Value Investors Club / LITHIUM AMERICAS CORP (LACDF)

Description

partner, Sociedad Quimica y Minera de Chile SA (SQM), is developing the Cauchari-Olaroz (Cauchari)

Lithium Project, located in Jujuy, Argentina, through its 50% interest in Minera Exar S.A. In addition,

Lithium Americas owns 100% of the earlier-stage Lithium Nevada Project in the U.S. The Cauchari mine

is expected to reach commercial production in 2019 and will ramp in two stages, ultimately to 50,000

tons per year of lithium carbonate equivalents (LCE) at the very low end of the cost curve ($2,500/ton).

Australia-listed Orocobre Ltd (ORE AU) has a contiguous brine project in Argentina called Olaroz with

similar geo-chemical characteristics and is currently ramping up, with expected annual production in

FY18 (ending 6/30/18) of 14,000 tons of LCE at a cash cost of just under $4,000 per ton (on its way down

to $2,500 per ton as well, ultimately). As it ramps up towards capacity of 17,500 tons per year, it points

the way forward for Cauchari and to some extent de-risks the execution phase.

This is a pretty simple story, one of the few pure-play lithium companies, and in terms of resource size,

this should be on par with the majors including SQM, FMC, Ganfeng Lithium (002460 CH) and Albemarle

(ALB). From our perspective as investors, we are right in the sweet spot for the best gains – just over a

year before commercial production, fully permitted, financing fully in place, partnered with a number of

very well respected industry players, and at a time in the commodity cycle where supply is barely able to

keep up with demand.

Lithium Supply and Demand:

Lithium Americas has a great corporate presentation, last updated in September, and we’ll steal a

couple slides, but in a nutshell, the electrification of the world’s fleet of vehicles would lead to a massive

3 million tons of LCE, versus today’s market of 180K tons (well some would argue it’s currently more like

220K tons when adding up all hard rock and brine production globally). Based on current plans by major

auto OEMs for EVs, the lithium market is expected to grow over 15% per year until 2025.

If you look at the new supply that could potentially come onstream in the next 5 years or so (some

earlier stage projects may slip into the 5-10 year time frame), it adds up to another 425K tons per year,

which sounds like a lot considering that we’re running at about 220K tons currently, but think about the

demand trajectory, and the need to double production every 5 years at a 15% compounded growth rate.

Depending on how quickly we electrify the world’s fleet, there could be a shortfall for years. In most

supply/demand models, we’ll find a potential shortage sometime in 2018-2020.

All this may be baked into the current price ($24K/ton spot price for lithium carbonate and $21K/ton for

lithium hydroxide) but we don’t know that for sure. We just know that there is a potential shortage that

will not likely go away until 2019-2020 at the earliest.

Cauchari-Olaroz Project:

Cauchari-Olaroz is located in the Jujuy province in north-west Argentina, and it is one of the largest

lithium brine resources in the world. It is fully permitted, with recent affirmation (March 2017) by the

secretary of Mining and Hydrocarbons of the Province of Jujuy. In early 2016, SQM purchased a 50%

ownership stake in Minera Exar SA, the local operating business of Lithium Americas. In addition to

some much needed cash ($25 million, a steal), this gave Lithium Americas access to one of the best (if

not the best) lithium operators in the world, significantly derisking future mine development. Note that

actual ownership of Cauchari is split at 45.75% each for Lithium Americas and SQM, with the remaining

8.5% going to the Jujuy provincial government. In early 2017, the companies provided an update which

outlined a two stage ramp-up to 50K tons per year of battery –grade lithium carbonate. Stage 1 calls for

an investment of $425 million (at 100%) for average annual production of 25K tons per year LCE at cash

cost of $2,495/ton for 40 years. Average annual EBITDA at 100% ownership, using a LCE price deck of

$12,000/ton would be $233 million, for an after-tax NPV at a 10% discount rate of $803M, after-tax IRR

of 28% and a payback period of 3.4 years. Sustaining capital beyond that would be just $5 million per

year.

In terms of financing, the company announced a financing agreement with Ganfeng Lithium ($9.5 billion

market cap in China) in January 2017, where Ganfeng paid C$64 million for 19.9% ownership of the

company. Ganfeng also agreed to a US $120 million construction financing loan at a pretty reasonable

interest rate of about 8%. Ganfeng also secured the option to buy up to 70% of Lithium America’s share

of Stage 1 production at Cauchari. The company also signed an agreement with Bangchak Petroleum

($1.7 billion market cap in Thailand), where Bangchak paid C$42.5 million for 16.4% ownership of the

company and agreed to a US $80 million construction financing loan at a similar interest rate to

Ganfeng’s. Bangchak has the option to buy up to 15% of Lithium America’s share of Stage 1 production

at Cauchari. Lithium Americas has now secured more than enough working capital to fund its share of

the Stage 1 initial capex at Cauchari.

