November 05, 2018 - 11:16pm EST by
2018 2019
Price: 0.81 EPS NA NA
Shares Out. (in M): 911 P/E NA NA
Market Cap (in $M): 561 P/FCF NA NA
Net Debt (in $M): -282 EBIT 0 0
TEV (in $M): 279 TEV/EBIT NA 0

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Nemaska Lithium (NMX CN or NMKEF) is an advanced stage, de-risked lithium developer with
a 100%-owned hard-rock (spodumene) project in Quebec called Whabouchi that is expected to
reach commercial production of spodumene in 3Q19 and commercial production of lithium
hydroxide and carbonate in 3Q20. We believe this is the most compelling pure lithium play in
the market, with conservative upside of 100% to C$1.60 per share (assumes 1X NAV using
$10,000/ton long term pricing for both lithium hydroxide and carbonate).
The company utilizes a unique, patented approach to process lithium concentrate directly into
lithium hydroxide, skipping the intermediate step involved in the more traditional method, where
lithium carbonate is first produced and processed further into lithium hydroxide. Per the
feasibility study released in January 2018, at a capital cost of C$875M (US $674M), the project
will produce 23,000 tons/yr of lithium hydroxide at a cash cost of C$3,655/ton (US $2,811/ton)
and 11,000 tons/yr of lithium carbonate at a cash cost of C$4,424/ton (US $3,403/ton). Because
of this efficient process, Nemaska will sit at the bottom end of the cost curve, below Albemarle’s
US $3,500/ton, SQM’s $3,800/ton and Tianqi’s $4,500/ton cost. Nemaska’s feasibility study
determined that the 33-year project will generate an unlevered after-tax NPV (8%) of C$2.4B
(US $1.8B) for an IRR of 30.5%, assuming lithium hydroxide prices of US $14,000/ton and
lithium carbonate prices of US $9,500/ton for the first 5 years and $12,000/ton thereafter. The
resource contains 1.38M tons of LCE (measured & indicated). Note that the current spot price
for lithium carbonate is roughly $11,700/ton and for lithium hydroxide is $16,400/ton per
Lithium America’s October 2018 presentation.
The company has 3 to 5 year take-or-pay offtake agreements with Johnson Matthey, FMC, LG
Chem and Northvolt covering 94% of their expected capacity. For those skeptical of this
proprietary technology, offtake partner Johnson Matthey, which is a very well-respected
producer of catalytic converters and various other emission control products, has very publicly
lauded the quality of hydroxide produced by Nemaska in their pilots to date. Nemaska’s
hydroxide grade of 57.5% is higher than that of FMC, Albemarle and Tianqi Lithium at 56.5%
Nemaska closed a C$1.1B (US $0.9B) financing package in May 2018 that included a US
$350M bond offering, a US $150M streaming facility with Orion Resource Partners and
C$454M in equity supported by major shareholders Softbank and Ressources Quebec. Post-deal,
top holders are Ressources Quebec at 12%, Softbank at 9% and management and employees
with 6%.
The Whabouchi Property has an advantage over most lithium concentrate projects in its
proximity to key infrastructure. It is easily accessible via the Route du Nord road that crosses the
property near its center and links it to the town of Chibougamau, with power lines following the
route. Airports, railroads and hydro stations are all in close proximity to the property.
There is significant upside potential to this resource, as there is an area called the Doris Zone
located immediately adjacent to the main Whabouchi deposit with 5 pegmatites running parallel
to the main zone, with very similar geophysical properties to the main zone. This has good
potential to increase the open pit resource and extend the mine life significantly. The company is
clearly thinking about this upside, as the CEO Guy Bourassa in the October 2018 conference call
“All of the parties to the agreements that we have currently signed are requesting more
tonnage than what we’ve agreed to sell or were able to sell or commit to. So we have a
very, very good understanding of the actual demand and the shortage of good-quality
hydroxide. So even though we’re definitively focused on the execution of our project
construction and to be ready to supply people according to our agreement, we’re certainly
very interested and involved in the evaluation of the possibilities to increase our
production capacity and see how we could team up one way or another with end users
that are desperately looking for a long-term good, safe supply of good quality, high purity
Lithium Supply and Demand:
FMC Corp had a great corporate presentation in May 2018 found here http://phx.corporate-
