Lithium Americas Stock: Why We Still Own LAC And LAAC (NYSE:LAC)

The next section was excerpted from this fund letter.

Lithium Americas (NYSE:LAC)

Lithium Overview and Place Replace

Investing within the Lithium mining and processing {industry} has gotten very tough; that is maybe no shock; in any case, the sector was nascent only a few years in the past and is now taking middle stage in a world transportation transition. Moreover, for individuals who don’t observe these items as intently as we do, the spot worth offered off roughly 75%-80% in 2023, relying on what worth index you’re looking at, having risen near 800% from the 2021 low to the 2023 peak. On the identical time, the contracted costs that key producers acquired in 2023 had been greater than these acquired in 2022. A big divergence has emerged between the clear however little-used spot worth and the opaque however industry-standard contracted costs.

As an {industry} nonetheless in its early phases of evolution, there are few administration groups value investing in, geopolitical danger, and vital medium to long-term potential. The price of entry for such alternatives is appreciable volatility. As ordinary, we’re not sure the place the market goes within the quick time period, however now we have a way of the overall path within the medium to long run and are investing on that foundation. What follows is a wide-ranging dialogue of the commodity, the provision and demand state of affairs, our present investments and positioning, and our ideas for the yr forward.

What We Personal and What We Are Brief

At present, we stay, at a small measurement, invested in two lithium mining corporations, Lithium Americas (LAC) and Lithium Argentina (NYSE:LAAC). Each corporations had been a part of a single entity (Lithium America Unique) as not too long ago as October. That entity was a long-time Massif Capital Funding initiated in March 2020 at roughly $2.5 per share. On the time, the agency was in pre-production at two property, an Argentina-based lithium brine deposit and a US-based clay deposit, to which we attributed little worth due to the state of processing know-how.

We used the inventory’s volatility to nice benefit all through 2020, 2021, and 2022 as we repeatedly offered each places and calls on the corporate, decreasing our entry price under zero by way of premium earned on these choices buying and selling actions. In 2021, the inventory peaked at roughly $39 a share, a roughly 1,460% acquire on our buy worth. Given the state of the agency’s property, we should always have minimize the whole place as an alternative of simply trimming. We had confidence within the administration crew, and momentum and enthusiasm for all issues EV and battery had been robust, providing the potential for the market to run the value properly previous any cheap worth. Moreover, on the time, the lithium costs we had been seeing implied a good worth of the 2 growth property properly north of $40 a share, and we had been having bother understanding how lengthy the development of sky-high costs would final.

Now we have written about our misstep in not promoting the entire place prior to now, so we won’t belabor the purpose. The inventory traded down after that preliminary peak, regaining its highs once more in 2022 earlier than promoting off, bouncing to greater than $30 a share, after which falling precipitously to the present mixed share worth of each corporations of roughly $6 to $8 a share, nonetheless a 150% acquire from our preliminary share worth but additionally a fall of 69% from the primary time we trimmed the place.

In October of 2023, the corporate break up in two, making a standalone entity targeted on operations in Argentina (Lithium Argentina or LAAC) and a standalone entity targeted on operations in North America (Lithium America or LAC). We at present have small positions in each, totaling 6% of the portfolio in complete. We’re profiting from the newest LAAC self-off so as to add to our place and are within the due diligence stage on a 3rd potential lithium funding at an analogous growth stage as LAC, therefore a choice to not add to the place at present.

On the quick facet of the ebook, we engaged in two varieties of Lithium shorts all through 2023. The primary is a standard alpha-focused firm quick. Particularly, we assessed Piedmont Lithium (PLL), a junior developer with publicity to property from Canada to Ghana, which is helmed by a administration crew that, whereas able to promoting a narrative, can not obtain its lofty objectives in the actual world.

Piedmont is a traditional mining inventory promotion with little likelihood of changing into something substantive. Throughout 2023, we generated a 23% return on the quick earlier than exiting it throughout the 4th quarter. We re-entered the quick not too long ago and are at present up an extra 50%. Now we have additionally partially hedged out lengthy positions in LAC and LAAC by way of a brief in LIT, the World Lithium X ETF. The hedging place, which we additionally exited within the 4th quarter, generated a 12.2% return throughout 2023, and now we have re-entered this place based mostly on a mix of weak sectoral internals, persevering with adverse development, and momentum all through the sector and a continued slide in Lithium costs.

The reestablished LIT quick place is at present up roughly 17%. Within the case of each the alpha-generating firm quick and the sectoral hedge, timing and holding durations had been guided by our evolving execution method that prioritizes momentum/development and market internals. Collectively, our quick actions inside Lithium had been our most profitable quick actions in an in any other case disappointing yr for the quick ebook and signify what we count on to be the case examine for a way we handle the quick ebook sooner or later.