Lithium Nevada Project:

Based on the 132 page NI 43-101 compliant technical report dated May 31, 2016, the Lithium Nevada

project is located in Humboldt County, Nevada on 15K hectares and has a measured, indicated and

inferred resource of 5.3 million tons (100% owned). This is lithium-bearing clay-rich volcaniclastic

sedimentary rocks, and to date there are no analogous deposits in operation worldwide – we do know

that this has some of the highest grade lithium claystones in North America. A resource of this size

could support a mine life of 20 years for the first phase of 20-25K tons per year LCE. Based on an update

provided a couple weeks ago, the company expects to complete a preliminary feasibility study by the

end of 2Q18. All preliminary drilling is focused on just one of 5 zones, so there is a real possibility that

the resource will end up being far larger, supporting a capacity increase and longer mine life.

To get a sense for valuation, there is a small Canadian company called Bacanora Minerals with a single

project in Mexico called the Sonora Lithium project. This project has a similar size, with a net measured,

indicated and inferred resource of 6.0 million tons, and is at a similar stage. With a market cap of

roughly $170 million, that’s about $28 per ton in value, pegging Lithium Nevada at a value of about $150

million. It could certainly end up being far more valuable as we get farther along, but that is in the right

range in terms of NPV for a project that’s still a few years out (first production likely by end of 2022), has

20-25K tons per year of production at a cash cost of say $4K/ton, pricing of $12K/ton, capex of $15-

20K/ton and a 15% discount rate.

Valuation:

Junior miners always seem to trade at a discount to fair value for a whole bunch of reasons: execution

risk (ORE AU is a good case study, they had major execution issues that were not explained well to the

market, hence their extreme underperformance – ultimately we think it will prove to be far less a case

about poor assets than about poor management of those assets but time will tell), timing risk (the

longer the time to peak production, the more risk of adverse pricing), financing risk (self-explanatory)

and commodity risk (also self-explanatory). The classic valuation method: run an NPV under a few

different scenarios, apply different discount rates, and take a weighted average of those scenarios. The

problem: garbage in, garbage out – too many inputs means wide ranging NPVs. The more comps with

established production histories (ie majors) you have, the more the market will start to play a relative

value game.

We now have a few established majors (SQM, Ganfeng, FMC, ALB). Because they are at different points

in their growth trajectories, their EBITDA multiples will probably be more homogeneous if we go out a

few years. Let’s take CY19 estimates and take an average EV/EBITDA multiple for this peer group: we

get 14.5X. Sounds high but remember we’re looking at a demand CAGR of 15% for lithium over the

foreseeable future, and supply will struggle to meet demand for the next few years at least. We can

assume that the average price deck used is $12,000 per ton, although that’s a guess (we’ve checked

consensus and it’s close). How do we take this information and apply to a late-stage junior miner? Go

out a few more years and discount back. Cauchari-Olaroz should be pretty easy: 4 year ramp-up from

2019 – assume we’ll hit peak rates in CY23 – 50K * $12,000/ton - $2,500/ton * 45.75% = $217M.

Lithium Nevada is more of a wild guess but given what we know, we’ll assume $150M (remember it’s

100% owned) and first full year of production at CY23. Combined that’s $367M. Discounted back at

15% to 2019 we get $210M. Let’s compare to the enterprise value: at a US price of $1.47, with 437.2

million fully diluted shares outstanding, and net cash of $6.4 million, the enterprise value is currently

about $635 million. If we assume the company draws down the revolvers to fund their portion of Phase

I capex (beyond which this becomes self-funding given minimal sustaining capex) the enterprise value

increases to $840 million. $840 million / $210 million is 4.0X. It takes time to re-rate towards multiples

on par with the majors, but by 2019, it’s probably fair to assume we re-rate to a higher multiple. You

can do the math, but let’s start with a fair value of $5.00 for LACDF (a bit under C$4.00 for LAC CN).

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Preliminary feasibility study for Lithium Nevada Project: 2Q18
Production update on Cauchari-Olaroz Project: quarterly through 2018
Initial commercial production at Cauchari-Olaroz (Phase 1): 1Q19

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			2017	2018
Price:	1.87	EPS	NA	NA
Shares Out. (in M):	437	P/E	NA	NA
Market Cap (in $M):	643	P/FCF	NA	NA
Net Debt (in $M):	-6	EBIT	0	0
TEV (in $M):	637	TEV/EBIT	NA	NA