Fundamentals & Near Term Drivers Suggest a Switch out of PLL and into LAC
Prompted by recent economic data providing evidence of the peak inflation narrative, a market rebound has been consistent since July 1st as the S&P returned +13% and the Dow returned +10%. Far outperforming these gains has been the performance of the lithium developers, partly riding the momentum from passage of the Inflation Reduction Act and partly due to the very positive financial results and guidance updates from the larger producers such as Albemarle (ALB) and Livent (LTHM).
Specifically, Cypress Development (CYP.V) advanced by +28% since July 1, while Lithium Americas (LAC) and Piedmont Lithium (PLL) have increased by +55% and +83% respectively. Piedmont Lithium’s dramatic recent rise can be attributed to excitement from their development pipeline given that four lithium projects are currently in simultaneous development. Initial production from Quebec (37% effective interest in Sayona Quebec + binding agreement for 50% production offtake) is expected to come online in 2023, followed by a project in Ghana coming online in 2024 and then followed by a massive North Carolina project expected to start production by 2025. Meanwhile with Lithium Americas, according to management, construction for the massive Cauchari-Olaroz project is over 90% complete. The 20,000 tpa (initial) processing plant is expected to commence commissioning shortly.
At the current time and for the reasons listed below, we would advocate a switch out of Piedmont Lithium and into Lithium Americas.
With Piedmont, we see the execution risk as very elevated given four simultaneous projects (one being in geopolitically sensitive Africa) currently being in development. Along with the fact that two of the near term projects coming on-stream are for spodumene production (essentially feedstock for North American lithium hydroxide production), we feel the recent run-up in the stock price is unwarranted.
With Lithium Americas, we see a management team which has been laser focused on construction at Cauchari-Olaroz and see meaningful production of battery-grade lithium carbonate in the very near term (process plant commissioning is expected shortly). Moreover, given management’s intent to spin-out the Nevada based Thacker Pass asset (something we believe is very much overlooked by the market), we expect much more near term value to be unlocked in the months ahead.
Though a rising (lithium) tide can float all boats, we feel that the recent steep increase in PLL shares has run ahead of itself given the near-term execution risk of four projects currently under simultaneous development. From the Piedmont pipeline, first expected to production is the Authier project, located in Quebec and primarily being developed by Sayona Mining (SYA.ASX). Sayona Mining acquired 100% of the Authier project in July 2016, since then, three phases of drilling was completed at the time the revised Authier Definitive Feasibility Study was published in November 2019. The DFS highlighted a nearly 14 year LOM producing 114,000t of spodumene annually. Though a different project, we can’t help but think of the fiasco which was the other well known Quebec based lithium project, Whabouchi (formerly listed on the TSX as Nemaska Lithium). Before being bailed out by the government of Quebec and the Palinghurst Group, the project had numerous construction delays and massive cost overruns to the tune of $375M shortly after completing a project financing deal for $1.10B.
Otherwise, Piedmont's other near term project, the Ghana based Ewoyaa project is expected to begin production in 2024. Like the Quebec project, Ewoyaa will also be spodumene operation which Piedmont is expecting to use as feedstock for lithium hydroxide conversion plants in North America. Not only is geopolitical risk higher in Africa, but generally speaking, spodumene projects should be valued at a discount to actual battery grade lithium carbonate production.
By comparison, Lithium Americas has been unilaterally focused on developing the Cauchari-Olaroz Project which will have meaningful initial production at 20,000 tpa (plant commissioning shortly given that construction is over 90% complete) with a Phase II ramp to 40,000 tpa shortly afterwards. As an additional near-term driver, since the beginning of the year management has been looking to spin-out its Nevada based, Thacker Pass development project from the Argentinian based Cauchari-Olaroz. With the recent Q2/2022 financial results announced on July 28, it was specifically mentioned that “the company continues exploring structuring alternatives to effect the separation". Given the continued strength of the lithium markets (and most specifically with strong investor interest for US domiciled lithium production), we think the spin-out of the Nevada asset can be a major catalyst for the company in the short term.
What sort of value can Thacker Pass currently garner? The best way to gauge any benchmark value is to look at its nearest comp – Cypress Development’s Clayton Valley development project which is also located in Nevada. Given the current resource statement, an in-situ value per LCE (T) was calculated as $0.16 based on Mcap for P&P reserves or $0.02 based on Mcap for the global resource. Using those very same Clayton Valley in-situ multiples, while also applying a zero premium or discount (1.0x multiple for conservatism), a comparable inferred Mcap of approximately $500M can be attributed to Thacker Pass, as a standalone project.
We would argue that a premium multiple is warranted for Thacker Pass seeing as the life of mine and annual operating capacity are larger when compared to Clayton Valley. Moreover, so are the corresponding after-tax NPV8% and IRR metrics, though we do acknowledge a higher average LCE price/tonne in the Thacker Pass Pre-Feasibility Study (PFS) versus that of the Clayton Valley PFS. Lastly, the average LOM cash cost for Thacker Pass is also lower than that of Clayton Valley. Most importantly, Thacker Pass development is well ahead of that of Clayton Valley – early-works construction is on track to begin later this year while the technical know-how from the Lithium Americas team will surely still be available post spin-out. As a stand alone, pure-play lithium project located in Nevada, we feel that investment demand will be high from both the institutional and retail sides.
At the current time and for the above listed reasons, we would advocate a switch out of Piedmont Lithium (execution risk, geopolitical risk and a necessary spodumene discount) and into Lithium Americas (meaningful near term, battery-grade lithium carbonate production along with value to be unlocked given a planned spin-out of the Nevada asset).