Description

Nemaska Lithium (NMX)

Consensus View: NMX is one of many lithium development projects that if successful will bring product to market in an oversupplied environment.

Variant Perception: Nemaska is a de-risked high quality project providing 2.5x MOIC returns at 2016 lithium prices. Futhermore, investors understanding of the lithium market is evolving and poorly understood. Actual battery grade supply coming online will be less than conventionally thought and the projected high lithium prices may stay elevated for years to come providing significant upside optionality. Last, if and when Nemaska reaches commercial production some time in calendar year 2019, their optionality to sell or build additional projects based on their low-cost production capability will only increase (lower cost of capital).

Overview: NMX is a hard-rock (spodumene) lithium miner with its primary assets located in Quebec, Canada. They have a novel approach processing lithium concentrate directly into lithium hydroxide (vs lithium carbonate). Lithium hydroxide earns a higher price than lithium carbonate as typically you have to upgrade lithium carbonate to get the former. They are developing the assets in two phases. Phase 1 which they are nearly finished with was to prove the viability of the ore deposit and the process. Once complete, they will seek up to $500mm in financing, both debt and equity to scale the plant, Phase 2. They have signed 2 off-takers (Johnson Matthey and FMC) representing ~50% of production.

Lithium Market: Anyone doing serious work on this space should pull several demand/supply projections. You then need to understand the rate and sensitivities at which electric vehicle penetration could occur and compare that to same for lithium production facilities. The variant perception is that EV production and penetration is out pacing lithium production. At some point EV is going to hit a tipping point and ramp aggressively but the lithium plants need years to be developed. Any plant already near development today will benefit dramatically.

Lithium Demand

Lithium Price Outlook

Valuation: The only way to value this is using a DCF for the project life. Using the Company’s feasibility study which assumed USD $9,500/ton for LiOH results in roughly a $2.10 NPV/share assuming dilution to finance the project. The lithium market is still small and not widely reported by the companies selling into it. Collecting a few data points for 2016, we think USD $13,000/ton for LiOH, was a conservative average for the year. Using this price results in $3.60 NPV/share as any increase in lithium price falls to the bottom line. But we have barely ramped up EVs with much more to come as (gulp) China leads the way followed in hot pursuit by the Republic of California. If you assume $20,000/ton for LiOH as Benchmark projects above, the NPV per share is $6.80, or nearly 5x MOIC.

Risks:

-Execution risk, delays

-EV penetration much slower than projected (perhaps because death of lithium supply)

Catalyst

Catalysts:

-Financing completed

-Phase 2 milestones

-Additional off-taker announcement

-Additional EV announcements