant on the terms of the company's strategic partner agreement but, following past trends in the sector, seems likely to play out similarly.
My favorite company in this article, Lithium Americas, has struck a strong balance between risk mitigation and the retention of a fairly discounted share price due to the remaining risk. While I have not recently covered the company, this does not reflect a lack of interest or excitement about the company's operations. Instead, I'm waiting for Lithium Americas to release their Definitive Feasibility Study and announce their financing plan for Thacker Pass until I cover the company again. Upon those two events, which are likely to happen in rapid succession, if not at the same time, I will release an updated, and thorough, thesis of the company. That being said, my previous analysis of the company, which required a slight update after COVID, covers the ins and outs of Lithium Americas' planned operations. Fellow Seeking Alpha author, Austin Craig, has more recently completed an analysis on the company, which I highly recommend that those interested give a read.
With no production as of now, Lithium Americas plans to bring two separate mines into production within the next two years. This is a pretty substantial move, especially considering the size of each mine. The company's project in Argentina, the Cauchari-Olaroz project, which received its DFS in late 2019, is expected to produce 40,000 tons of lithium carbonate per year. The company's Thacker Pass project, located in Nevada, USA, is expected to produce 60,000 tons of LCE per year, according to the PFS released in mid-2018.
While Lithium Americas only owns 49% of the Cauchari-Olaroz project, the company currently owns 100% of the Thacker Pass project. The Cauchari-Olaroz operating costs are expected to be $3,576 per ton of lithium carbonate. At Thacker Pass, the company will follow a similar model as ioneer. Operating costs of $2,570 per ton are made possible by the sale of byproduct credits that amount to $1,518 per ton. In other words, without byproduct credits, the operating costs are $4,088 per ton of lithium carbonate.
Cauchari-Olaroz is expected to operate with an EBITDA of $307 million, compared to Thacker Pass' expected EBITDA of $520 million -- $246 million for the first phase. However, Thacker Pass' PFS was completed without the production of lithium hydroxide in mind as, at the time the study was completed, the market showed little evidence that there would be a significant shift to the compound. More recent comments from Alex Zawadzki, Lithium Americas President of North American Operations, (8:25, 10:29), indicate that the company will ultimately favor hydroxide production at Thacker Pass. As such, these figures are likely to be largely corrected following the company's DFS.
It is worth noting who exactly owns the other 51% of Lithium Americas' Cauchari-Olaroz project. Ganfeng Lithium (OTCPK:GNENY) is the third-largest producer of lithium in the world. This makes the decision of the Chinese lithium giant to take a 51% stake in the project a tremendous vote of confidence, but it also provides more value. Ganfeng has loads of experience operating lithium projects and bringing them to production. Something that Lithium Americas does not. This partnership allows for close collaboration between the two companies and provides invaluable operating experience that Lithium Americas can then utilize. In terms of a partnership, this is even more valuable than Standard Lithium's partnership with Lanxess.
At Cauchari-Olaroz, production is expected to begin later this year. Construction has been ongoing, halted during COVID highs but has since resumed. The image below shows the brine pools, already filled and beginning their evaporation process. This demonstrates the full capability for Cauchari-Olaroz to now begin production before year's end.
Source: Lithium Americas
At Thacker Pass, production was originally expected to start in the third quarter of 2022. However, the company no longer includes that target on their website, leading me to believe that this is no longer the target for the company. With the release of the DFS now delayed for almost a year, it would be fair to assume that the company will have delayed their production target by around the same time. As such, I would expect the company to begin production at their Thacker Pass site in mid to late 2023. My price targets for the company are fairly outdated at this point but can still offer a strong point of reference.
Lithium Americas has not been shy about the fact that they intend to bring in a partner, to which they will sell a portion of the Thacker Pass project to, in order to finance the larger of the two projects. This will alter the company's future profitability, but it is unlikely that this will ultimately be a significant portion of the project. After raising $400 million, something that was fairly unexpected, it appears that my previous analysis suspecting a 20% sale of Thacker Pass equity may even be too conservative.
Adjusting the timeline to fit the altered operating conditions, I would expect a share price of around $21 for the end of the year. The following year, I would anticipate growth to around $35 per share to then reach a price of $50 the following year. Upon reaching full production in 2027, I would expect a share price of around $100. This may seem extreme, but when looking at how much lithium the company will be producing, the numbers add up. Taking a look at Livent (LTHM), which is currently valued at around $2.6 billion and produced 16,000 tons of LCE last year, Lithium Americas' potential to reap the rewards of around 68,000 (assuming a partner gains 20% of the Thacker Pass project) would be a 4.25x what Livent is producing today. Applying that multiple to Lithium Americas would provide the company with a value of just over $91 per share. This is a fairly crude metric but it goes a long way to show that such a, seemingly, pie in the sky value is actually possible. The size of the projects owned by Lithium Americas is truly massive and the calculations completed for my thorough review of the company last year provide a fair look at the potential for the company.
