Rodinia Lithium (CVE:RM) (OTCQX:RDNAF) announced Tuesday the results of a preliminary economic assessment (PEA) for its Salar de Diablillos lithium brine project in Salta Province, Argentina, indicating a potentially low cost operation with a net present value as high as US$964 million, and a mine life of 20 plus years.
The results of the economic report, said CEO William Randall on a conference call this morning, suggest that Rodinia's stock is currently undervalued, with plenty of room for upside. According to the company, the project's economics compare favourably with other junior lithium explorers in the region, but Rodinia is trading at a small fraction of the price.
Indeed, investors cheered the results of the PEA done by SRK Consulting, with shares rising more than nine percent in the early morning, to trade at $0.235 as of 9:47am ET.
The report outlined two production scenarios, the first being an operation producing 15,000 tonnes of lithium carbonate and around 51,000 tonnes of potash per year, and the second producing an increased 25,000 tonnes of lithium carbonate and 85,000 tonnes of potash per year.
The first scenario returned a pre-tax net present value of US$561 million, and an internal rate of return (NYSE:IRR) of 34 percent at an eight percent discount rate and a lithium carbonate price of US$5,500, while the second alternative projected a much higher net present value of US$964 million, along with a pre-tax IRR of 36 percent.
Total initial capital costs were estimated at $144 million, and $220 million, with years to payback at 1.6 and 1.5 years, respectively. Capital costs were kept low due to an initial unlined evaporation pond, and a planned lithium carbonate plant offsite at an industrial park in Pocitos, with infrastructure, natural gas and power already in place. Initial capital costs also exclude closure costs and sustaining capital, which are estimated at roughly $80 million.
The company's management sees the first option as the base case scenario, with the potential to produce as much as 25,000 tonnes per year in the first stage in the event that further offtake agreements are secured. Rodinia, which has an existing strategic investment secured from China's largest lithium-ion battery materials provider Shanshan, said it is already in discussions with multiple groups on this front.
Randall commented: "The PEA demonstrates that Diablillos has the potential to be a low cost producer of high purity, battery-grade, lithium carbonate, potash and boric acid using conventional, environmentally friendly methods to harvest the salts.
"Due to the favourable geochemistry of the brines, our potash and boric acid production is such that revenue from the sale of these products will result in credits in excess of US$3,500/tonne of LC, more than covering our total anticipated production costs. As long as prices for potash and boric acid remain at today’s levels or higher, Diablillos has the potential to remain price competitive down to historic lows for lithium carbonate pricing.”
Operating costs per tonne excluding potash and boric acid credits were projected as low as $1,519 per tonne of battery-grade lithium carbonate for the base case, and $1,486 per tonne for the 25,000 tonne per year alternative.
However, including by-product credits that exceed the costs to produce lithium carbonate, combined operating costs were brought below zero, at negative $703 per tonne for the base case scenario. This means lithium carbonate could be stockpiled, and the company would still make money from potash and boric acid revenue.
The proposed operation for Diablillos will use conventional evaporation-based processing, similar to other lithium brine projects (considered the more economical and environmentally friendly process as opposed to hard rock), as brine is to be pumped from subterranean aquifers by a series of production wells to an initial unlined evaporation pond to increase concentration.
High grades and recovery rates, favourable lithologies, low magnesium ratios and high specific yield rates are required to ensure enough contained brine will drain out of a formation by pumping.
The Salar lithium recovery process is a combination of solar evaporation steps, in-field brine treatment, by product potash and boric acid recovery and chemical processing to produce lithium carbonate, resulting in a high lithium recovery of approximately 65 percent.
The process contemplates a series of six ponds from largest to smallest, where the largest is used to bring brine to saturation and is designed to be unlined reducing the capital cost of pond construction, the company said. Rodinia also said there is natural clay occurring near Diablillos that will allow for the construction of the initial pond, offering cost savings over lined ponds.
Any brine losses experienced in the unlined pond go straight back into the underlying Salar sediments and can be potentially recovered at a later date, the company added.
Brine extracted from the final pond will have a concentration of approximately 12 percent lithium chloride and will be transported to the treatment facility in Pocitos, where boric acid and lithium carbonate are produced.
Rodinia said the project has favourable economic potential across a range of discount rates, annual production rates, and long-term lithium carbonate prices. Indeed, at a lower discount rate of six percent, the net present value of the project jumps to $716 million for the base case, and $1.23 billion for the alternative option.
"In all cases the Salar shows robust economics consisting of large NPV values and significant positive cash flows, which position it favourably relative to other PEA reports issued for salars at a similar stage of development in the Puna region of South America," the company said in a statement.
The projected IRRs for the property are the highest when compared to other players in the region, including Lithium One (TSE:LI) and Orocobre (TSE:ORL), but Rodinia's market capitalization is the lowest.
Rodinia also said that it gained considerable insight to further improve on these numbers, with plans to review these opportunities during the feasibility study phase, which is due to begin once the PEA report is finalized. Randall said that costs could be further reduced by using clay on site. Initial production for the project is estimated for 2015, with mine construction targeted for 2013.
Investors can look forward to a host of expected developments in the next year, including the construction of a pilot plant, as well as a full feasibility study.
In early October, Rodinia reported that initial pump and tracer tests to assess the deep and shallow acquifers at the property confirmed high transmissivity and effective porosity values. The company also earlier confirmed the positive properties of the acquifers, as it said drilling at the site has consistently intersected sand and gravel dominant lithologies, with recoveries of between 10 percent and 100 percent, an important insight into what Rodinia's eventual production scenario should look like as brine typically flows much better when in loose sand and gravel.
The Salar de Diablillos property, which rests about 145 kilometres southwest of the city of Salta, has a recoverable inferred brine resource of 2.8 million tonnes lithium carbonate equivalent from an in-situ inferred brine resource of 4.9 million tonnes lithium carbonate equivalent.
In addition to its Argentina project, Rodinia holds 100 percent mineral rights to approximately 70,000 acres in Nevada's lithium-rich Clayton Valley in Esmeralda County, placing it in a prime position to benefit from increasing lithium demand.
Lithium's characteristics make it suitable for a number of uses, but for many years, the metal was used mainly in the production of ceramics, glass and as a strong aluminum alloy. However, demand for lithium has since boomed due to the advent of the rechargeable lithium-ion battery, used in anything from watches and cell phones, to BlackBerrys, iPods and for electric vehicles, power tools and military equipment.