9MQ==&t=1 and we’ll borrow a couple slides, but in a nutshell, they believe the global market
for lithium will grow from 240K tons in 2018 to 1M tons in 2025, with battery electric vehicle
(BEV), or pure EV penetration ramping from the current 1% to 12%, average battery pack size
per vehicle increasing from 36 kWh to 52 kWh, and average lithium content per kWh dropping
from 1.1 kg to 1.0 kg. With roughly 108M vehicles in 2025, this means 13M BEVs consuming
about 680K tons of lithium.
The other 320K tons is expected to be consumed by other energy storage applications (from cell
phones and tablets to distributed solar energy). This 1.0M tons is the high end of most estimates
which range from about 600K to 950K, with a wide range of estimates for BEV penetration,
battery size per vehicle and lithium content per kWh, but even if we use the average estimate of
roughly 730K tons in 2025, that represents a CAGR of 17%/yr.
Orocobre also had a great presentation in July 2018 found here that we will borrow from. They detail a major
supply chain issue that has plagued and continues to constrain growth in battery-ready lithium.
As shown in the slide below, China has massively overpromised and under-delivered on their
lithium conversion capacity, growing from 70K tons in 2012 to just 130K tons in 2017 (60K
tons) vs their original target of 213K tons of added capacity (ie under 30% of planned conversion
By 2020 there is supposed to be another 308K tons added, but again, only about a third of this is
likely to come to fruition during that time, resulting in effective capacity of 210K tons by 2020.
This represents a serious bottleneck to supply of battery-grade lithium, which is what ultimately
drives prices for NMX. We can have a massive oversupply of spodumene (raw material) and yet
have a deficit of battery-grade lithium due to a lack of adequate spodumene conversion capacity.
SQM in its Investor Day in September 2018 suggested that
capacity will onlygrow at a 12% CAGR from 2018 to 2025, growing from 300K tons to 700K
tons (and note that utilization rates never get much higher than 80%, so “effective” production
capacity will be less than 600K tons. Based on history, supply will most likely continue to come
well below expectations, with longer lead times, cost overruns, etc, than anticipated.
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, Livent (FMC spinoff), ALB). Because
they are at different points in their growth trajectories, their EBITDA multiples will probably be
more homogeneous if we go out a couple years. Let’s take CY20 estimates and take an average
EV/EBITDA multiple for this peer group: we get 9.8X. 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.
Whabouchi & Shawinigan should be fully ramped up by CY22: 23K tons lithium hydroxide at
US $12K/ton pricing less cash cost of US $2,800/ton = US $212M in EBITDA, plus 11K tons
lithium carbonate at US $14K/ton pricing less cash cost of US $3,400/ton = US $117M in
EBITDA for a combined US $330M in EBITDA. Discounted back at 10% (no permitting or
financing risk, low execution risk) we get US $225M. Let’s compare to the enterprise value. At
a US price of $0.62 per share, with 911M fully diluted shares outstanding and net debt after
taking on the C$875M in debt to complete the projects of roughly US $400M, we have an
enterprise value of US $965M, so that’s a EV/EBITDA of 4.3X. At 7X (below the low end of
the majors) this stock would trade at US $1.29 (C$1.69) for more than a double.
Probably the best comp to Nemaska is FMC’s recently spun off IPO Livent which is a pure play
lithium producer with 100% of its assets in Argentina (which has proven to be prone to rain-
delays, cost overruns and of course an unstable currency, just ask Orocobre or Lithium
Americas). Unlike Nemaska it has been producing for years, but the bulk of its value comes
from its expansion from 25K tons in 2017 to 74M tons in 2022. EBITDA that year is expected
to be $390M and the company’s current EV is roughly $2.45B. If we discount that back at 8%
(lower risk than Nemaska’s ramp up), we get $285M in EBITDA for an EV/EBITDA of 8.6X.
Again, I feel comfortable with my price target of C$1.69 for NMX CN (and US $1.29 for
NMKEF) which implies a 7X multiple on 10% discounted EBITDA from 2022.


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.


  • Initial commercial production at Whabouchi mine: 3Q19
  • Initial commercial production at electrochemical plant at Shawinigan: 3Q20
  • Increase in spot pricing (2 consecutive upticks in the last week, first since November 2017)



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