Why Do We Nonetheless Personal LAC and LAAC

Within the case of LAAC, we view the enterprise as a compelling worth play, with a de-risked producing asset (Cauchari-Olaroz) and the potential to reinvest capital at excessive charges of return by way of the event of its Pastos Grandes property. The corporate trades at a reduction to its elementary worth, a spot that might shut within the close to time period as the corporate continues to ramp up manufacturing. With 40 ktpa in Lithium Carbonate Equal (LCE) manufacturing that’s 90% contracted underneath a market worth offtake settlement, the agency seems well-positioned to have a profitable 2024.

Our elementary worth is predicated on a web current worth of the Cauchari asset, with no upside related to the potential growth of Pastos Grandes. Now we have barely adjusted the 2020 Definitive Feasibility Examine (‘DFS’) manufacturing ranges and vital changes to our anticipated working prices. Then, we valued the asset at numerous lithium carbonate worth ranges.

We run our valuation at lithium carbonate costs of $15k per ton, $22.5k, and $30k vs. the present reported South American Lithium Carbonate FOB Swap worth of $16.0k per ton, which is down 43% or so within the final three months. The first distinction between the DFS asset degree working mannequin and our personal is within the working price of the asset. The DFS signifies that in 2020, the agency anticipated an operational price of roughly $3,500 per ton of lithium carbonate. Of that, roughly 51% of the fee was for reagents concerned within the chemical conversion of lithium brine to battery-grade lithium carbonate.

The reagents used within the manufacturing course of embody chemical compounds reminiscent of soda ash (sodium carbonate), which is up 25% because the DFS publication. Labor and energy account for an extra 13.4% of projected CapEx; based mostly on conversations with {industry} contributors, each prices have elevated. We assess that the projected price of manufacturing is thus unlikely to be achieved. Primarily based on a evaluate of {industry} information, we imagine that the working price of brine property is nearer to $5,500 a ton. As such, we ran our valuation at that degree.

We count on the hole between the present market worth and our elementary worth to shut quickly because the agency ramps up manufacturing this yr. Whole manufacturing capability is anticipated to be achieved by mid-2024, as is a battery-grade lithium carbonate product. Throughout final yr’s preliminary ramp-up and on this yr’s first half, the lithium offered is technical high quality lithium, which falls in need of battery high quality. Along with reaching the asset’s industrial run charge in 2024, administration is targeted on stage 2 of the property, which is predicted so as to add 20ktpa of capability to Cauchari.

On the present time, the agency appears costly compared to friends, however that modifications quickly because the agency ramps up manufacturing within the coming years:

EV/Goal Manufacturing Capability ($/t LCE)

Ticker

Present EV

2023E

2024E

2025E

2026E

ALB US Fairness

$17,191

$106,411

$93,835

$77,901

$68,131

AKE AU Fairness

$5,128

$105,491

$48,312

$30,195

$25,564

LAAC US Fairness

$935

$230,345

$32,906

$28,793

$23,034

LTR AU Fairness

$3,017

N/A

$132,895

$66,447

$66,447

LTHM US Fairness

$2,743

$73,496

$48,806

$40,046

$40,046

MIN AU Fairness

$13,755

$131,088

$131,088

$131,088

$131,088

PLS AU Fairness

$7,907

$106,934

$99,137

$99,137

$67,498

SGML US Fairness

$3,171

$120,437

$46,907

$42,848

$42,848

SQM US Fairness

$15,498

$77,364

$67,693

$55,073

$53,796

Supply: Firm Studies, Bloomberg, TD Cowen & Massif Capital Estimates

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On the present spot worth for South American Carbonate, we imagine LAAC will produce an attributable common annual EBITDA of roughly $350 million per yr for the primary ten years of the agency’s operations. The peer group above has a imply EV/EBITDA of 6.1x, implying an EV of $2.1 billion, suggesting a Market Capitalization of $2.0 billion, a per-share worth of roughly $13 a share. The relative valuation is somewhat punchier than our NAV-based valuation however is in the identical ballpark.

This evaluation doesn’t take into account any potential upside from the agency’s Pastos Grandes undertaking both. It’s nonetheless early for this undertaking, so we don’t want to incorporate it in our valuation till now we have additional info, however it’s extremely potential. It’s unclear how lengthy it would take to build up ample info to start out thoughtfully together with the undertaking in our valuation. Nonetheless, we’re optimistic that it’s going to happen over the following 12 to 18 months. At present, we discover the undertaking extra helpful or useful in evaluating the administration crew’s capital allocation abilities.

As some detractors have identified, the administration crew that made Pastos Grandes acquisition differs from the crew at present operating the enterprise. Key gamers decamped to the brand new Lithium Americas, however we might reply by noting that the crew that ran South American operations throughout the acquisition is identical crew at present operating LAAC and, thus, is more likely to have had vital enter into capital allocation choices. That is encouraging because the agency’s acquisition of Millennial Lithium, which is how the enterprise acquired the Pastos Grandes undertaking, was extremely financial.

Primarily based on our evaluation of a handful of current lithium acquisitions, we imagine the LAC/LAAC crew paid 75% much less per ton of useful resource foundation than peer transactions.

