Updated: Jun 12, 2022
Given the continued trends of grid electrification and EV adoption, we have seen clear signs for the importance of battery technology, both from the standpoint of energy storage developments and from shifting consumer preferences, most visible in growing EV demand. These trends have been further reinforced of late with WTI crude nearing the 2008 highs above $120/bbl and with the renewed emphasis on domestic supply chains and energy independence. Certain commodities have been identified as key to the latest developments in battery technologies, with some of the most critical elements being nickel and lithium. Though there is no efficient way to invest in pure-play nickel production (most nickel is produced as a by-product or dwarfed by other commodities mined by the global giants such as BHP or Rio), more concentrated lithium exposure has been perceived as possible through producers such as Albemarle Corp. (ALB), Livent Corporation (LTHM) and to a certain extent, Sociedad Quimica y Minera de Chile (SQM). Recall that with large (and accelerating) demand expected over the next 10+ years, the lithium market is expected to be in deficit for a long time coming. A total of 345,000 tonnes of processed lithium was produced in 2020, dominated by resources from the South American lithium triangle and Australia. Lithium production must quadruple between 2020 and 2030 to meet growing demand, from the 345,000 tonnes in 2020 to the expected 2.0M tonnes needed by 2030.
With record inflows driving up the very limited investments offering lithium exposure, we can seen how valuations into the aforementioned companies have far outpaced those of peer miners in the precious and base metal categories (both ALB and LTHM ranking in the top right quadrant):
Note as well that operating profits for the two largest outliers have been relatively small in relation to company size, with ALB generating $798.4M and LTHM generating $29.7M in FY/2021. Moreover, the above mentioned companies are hardly lithium pure-plays. Livent (a spin-out from the FMC Lithium Division) can be better characterized as a diversified lithium producer which manufactures downstream elements for the industrial, aerospace, agriculture and pharmaceutical industries. Products include polymers and specialty lubricants. Albemarle can be better viewed as a specialty chemicals company, producing various lithium compounds as well as other specialty metals, while SQM is more of a diversified Chile based miner. In terms of pure-play lithium miners, we can endorse two near-term producers (amongst a very short list) with interesting project profiles. Both Lithium Americas (LAC) and Piedmont Lithium (PLL) have economically robust projects on the horizon, but owing to project quality, asset focus, near term drivers, current valuation and current balance sheet health, our preference is with Lithium Americas. As can be seen below, investor appetite for the very limited lithium pure-plays has been extremely strong.
Though we went short (trading call based solely on valuation in November 29, 2021), we advocated a re-entry following a 35% correction on January 31, 2022 (link below). Our thesis continues to play out as the lithium fundamentals remain as strong as ever with the lithium carbonate price advancing by 80% YTD and reaching $79,000/t (or lithium hydroxide reaching $68,000/t). Note that despite the dramatic price appreciation in both LAC and PLL over the last two years, LAC has only advanced by 12% YTD, underperforming by a large margin the underlying commodity.
Having won the bidding war last year for Millennial's flagship Pastos Grandes lithium brine project (Salta province, Argentina), LAC provides for an attractive (and now consolidated) growth opportunity near Cauchari-Olaroz (Argentina) with the potential to extract significant synergies. The Cauchari-Olaroz project is currently under construction (85% complete) and is due to start lithium carbonate production later in H2/2022, ramping up to a rate of 40,000 tpa with a Stage 2 development plan for an additional 20,000 tpa. The project has a projected 40 year LOM with operating costs estimated at $3,600/t. The company currently has nearly $511M in treasury (representing 11% of MCAP) while construction is fully funded with available debt. Note that in terms of pricing, 80% of planned stage 1 production has already been contracted for at future prevailing market prices.
Equally important in our view is the fact that on February 28, LAC submitted a draft loan application to the US Department of Energy for funding to be used at the company’s other asset, the wholly owned Thacker Pass Lithium Project, located in Nevada. To further extract value, management is evaluating the possibility to spin out its US project. We would view the prospect of separating the US and Argentinian projects as very positive on a single project basis. This type of spin-out would lead to additional interest from specific investors looking for stand-alone asset and risk profiles in certain geographic regions, which may be constrained to them at the moment. Pure-plays always garner higher premiums, just ask any silver pure-play (...if any still exists). The time is certainly right for LAC at this current stage.