LAC - Ganfeng Lithium Has Large Lithium JV Projects Coming And Is Well-Valued Again

2023-07-25 12:15:37 ET

Summary

• Lithium converters like Ganfeng have struggled to be profitable after the big fall in lithium chemical prices; however prices are now improving and Ganfeng is much more than a converter.
• Looking ahead to the next 3 years, Ganfeng's JV projects (Cauchari-Olaroz & Goulamina) are set to very significantly increase Ganfeng's own sourced lithium production.
• Valuation looks very attractive again. 2023 P/E is 7.77, 2024 is 7.4. 2023 yield is 1.15%. 2023 net profit margin is a healthy ~35%.
• Current consensus analyst recommendation is a "buy" with a price target of CNY 85.99, representing ~55% upside.
• Risks revolve around lithium prices, China stocks, and execution of Ganfeng's lithium projects expansion plans. Also, numerous sovereign risks with JV projects in Argentina, Mali, China etc.

Jiangxi Ganfeng Lithium [SHE:002460] [HK: 1772] ( OTCPK:GNENF , OTCPK:GNENY ) ("Ganfeng")

For a background on Ganfeng Lithium Group Co., Ltd., you can read our past articles:

• December 2021 - Top 5 Lithium Pure Play Producers With The Biggest Expansion Plans To 2025 .
• August 2021 - Ganfeng Lithium - Massive Lithium Assets And Long-Term Lithium & Battery Production Plans.

Jiangxi Ganfeng Lithium 5-year price chart - Price = CNY 57.75 ( source )

About Jiangxi Ganfeng Lithium

Ganfeng is best known as being a Chinese lithium chemicals producer. The company converts lithium raw materials such as spodumene or brine into lithium hydroxide or lithium carbonate. Ganfeng also produces both lithium-ion and solid-state batteries, stationary energy storage products , and does lithium-ion battery recycling .

Ganfeng has extensive interests in lithium mines and projects globally including the following major ones:

• Several Chinese lithium mines interests in Qinghai, Jiangxi, and inner Mongolia.
• Mt Marion Lithium spodumene mine (50% owned) in Western Australia, JV with Mineral Resources [ASX:MIN] ( OTCPK:MALRF ). Mt Marion is expanding capacity to reach 900,000 tpa spodumene.
• Cauchari-Olaroz brine mine in Argentina ( 46.7% owned) (51% of Minera Exar), JV with Lithium Americas [TSX:LAC] ( LAC ). The Project plans to produce 40,000 tpa in Stage 1 (production started in June and will now ramp up) to be followed by at least a further 20,000tpa in Stage 2 (2025/26 start) of lithium carbonate for ~40 years. Note: Ganfeng Lithium (51%) and Lithium Americas (49%) effectively own 91.5% interest of Cauchari-Olaroz and are entitled to 100% of production. The Total Resource is now at a massive 24.58 million tons of lithium carbonate equivalent ("LCE") with an average grade about 592 mg/L lithium.
• Goulamina spodumene project in Mali ( 45% share ) with JV partner Leo Lithium [ASX:LLL] (45%). Direct shipping ore ("DSO") planned to begin in Q4, 2023 . Spodumene production at Goulamina is planned to ramp to 506,000tpa (starting from start in Q2, 2024) , then after 18 months expanding to 831,000tpa. Goulamina has a massive Resource estimate of 211 Mt at a grade of 1.37% Li2O. Note the project is currently awaiting "an announcement in relation to correspondence from the government of Mali relating to plans to produce Direct Shipped Ore." We don't yet know the issue but it may relate to the additional risk in doing business in Mali.
• Mariana Brine Project in Argentina ( 100% ). Mariana has a M&I Resource of 6.85 million tonnes contained lithium carbonate equivalent [LCE] & and an Inferred resource of 1.267 million tonnes LCE, with an average grade of 319 mg/L lithium. Construction is underway and the Project plans to produce 20,000 tpa of lithium chloride . You can read more here .
• Sal de la Puna (SDLP) lithium brine project in Argentina (35% owned), JV with Lithium Americas who took over Arena Minerals
• Pastos Grandes lithium brine Project in Argentina (100%) (bought from Millennial Lithium Corp. [TSXV:ML] ( OTCQX:MLNLF ) for C$353m). The Pastos Grande Project has a M&I Resource of 4.12m tonnes LCE, with an average grade of 427 mg/L lithium. The DFS has a post-tax NPV8% of $1.03b. You can view more details on the Pastos Grandes DFS here. Cauchari East Lithium Project is also part of the above deal.
• Avalonia spodumene project in Ireland (55% owned, earn-in option to acquire another 24%), JV with International Lithium Corp. (Not sure of the updated the ownership structure %).