(LCE)

Oct-21

Zijin Mining Group Co Ltd

Neo Lithium Corp

$737

7.63

$97

Nov-21

Lithium Americas Corp

Millennial Lithium Corp

$390

5.3

$74

Dec-21

Rio Tinto PLC

Rincon Mining

$825

11.8

$70

Could-22

Zijin Mining Group Co Ltd

DunAn Holding Group

$1,125

2.14

$526

Jul-22

Ganfeng Lithium

Lithea Inc

$962

3.6

$267

Dec-22

Lithium Americas Corp

Enviornment Minerals Inc

$227

0.6

$378

Sep-23

Albemarle Corp

Liontown Sources Ltd

$4,359

5.4

$807

Common

$317

Supply: Firm Studies, Bloomberg, TD Cowen & Massif Capital Estimates

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Time will inform if the present crew allocates capital in addition to the prior crew however given the instrumental position they should have performed in Pasto’s Grande’s acquisition, we’re snug betting that they’ll. At present, now we have a 5% place within the firm and are including when it trades down. Whereas not sure of our ultimate goal allocation weight, we’re theoretically snug allocating as a lot as 7% of the portfolio to LAAC.

Not like LAAC, which is ramping manufacturing and promoting lithium, even whether it is nonetheless simply technical grade, LAC is creating an asset that the administration crew hopes to activate in direction of the tip of 2026, with preliminary building beginning final yr. Though we’re assured that administration can be profitable within the fullness of time, a sentiment shared by administration at GM, who’s footing the invoice for an enormous chunk of the development price and has 100% of the offtake from the mine for the primary ten years, we favor allocating extra out there capital to different alternatives.1

If we do not intend so as to add to the place within the quick time period and imagine there are higher alternatives, why proceed holding? At 1%, our de minimis place is a toehold that needs to be added to sooner or later however needn’t be added to in a rush. On the floor, LAC has many strengths: robust administration, robust backing, a first-of- a-kind circulate sheet that seems more likely to ship a money price per ton of LCE at roughly $7,000 vs. present US spot costs of $17,000, and a chance to be the biggest producing lithium mine in North America. These are all essential variables, however the property’ actual energy lies under floor within the deposit’s geology.

Though, in geological evaluation phrases, we’re nonetheless within the early days of understanding the character of claystone lithium deposits, a current journal article revealed in Science Advances by a trio of volcanologists means that the McDermitt Caldera, which homes the Thacker Go deposit, might be among the many largest lithium deposits on the planet.2 Solely time will inform if the geological mannequin the crew (which included a LAC geologist) can be utilized to clarify different examples of hydrothermally enriched lithium deposits and thus justify the declare that the deposit is likely one of the world’s largest, however it’s promising.

One of many challenges with mining corporations, particularly when discussing tier 1 property like Thacker Go, is that the precise worth of the asset can’t be absolutely captured by way of an NPV calculation as the longer term money flows prolong far past the purpose at which discounting them again implies little or no worth. On the identical time, we all know these future money flows should not nugatory however distant. We’re certain that some finance professors someplace will discover this line of thought doubtful, however we stand by the concept there may be worth in property with lives that may stretch to 50 or extra years that can not be captured by way of discounting cashflows.

Footnotes

1Based on materials depth estimates from BNEF and Benchmark Supplies, Thacker Go part 1 ought to produce sufficient LCE for roughly 800,000 EVs yearly. Illustrative 60 kWh batteries use between 45 kg and 50 kg of Lithium Carbonate per battery relying on chemistry (LFP vs. NMC). GM sells roughly 2.2 million automobiles a yr within the US.

2Hydrothermal Enrichment of Lithium in Intracaldera il-lite-bearing claystones, 30 Aug 2023, Science Adances

Opinions expressed herein by Massif Capital, LLC (Massif Capital) should not an funding suggestion and should not meant to be relied upon in funding choices. Massif Capital’s opinions expressed herein handle solely choose features of potential funding in securities of the businesses talked about and can’t be an alternative choice to complete funding evaluation. Any evaluation offered herein is restricted in scope, based mostly on an incomplete set of data, and has limitations to its accuracy. Massif Capital recommends that potential and present buyers conduct thorough funding analysis of their very own, together with an in depth evaluate of the businesses’ regulatory filings, public statements, and rivals. Consulting a professional funding adviser could also be prudent. The knowledge upon which this materials is predicated and was obtained from sources believed to be dependable however has not been independently verified. Due to this fact, Massif Capital can not assure its accuracy. Any opinions or estimates represent Massif Capital’s finest judgment as of the date of publication and are topic to alter with out discover. Massif Capital explicitly disclaims any legal responsibility which will come up from using this materials; reliance upon info on this publication is on the sole discretion of the reader. Moreover, by no means is that this publication a proposal to promote or a solicitation to purchase securities or companies mentioned herein.

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