Lithium Americas Corp. (TSX: LAC) could become the world’s lowest-cost lithium producer
SmallCapPower | January 12, 2017: Lithium has been touted as the ‘gasoline of the future’ due to its essential role in batteries. As the world shifts to green renewable technologies—energy storage, electric cars, solar panels—markets for lithium batteries is expected to grow by 30% annually through 2025. With growth of worldwide lithium carbonate (LCE) supplies trailing demand, LCE spot prices have doubled in the past decade, even tripling in Chinese spot markets in 2016 alone.
Timing and resources could not be better for Lithium Americas Corp. (TSX: LAC) as it paves the way to becoming the world’s lowest-cost lithium producer. In conjunction with the growing market for energy storage and its joint venture with the world’s leading lithium producer, Lithium Americas is positioned as a promising speculation for the long term.
During Q1, 2016, Lithium Americas announced a 50/50 joint venture with Sociedad Quimica y Minera de Chile (SQM) for the Cauchari-Olaroz project in Jujuy, Argentina. Cauchari-Olaroz is believed to be the world’s third-largest lithium brine resource, located in the lithium-triangle of Argentina; source of the cheapest and highest quality lithium brine deposits in the world. The site benefits from a supportive Jujuy government and excellent infrastructure, including a paved highway, fresh water site, natural gas pipeline, access to labour, and a deep sea port. The mine features a healthy potash reserve (see chart below) as a by-product, further reducing operating costs. Cauchari-Olaroz is fully permitted with construction scheduled for 2017, and Stage 1 production in 2019 of 20,000 tpa. A Preliminary Economic Assessment (PEA) identified Lithium Americas as having one of the lowest operating costs of US$1,332 (including potash by-product credits) per tonne of lithium carbonate in the industry.
Cauchari-Olaroz Lithium Reserve and Resource Estimate
Cauchari-Olaroz Potash Reserve and Resource Estimate
SQM is considered the world’s largest and lowest-cost producer of lithium from brines, with decades of development and operating experience. The benefits of this joint venture not only include an accelerated learning curve of the latest technology and extraction methodologies, but an opportunity for Lithium Americas to implement these operational learnings to its solely-owned Lithium Nevada project. SQM has a long history of successful joint ventures, which further de-risks on-time production and development of Cauchari-Olaroz.
Lithium Americas is comprised of three subsidiaries: Minera Exar SA, Lithium Nevada Corp, and Rheominerals Inc. The 50/50 joint venture Cauchari-Olaroz mine falls under Minera Exar SA. A 2012 definitive feasibility study highlighted a pre-tax NPV of US$738M, assuming production capacity of 20,000 tpa and LCE average prices of US$5,900. However, an updated NI 43-101 Feasibility study is expected by Q4 2017, leveraging rising LCE prices, falling production costs (currency and technology) and doubling capacity to 40,000 tpa. The site also benefits from sales of by-product potash (40,000 tpa), which further offsets production costs.
As for the Lithium Nevada mine, a January 2012 preliminary feasibility study calculated a pre-tax NPV of US$262M using a base delivery case of 689,850 tonnes of dry mill feed for 21 years. Lastly, Rheominerals, a specialty clay minerals company, is another asset worth mentioning, but due to lack of available valuation metrics, was not included in the peer comparison.
Comparison with Industry Peers
*All NPV values at 8%, All figures are in CAD
Lithium Americas (LAC) has the potential to be an industry disruptor with world class, low-cost operations thanks to the technical expertise of SQM. With the average P/NAV for mining companies at roughly 0.7x, LAC is far below this figure. Compared to Nemaska Lithium Inc. (TSX: NMX), LAC appears to be undervalued with a P/NAV of 0.31x vs 0.35x. Additionally, operating costs per ton of lithium is substantially lower for Lithium Americas, nearly a third of NMX. Although Critical Elements Corporation (TSXV: CRE) appears to be the best value of the three companies, its per ton operating costs are more than twice that of LAC, leaving CRE vulnerable to lithium price volatility. Additionally, it is worth noting that this calculation does not include Rheominerals, an asset of LAC which is pure upside. Also, this calculation does include the updated plans to double lithium production to 40,000 tpa and potash production to 80,000 tpa, which would significantly increase the net asset value of Cauchari-Olaroz.
With no revenues as of yet, Lithium Americas is up 300% this past year. Perhaps this is a sign that its large-scale lithium carbonate production capabilities and advantages of its joint venture are priced in. According to its feasibility study, LAC has an option to exercise an off-take agreement in place with Symatec (Magna), to purchase up to 25% of the company’s LCE production at a 5% discount to market prices. In return, LAC will receive interest-free financing for project development equal to its off-take rights. Without this loan, Lithium Americas will likely need to raise capital to finance the project to production, as it has only CAD$13.3M in cash, risking share dilution. Nonetheless, Lithium Americas offers investors a low-risk jurisdiction, production by 2019, and a solid after-tax internal rate of return. With an updated feasibility study expected at the end of this year, Lithium Americas is definitely a company to keep an eye on, as it is on pace to become a world-class lithium producer.