Plus

• Pilgangoora spodumene mine off-take (10+5+5 year deal).
• Finniss spodumene mine off-take ( 75,000 tonnes over 4 years ).

Note: You can view a complete list of Ganfeng's mining interests here .

The Cauchari-Olaroz Project aerial view - Commissioning and 1st lithium produced in June 2023 ( source ).

Goulamina Lithium Project set to potentially begin DSO in Q4, 2023 and spodumene in Q2, 2024 ( source )

Ganfeng Lithium has several large lithium JVs projects coming online or expanding

Cauchari-Olaroz JV (51% share of JV) - Production began in June 2023

On June 12, 2023 Ganfeng reported : "the first lithium carbonate products of its Cauchari-Olaroz salt lake project in Argentina have been produced."

Given the Cauchari-Olaroz JV with Lithium Americas will be one of the largest lithium brine-producing projects globally, this is big news. As stated above, Stage 1 plans to ramp to 40,000 tpa of lithium carbonate production. The ramp may take 3 years but based on the news above it is starting now.

Goulamina Project JV (45% share of JV)

As reported by JV partner Leo Lithium, Goulamina DSO production is planned to begin in Q4, 2023. Spodumene production at Goulamina is planned to ramp to 506,000tpa starting from start in Q2, 2024. A stage 2 production target is being considered that would raise total Goulamina production to 1 million tpa spodumene.

Mt Marion JV is expanding (50% share of JV)

Quoted from a June 16, 2023 article ( source )

All of the above means 2023, 2024, and 2025 should see very significant increases in lithium production volumes attributable to Ganfeng. Ganfeng targets to reach 300,000 tpa LCE production by 2025 and 600,000 tpa LCE by 2030.

A quote on Ganfeng Lithium's global assets and production goal of 600,000tpa by 2030 ( source )

Trend Investing's model is different as it uses "100% only source material" (not off-take volumes from 3rd parties as would be included in Ganfeng's targets above). It assigns Ganfeng's LCE production in 2025 to be 120,000tpa and by 2030 to be 280,000tpa. We do expect a surge in 2023-25 from Mt Marion, Cauchari-Olaroz JV, and Goulamina JV.

The Trend Investing model is shown below

Valuation

Ganfeng's current market cap is CNY 112b (~US$15.66b). 2023 net debt is forecast at zero .

2023 P/E is 7.77 , 2024 is 7.4, 2025 is 6.4. 2023 yield is 1.15%. 2023 net profit margin is a healthy ~35%. See chart below for a historical P/E comparison.

Current consensus analyst recommendation is a "buy" with a price target of CNY 85.99 , representing ~55% upside.

Valuation looks very good again for Ganfeng.

Ganfeng's financials and forecast financials ( source )

Ganfeng's P/E ratios are much lower than the historical average (actual and forecast) ( source )

Risks

• Lithium prices falling.
• Technology change away from using lithium-ion batteries.
• The usual mining risks - Partner, exploration, permitting, funding, environmental, project delays or cost blowouts, and production risks.
• Supply chain risks and/or off-take risks - Some of Ganfeng's spodumene suppliers may develop their own conversion facilities and end off-take agreements with Ganfeng.
• Business risks - Competition (several companies are moving into the lithium conversion business including Tesla ( TSLA )), management, debt, liquidity, and currency risks.
• The U.S Inflation Reduction Act requires increasing percentages of battery materials to be sourced from U.S free trade agreements or safe countries. This may work mildly against Ganfeng being a Chinese lithium producer.
• Sovereign risk - Moderate to higher risks in Mali, Argentina, and China. Lower in Australia and Ireland. Ganfeng's Sonora Project in Mexico was nationalized by the Mexican Government. The Goulamina Project in Mali is currently waiting on "an announcement in relation to correspondence from the government of Mali relating to plans to produce Direct Shipped Ore."

