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Lithium Americas receives initial buy rating from Dundee, brings number of firms with coverage to 5

Lithium Americas (TSE:LAC) received bullish initial coverage from equity research firm Dundee Capital Markets today, as the lithium explorer was noted for having the potential to be one of the lowest cost lithium carbonate producers in the world.

Indeed, with brine resources of over 8 million tonnes of lithium carbonate equivalent, Lithium Amercias' Cauchari-Olaroz deposit in Argentina is the third largest lithium resource in the world after the Bolivian state-owned Uyuni brine and SQM's Atacama brine in Chile.

The company's main Cauchari-Olaroz properties cover 82,498 hectares of two adjacent Argentinean salars, Cauchari and Olaroz, with updated measured and indicated resources of 5.3 million tonnes and 2.7 million tonnes of inferred resources.

In addition to this hefty resource, the company is aligned with strategic partners Magna International and Mitsubishi Corp, two heavy-weights in the automotive industry, which own 17% of Lithium Americas.

The two big-names have off-take option agreements in place for up to 37.5% of the company's production in exchange for financing up to 37.5% of the capital costs via interest-free loans. Even with these agreements locked in, Lithium Americas is still able to sell its lithium resource to others, retaining 100% interest in its project.

All this has led Dundee to initiate coverage of Lithium Americas with a "buy" rating, and a 12-month price target of C$3.15, up from the company's current trading price of $1.66.

The Canada-based lithium explorer expects a phase one production rate of 20,000 tonnes per year after start up at Cauchari-Olaroz, with potential to ramp up to 40,000 tonnes per year in phase two.  Dundee noted that even though the rate is higher than the company's closest peer, Lithium Americas has completed extensive test work ensuring the feasibility of this level of production, with full capacity equivalent to the world's largest lithium carbonate equivalent producer today.

Dundee even used conservative estimates for its calculations, including a lower than projected 30,000 tonne per year output rate, a lithium price of $5,500 per tonne, total cash costs of US$2,089 per tonne excluding by-product credits, and a capex of $400 million for both phases of construction.

In a recent pre-feasibility study, the property was estimated to have an after-tax net present value of $715 million, with cash operating costs estimated at US$1,434 per tonne, excluding additional credits.

The equity research firm noted that any potash or boron production could help decrease costs further, significantly improving project economics.

According to Dundee, assuming potash sales of 80,000 tonnes per year at US$450 per tonne, cash operating costs could potentially drop down to near US$534 per tonne of lithium carbonate equivalent, and boost potential gross margins to almost US$5,000 per tonne.

In addition, exploration upside from the project is abundant, as the company has claims in Argentina that could account for an additional 1.5 million tonnes of lithium carbonate.

Lithium from brine resources, which is used for lithium-ion batteries in a host of consumer electronics and electric car and aerospace applications, relies heavily on evaporation ponds to partially extract the lithium mineral from the brine. 

As Cauchari-Olaroz is located at a relatively high altitude of 4,000 meters above sea level, characterized by arid conditions and high levels of sunlight, conditions for the company's main asset "seem right" for the evaporation process to work effectively, Dundee said.

With roughly $26 million of cash on hand and no debt as of the end of February, Dundee believes Lithium Americas is funded through to the definitive feasibility stage of the project, expected in the first quarter of 2012, with initial production anticipated in late 2014.

Dundee's coverage brings the number of firms with research on Lithium Americas up to five, with price targets ranging from $3.15 to a high of $4.50, nearly triple the company's current value.