Description

Investment Thesis

I believe the pendulum has once again swung too far, creating a very attractive buying opportunity in the lithium mining space.  The newly created Argentine pure play, Lithium Americas (Argentina), is my favorite way to express this bet, although I believe a rising tide will float all boats when the storm clears.  With an EV of about $1.0B and EBITDA ramping to over $300M in the next 6-12 months, a self-funded development plan with an unleveraged balance sheet, bottom quartile cash costs and a mining-friendly jurisdiction, I’m finding a lot to like in this stock.  I think it could easily be a double within 12 months, and I’m giving it a $12 price target.  

Background

In early October, Lithium Americas completed the separation of its US-based and Argentina-based operations, with Lithium Americas (retaining the original ticker LAC) becoming a pure US miner and Lithium Americas (Argentina) Corp (ticker LAAC) commencing trading on October 4, 2023.  The rationale for the separation was that it would allow for increased focus on each core project separately to accelerate growth and strategic plans.  More likely, the driving force was rising geopolitical tensions between the United States and China, with LAC’s partnership with China’s Ganfeng Lithium in Argentina.  With Lithium Americas looking to advance the Thacker Pass mine in Nevada, a project that had recently drawn a $650M investment from General Motors, and a large component of the funding for the project expected to come from the Department of Energy’s Advanced Technologies Vehicle Manufacturing Loan Program, it simply cleared the path for approval by separating the Argentine operations from the US business.  

Cauchari-Olaroz Project (44.8% owned):

LAAC’s flagship Cauchari-Olaroz project is the first new lithium producer in Argentina since 2015.  The traditional brine lithium project, located in the Jujuy Province of Argentina achieved first production in June 2023.  Infrastructure around the project includes major paved highways, with a connection to the Antofagasta port in Chile for exports.  It is operated through a holding company called Minar Exar, which is a JV between LAAC (44.8% ownership), Ganfeng Lithium (46.7%) and Jujuy Energia y Mineria Sociedad del Estado (8.5%).  The project is expected to produce 5K tons of lithium carbonate in 2023, with nameplate production capacity of 40K tons targeted by mid 2024.  Offtake agreements are in place with over 90% of LAAC’s attributable production already secured with Ganfeng Lithium and Bangchak, an energy  company in Thailand.  Cauchari-Olaroz represents arguably one of the lowest cost large scale lithium mines in Argentina, and it will provide LAAC with a considerable platform for growth.  

Work on a Stage 2 expansion is already underway, and once complete, capacity will be over 60K tons Li2CO3 (likely by 2028).  As of June 30, 2023, $895M of the $979M in total capital costs had been spent and LAAC currently has plenty of liquidity to fund the rest ($167M in cash and an undrawn $75M revolver).  With first quartile cash costs of under $6,000/ton, Stage 1 should generate attributable free cash flow of about $100M in ‘24 growing to about $400M by 2028, enough to fully fund the $500M capital cost for the Stage 2 expansion (at a 100% basis).  

Pastos Grandes Basin (100% owned), Sal de la Puna (65% owned):

LAAC also holds a 100% interest in the Pastos Grandes project 100 km south of Cauchari-Olaroz in Salta Province, Argentina.  Pastos Grandes was acquired in January 2022 through the acquisition of Millennial Lithium for $390M.  The adjacent Sal de la Puna project (65% owned) was acquired in April 2023 through the acquisition of Arena Minerals for $227M.  Pastos Grandes is controlled by both LAAC and Ganfeng Lithium, with Ganfeng owning the other 35% of the Sal de la Puna project, in addition to the neighboring Pozuelos-Pastos Grandes project, which it acquired for $962M in 2022.  It appears likely that there will be further collaboration between Ganfeng Lithium and LAAC given the proximity and shared ownership of the projects in the Basin.  Management is targeting a construction decision as early as 4Q23, which could lead to first production by 2028 or so.  Annual production will be up to 25K tons Li2CO3 per year.  The project is situated within the Department of Los Andes, near highway access to the international border with Chile and connections to the ports of Antofagasta and Mejillones in northern Chile.  Both ports are major transportation hubs for the importation of mining equipment and the exportation of mineral commodities.  

Lithium Market

Global demand for lithium has slowed down from +44% in ‘21 and +48% in ‘22 to about 29% in ‘23 per JP Morgan estimates, while supply is catching up, with growth rates increasing from +18% in ‘21 and +34% in ‘22 to +40% in ‘23.  With demand continuing to moderate amidst a tough interest rate backdrop and supply still strong, the market appears to be shifting from a deficit to a surplus, far sooner than most expected a year ago.  That said, downstream inventories appear to be quite depleted, and we’re hearing that appetite from China is starting to pick up again as prices start to dip into the high end of the cost curve.  We may overshoot again, but my guess is that we will not stay below $20K/ton for long.

Valuation:

With 160M diluted shares at $5.81 and about $90M in net debt, LAAC has an enterprise value of approximately $1.0B.  Cauchari Olaroz will likely ramp to a run-rate of about $320M/yr in attributable EBITDA per year by mid to late 2024 for an EV/EBITDA of 3.2X at $25K/ton pricing.  With operating costs of $6K/ton there’s little danger of a liquidity crisis, although the Stage 2 development would have to be dialed back if prices dropped below $15K/ton as Stage 1 free cash flow is earmarked to fund Stage 2 capex.  I think there’s a pretty strong case for multiple re-rating as sentiment shifts once again - it’s amazing to me how the same analyst community can shift from “we will have a growing deficit through the end of the decade” to “the surplus has already arrived” in less than 12 months.  The reality is that supply Always disappoints, bottlenecks Always appear, and the EV story is at the S curve of adoption - I think we will likely see some stabilization at or near current levels.  

Catalyst

Earnings next week, stabilization in lithium spot price as Chinese buyers start restocking again.  Street has all but capitulated, just like they did during Covid.