Key recent news

• June 12, 2023 - "Lithium Americas announces first lithium as part of commissioning at Caucharí-Olaroz....has produced its first lower than battery-quality lithium carbonate as part of commissioning. Additional purification processing equipment necessary to achieve battery-quality lithium carbonate is expected to be completed in the second half of 2023, as planned."
• May 29, 2023 - "Leo Lithium secures A$106m Strategic Placement and transformational Cooperation Agreement with Ganfeng Lithium."
• May 23, 2023 - "Ganfeng Lithium has announced mass production of solid-state batteries. China's largest lithium mining company has transformed itself into a battery manufacturer, and is now the very first company to announce mass production of revolutionary solid-state batteries....."
• April 19, 2023 - "Leo Lithium, Ganfeng Lithium JV to acquire two mineral concessions in Mali....."
• March 30, 2023 - "Ganfeng Lithium to hand out 2 billion Yuan in dividends as 2022 profit soars 292% on strong battery demand."
• July 2022 - "Ganfeng Mariana Salt Lake Project held a groundbreaking ceremony."
• July 2, 2022 - "Fengcheng project officially started......annual production capacity of 50,000 tons of LCE lithium-ion new energy materials by extracting lithium through spodumene."
• July 2, 2022 - "Annual production of 10GWh battery project put into operation......The fully automated production line of the new lithium battery with an annual output of 10GWh will be Put into operation, the production capacity of Ganfeng lithium electric power and energy storage batteries has been greatly improved; the first batch of 50 Dongfeng E70 electric vehicles equipped with Ganfeng solid-state batteries has been officially delivered, and the commercialization path of solid-state batteries has become clearer."

Further reading

• Nov. 2021 - China's Ganfeng Lithium inks 3-year supply contract with Tesla....starting from 2022 .
• May 2023 - Cauchari-Olaroz May 2023 video update (2-minute video).
• Lithium Miners News For The Month Of May 2023
• 2024 Potential New Lithium Producers To Consider (discusses Leo Lithium and the Goulamina Lithium Project JV)
• June 2023 - Lithium firms seeking new ties overseas

Ganfeng is vertically integrated across the entire battery ecosystem ( source )

Conclusion

Lithium converters such as Ganfeng have struggled to be profitable after the big fall in lithium chemical prices, especially as spodumene prices remained quite high. This has been the main cause for Ganfeng's significant stock price falls the past year. However, the cycle is now turning with lithium chemical prices recovering since May. Furthermore, Ganfeng is now much more than a just a converter - they produce batteries and have numerous interests in lithium projects that are soon likely to bear fruit.

Looking ahead to the next 3 years, Ganfeng's JV mines/projects (Mt Marion expansion, Cauchari-Olaroz, & Goulamina) are set to very significantly increase their own sourced lithium production. There may also be some production from the Mariana Project. This should then start to flow through to higher revenues and profits. Other Ganfeng lithium projects will also potentially start to come into production after 2025 (Sal de la Puna, Pastos Grandes, Avalonia, and others) further boosting their own sourced lithium.

Ganfeng is a key lithium supplier to Chinese battery and car companies as well as a supplier for Tesla , Volkswagen , BMW Group, and LG Chem .

Valuation looks to be very attractive on a 2023 of 7.77 and 2024 PE of 7.4. The current consensus analyst recommendation is a "buy" with a price target of CNY 85.99 , representing ~55% upside.

Risks are the usual mining and business risks plus several sovereign risks (Argentina, Mali, China, etc.). Please read the risks section.

We view Ganfeng Lithium as a solid buy, suitable for a 5 year-plus time frame, but are still mindful of the various sovereign and other risks.

As usual all comments are welcome.

For further details see: