SGML - Atlas Lithium Corporation: Almost Set For Commercial-Scale Production In 2024

2023-12-26 16:31:31 ET

Summary

• Atlas Lithium Corporation has experienced a surge in its stock price due to growing global demand for lithium and increased resource mobilization for its Brazilian mines.
• The company has secured funding for its first lithium production, which is scheduled for Q4 2024, and aims to produce at least 300,000 tons of battery-grade spodumene concentrate per year by 2025.
• Atlas Lithium has formed strategic partnerships with Chinese firms Chegxin Lithium and Yahua Industrial Group, who are key suppliers of lithium hydroxide to EV companies such as Tesla.

Atlas Lithium Corporation ( ATLX ) has surged 290.84% (YoY) boosted by the growing global demand for lithium and accelerated resource mobilization for its primary Brazilian mines. In line with the transition to green energy, the company announced that its first lithium production slated for Q4 2024 had been fully funded. ATLX is looking at a production target of at least 300,000 tons (per year) of “battery grade spodumene concentrate (containing lithium)” by 2025.

Thesis

I believe that the partnership between Chinese firms; Chegxin Lithium, Yahua Industrial Group, and Atlas Lithium is strategic in not only providing financing for the former's lithium exploration but also market providence. In its announcement, ATLX stated that these two chemical companies are integral "suppliers of lithium hydroxide to Tesla, BYD, and LG." Of special note is the fact that ATLX has managed to raise its capital expenditures through 2023 without diluting its stock, growing its stock price by more than 383% from its IPO price of $6.

Record win against Odds

Despite recording no revenues, ATLX’s CEO, Marc Forgassa has managed to convert the company from a start-up status to a market capitalization of $322 million. Atlas also received a $20 million investment from Lithium Royalty Corporation ( LITRF ) to fund its Phase 1 lithium exploration in Brazil in return for a gross overriding revenue royalty ((GOR)) of 3.0%. Atlas’ management is looking at producing better lithium with affordable assets.

Noteworthy, is that despite being a U.S. firm, Atlas owns the entire mineral rights (for all the minerals making up EV batteries) from its Neves project area in Minas Gerais in Brazil. This location is a lithium-mining friendly zone in South America. Due to this ownership, Atlas was able to formalize its agreement with Japanese development firm Mitsui & Co. (MITSY). Together with the $20 million funding for Phase1 (from institutional lithium investors), Atlas also negotiated an offtake funding agreement that included “a potential funding of $65 million granting Mitsui the right to purchase 100% of the lithium produced in its Brazilian mines.” At the time Atlas had envisioned a planned output of 150,000 tons of lithium concentrate, and with a ready buyer in place, Atlas looked all set.

Speaking during this announcement, CEO, Marc Forgassa stated ,

Our lithium assets are world-class and therefore we are enthusiastic about the prospects of a long-lasting and mutually rewarding partnership with such a well-known and global-reaching company as Mitsui.”

This memorandum of understanding sweetens the deal with Chegxin Lithium and Yahua Industrial Group, who in return committed about $50 million to Atlas for the completion of Phase 2 production of lithium concentrate. In the agreement, a $10 million payment to Atlas would be used as equity (with the stock price at $29.77) and the remaining $40 million would be prepayment in return for 80% of the company's Phase 1 lithium production- in a non-dilutive transaction. These two companies are doubling the offer earlier made by Lithium Royalty Corp. indicating Forgassa's Asian trips seeking partnerships are steadily paying off.

Proximity to other lithium projects

There are various lithium concentrator mining projects located in the Brazilian Minas Gerais state. Together with Atlas Lithium, Sigma Lithium Corp ( SGML ) has a high-grade Tier 1 lithium project called Grota do Cirilo. The company had estimated that the project was supposed to deliver about 27Mt of lithium concentrates by May 2023. As of September 30, 2023, the company raised its production forecasts to range from 26Mt to 30Mt. after it realized its first revenue of $95.7 million and a gross profit of $61.8 million. Sigma Lithium is looking to raise its lithium production estimate to above 110 Mt (representing an increase of more than 25%) to the current open pit deposits.

Another company which I believe has substantive tenements in the Minas Gerais location includes Latin Resources ( LRSRF ) with its Salinas Lithium project. The Australian miner secured $22 million to support lithium exploration in its Brazilian mine into 2024. After this financing commitment, Latin Resources announced expanded drilling conquests at the Colina deposit that sits within the Salinas Lithium project. The details from the Colina deposit include the following, I quote

A peak intercept at Colina of 13.56m reading 2.03% li thium oxide (LiO2) from just 98.44m, with a maximum width of 26.85m going 1.39% lithium oxide (LiO2) from 260.75m. Other headline results include a 15.7m hit at 1.59 percent lithium oxide from 206.09m, 20.74m grading 1.42% lithium oxide (LiO2) from 335.45m and 17m going 1.55% lithium oxide (LiO2) from 139m.

I will also bring into the picture, Lithium Ionic, a Canadian miner with its Itinga and Salinas projects (in Brazil) located Northeast of Minas Gerais covering more than 14,000 hectares in the region. The company announced a 20,000m drill program towards H2 2023 with at least 9 tenements in the region covering about more than 5,700 hectares. In its Corporate Presentation , Lithium Ionic explained that it had signed an MOU with Invest Minas (the region’s state department) that gave the company a priority status in its two main drilling projects.

From my perspective, these spodumenic plays especially in the Brazilian context are trading at discounted rates (some mostly in the penny stock category) making them very attractive. By September 2023, Sigma Lithium had already initiated a strategic review that would eventually see the sale of the company’s core asset, the Brazilian Grota do Cirilo valued at about $155 million. I believe SGML may be sold by Q1 2024 even as Atlas Lithium plans to grow its production in the same period. Sigma has already commercialized its mineral deposits raising the stakes for ATLX's functionality in the global sphere. The cost of spodumene ranged at $300 to $400 (per metric ton).

Application of New technology and resources cost

ATLX’s Marc Forgassa has reiterated his commitment to making the company, “the second-high-grade producer of concentrate” while supplying the commodity at “a competitive cost." To achieve this, the company plans to assemble the modular on-site "capable of producing 150,000 mt per annum of 5.5% to 6% of spodumene.” This production will utilize the dense-medium-mid separation technique.

Additionally, the US Department of Energy (DoE) published new requirements in December 2023 aimed at encouraging the supply of batteries and other electric vehicle components. The draft policy is aimed at growing the supply chain of "clean vehicles" referring to the carbon-less emissions through subsidies and tax credits. In my view, ATLX (after it begins production) qualifies to receive subsidies for its materials (especially since these commodities will also be exported back to the U.S.). With these subsidies, ATLX will, as Marc predicted raise its level of competitiveness for their affordable resources. This scenario will also hold in case the company decides to go into a merger & acquisition with another company.

Another report also indicates that the annual processing capacity of Lithium in Europe may increase to about 650,000 mt by 2028. Additionally, the continent has seen "more than 20 mining and refining operations going to full-scale commercial scale." In my view, these novel refining projects indicate the looming shortage and low production of lithium. The article also estimates that the global demand for lithium may reach 1.87 million metric tons by 2027 from 884,000 mt in 2023. This increase will likely be fueled by the rising electric market battery.

Other opportunities to consider

Unlike other junior miners, ATLX has continued to extend its drilling projects in the Lithium Valley of Brazil. After production commences hopefully in 2024, ATLX is scheduled to collect added revenue with more investors being added to the company’s portfolio. Atlas Lithium’s neighbor, Sigma Lithium may be up for sale raising attention to ATLX. The company's management led by Marc Forgassa may also grow drilling campaigns for other metals such as iron, gold, and rare earths among others.

ATLX's cash position as of September 30, 2023, grew 5,625% (YoY) to $22.9 million from $0.4 million owing to the financing agreement by Mitsui & Co. I expect more financing into 2024 that will cover the company’s operational activities.

Risks and Valuation

Atlas Lithium has managed to raise its CapEx going into 2024 without selling its outstanding shares. Its primary target of $49.5 million may be met with the $50 million financing from the two Chinese companies, “Chegxin Lithium and Yahua Industrial Group.” However, an increase in operational expenses as well as R&D in 2024 may necessitate dilution to cover the unforeseen expenses. This dilution may affect the stock’s price.

ATLX generated less cash from its operational activities in the 12-month trailing to September 2023 as compared to the 12-month trailing to June 2023. This amount decreased 81% to $2.1 million from $11.6 million in the previous quarter. Continual decrease into 2024 will affect the runaway balance in 2024 when it expects to commence production.

There also stands the risk of the production attracting environmental protests, especially from activists. ATLX will need to conduct environmental audits and share them with the local communities on the clean-energy production mechanisms in use during the drilling process to avert negative activism. In the end, weaker demand for spodumene may affect the product's price thereby affecting production.

In regards to valuation, Atlas Lithium Corporation's price-to-book ratio stands at 47.39 against the industry average of 1.75 (representing an increase of more than 2,600%). This metric shows the stock is slightly overvalued and we may see some downside into 2024.

Bottom Line

ATLX is operating at an advantage boosted by corporate investments as it prepares for its first production in 2024. Already, the company's Neves project has been funded to the tune of $20 million from Lithium Royalty, with other companies jumping on board into 2024. With time, ATLX will also diversify its drilling activities due to the availability of more resources at its Brazilian mining base which as we have seen is friendly toward mining. The company’s management is confident of commercializing the resources giving hopes for revenue introduction. I would recommend a hold rating of the stock as we await the resource report in the first quarter of 2024.

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