Odds are, one of the companies on this list will fail. Perhaps more. I provide a far more in-depth look into each company's risk profile in each company's individual article but finding the winners and the losers can ultimately prove to be a coin flip. If there's anything we learned over this past year, it's that we should all make a habit of expecting the unexpected. However, a close look at each company can help shed some light as to which ones are more likely to experience the unfortunate unexpected. I'll explain how I chose to deal with this risk in the section below.
Another risk that this thesis is subject to is capital allocation risk. With production still years away for most of these companies, there's the potential for growth to stunt as momentum dies down. By just having your money sitting in a company that isn't doing much movement, it isn't being put to good use and is somewhat of a waste. However, due to the high risk associated with lithium juniors, I wouldn't recommend allocating a significant amount of an investment account to these companies anyway, lessening the impact of this potential risk.
The final overarching risk of this thesis is the failure of lithium to maintain fair pricing. While weaker lithium prices still allow for success, as juniors can rely on their journey to production in order to stimulate value growth, they may struggle to secure the funds necessary to complete their journey. Financiers are far less likely to fund a project in a weak market, leaving juniors unable to acquire the necessary funds to continue. Additionally, while growth would still be possible upon reaching production, it would be far weaker than it otherwise would've been and would no longer offer a favorable risk/reward profile. While I maintain a bullish outlook for the lithium market, it is a lingering possibility.
If I were to average the recent performance of these companies and compare them to the top three producers, Albemarle (ALB), Sociedad Química y Minera (SQM), and Ganfeng, the numbers speak for themselves. Over the last six months, the juniors listed in this article averaged a 297.3% return while the three majors averaged a 78.75% return. Now, a 78.75% return in six months is nothing to blow off, but the juniors still blow the majors out of the water.
I gave a pretty somber warning in the previous section: "Odds are, one of the companies on this list will fail. Perhaps more." I mean that, but that isn't reason to panic. First of all, some have a greater chance of failure than others. Take Lithium Americas, for example, some may say that the presence of two projects makes for greater uncertainties, and they're right, but it also allows the company to spread their risk a bit. Cauchari-Olaroz is far more likely to succeed, with a major lithium producer at the helm and the utilization of standard brine extraction procedures. The project has also already published its DFS and is fully funded to production. In my article covering the company, I determine that the company's Cauchari-Olaroz project will prove valuable enough to double Lithium Americas' current value on its own. This hedges against the risk that Thacker Pass may fail. Standard Lithium is another stand-alone lithium junior that offers fair risk-aversion but via a different means. For those only considering one lithium junior, I would point you towards one of these two companies.
However, there is a second response to this warning that, in my eyes, is the far better approach. Sure, keep Standard Lithium or Lithium Americas, but add more juniors. With growth that will dramatically surpass 100% for successful juniors, one, or even two, failures will still result in fair returns. It's a bit strange to buy into a few companies with the expectation that one may be sold for a tremendous loss but take a look at the disclosures down below and you'll see that it's exactly what I've done.
As I've stated already, Lithium Americas is my favorite company on this list. It's really my favorite company period. I believe the Cauchari-Olaroz project offers a substantial safety net while Thacker Pass offers some incredible growth potential. This fine balance is unavailable in other lithium juniors and makes Lithium Americas positively unique.
Beyond Lithium Americas, however, I have a few other companies that I identify as prime candidates. Beginning with Neo Lithium, I like this company for reasons similar to Lithium Americas. While they don't have the incredible safety net that Lithium Americas has, they do have a world-class partner. While not a lithium producer, CATL is well versed in the requirements for battery-grade production and will likely provide a strong offtake agreement soon. Neo Lithium has the most secure lithium project, pre-DFS, giving me confidence in its ability to execute on its promises.
Moving on, E3 appealed to me because of its DLE technology. While Standard Lithium is unquestionably more advanced than E3, with the hedge of other lithium juniors I didn't feel the need to take on the safer Standard Lithium. As such, with the desire to grab a company at the forefront of this technological change, E3 stood out to me. The potential for expansion is also important to note and the project's economics are appealing as well. While a bit riskier than Lithium Americas or Neo Lithium, E3 offers its own unique component to my diversified junior portfolio.
The final company I own from this list is Cypress Development. I like them because of the severe discount that the company currently trades at. My position in Cypress is the smallest of the bunch due to the greater risk associated with the company. However, its strong discount relative to peers is hard to pass up; Cypress has the potential to be the largest percentage gainer of any other company in this article. Lithium juniors are a risky investment path to go down but, if the right precautions are taken, it is one that I believe offers a rather favorable risk/reward profile.
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