LLKKF - Lake Resources: Be Cautious Amidst Short Report And Management Turmoil

• The CEO’s sudden resignation has created a lot of uncertainty.
• J Capital Research, an activist short seller, has piled-on by issuing a short report.
• Executive Chairman says Lake Resources is considering “exceptional” candidates for vacant CEO position.

Thesis

I last wrote about Lake Resources NL ( OTCQB:LLKKF ) in April, discussing the company's Kachi project in the Lithium Triangle, it's partnership with the Gates Foundation-backed Lilac Solutions, and the favorable funding opportunities available to the company. I concluded the article by recommending the stock based on the fact that the project was continuing to advance in a smooth and predictable manner. Since then, however, much has changed and Lake is now making headlines for all the wrong reasons.

And while none may be sufficient to justify dumping the stock, investors may want to take a wait and see approach before initiating or adding to already existing positions. At least until the company names a new CEO, and we get a better understanding of how that person will lead the company.

C-Suite Turmoil

By mid June, the company's stock price was already taking a hit because of a pullback in the lithium sector triggered by rising interest rates, an economic slowdown, and a broader market sell-off. But the sudden resignation of Steve Promnitz on June 20, along with reports that he had fully liquidated his 10.2 million shares, shocked the market and caused the stock price to plunge.

This clearly wasn't an amicable split as Promnitz reportedly emailed the board on a Friday afternoon informing them that he was leaving his positions as Managing Director and CEO effective immediately. It was under his leadership that the company established its presence in South America and forged its partnership with Lilac Solutions. The company, which appears to have been caught off guard, announced that Stu Crow, Chairman of the Board, had been appointed Executive Chairman for the next six months to oversee the transition.

Short Report

If that wasn't enough, the pile-on continued when J Capital Research, an activist short seller, released a report on July 11. The activist questioned Lake Resource's valuation by citing several unnamed "experts". They question Lilac's yet to be proven DLE technology and whether it can work at scale, whether it can work at a reasonable cost, and whether it can work in the Argentinian province of Catamaca.

The report points to the pilot plant being behind schedule and Lake missing several deadlines over the years. It also targets Lake's claims that its lithium extraction methods are a "cleaner technology" that is "sustainable - low water/land impact". J Capital attempts to rebuke these claims by saying that, "The reality is DLE technology may only halve the water requirement, compared with evaporation, and many reports indicate that it will likely produce significant toxic waste." They go onto say:

"We understand that traditional brine evaporation methods use 400 litres of fresh water for every kilogram of lithium chloride produced. We believe DLE will use around 190 litres of fresh water for every kilogram of lithium chloride produced."

The report concludes by discussing the work histories of both Stuart Crow and Steve Promnitz.

Strong Arguments?

Any readers wishing to read J Cap's full report can find it here . As far as short reports go, I found most of its arguments to be unpersuasive.

Falling behind schedule, missed deadlines, and delays are part of the lithium and especially junior lithium mining industries. If investors were to short pre-production lithium miners every time one of them missed a deadline, short interest in most junior lithium stocks would quickly go to 100%. This is especially the case when developing a new method of doing things.

With regards to questions surrounding water usage and waste, whereby DLE technology will 'only' cut water requirements in half and generate some industrial waste that must be disposed of. I am not aware of anyone at Lake Resources, or within the DLE industry as a whole for that matter, who has ever claimed that DLE technology will have zero environmental impact, in terms of resource consumption. Clearly, some resources must be used, including water, in the extraction of industrial metals from brine, and those processes will generate waste. No one claims that DLE is an environmental panacea, but rather an incremental improvement over the existing process.

And, as to the report's many "experts" who question the possibility of DLE tech living up to its expectations, they may be right. But one also shouldn't forget all the 'experts' in the early 2000s who believed that telephones without physical buttons were impossible, or the 'experts' in the early 2010's who believed that electric cars were just a fad. There's no question that betting on DLE tech is a higher risk play then investing in a conventional lithium mine, but the possibility for asymmetric returns is also much greater.

The report also criticizes Lake for putting all of its eggs in one DLE basket; working with only one DLE provider instead of two or three, as some other lithium producers are doing. That's a valid criticism, but not one for which the stock should be shorted. Rather, an investor wishing to gain exposure to DLE tech should consider that fact when sizing positions, taking a larger position in a stock with multiple DLE partners while holding a relatively smaller position in Lake.

Filling the CEO Role

Surprisingly, J Capital's report did not have much to say with regards to the departure of Steven Promnitz. However, Stuart Crow, the company's aforementioned Executive Chairman, did address the issue in a webinar recorded on June 24, and posted it to the company's YouTube channel on June 28.

In it, he discussed how six months ago, the board began discussing the hiring of a new CEO with a broader set of skills, capable of transitioning the company from an being an explorer to being a lithium producer. Four months ago, the company began actively searching for someone to fill that role. They wanted to move Promnitz into an executive position in order to bring in, "people that have had experience managing and delivering projects of this scale". I'm not too surprised that Promnitz wasn't enthusiastic about the plan.

Crow mentioned that the company was in the final stages of shortlisting candidates for the CEO role as well as other executive and non-executive positions. According to Crow's timeline at the date of the interview, the company should now have a short-list of 4 candidates of which one will soon be chosen.

During the interview, Crow shot down rumors that Promnitz had left and sold his shares because the Lilac process doesn't work. He pointed to 4.5 years of data at bench scale and pilot scale to reinforce his point. Not to mention, the demonstration plant which is currently sitting in a warehouse in Argentina until it's moved to the site on July 15.

For most of the 20-minute interview, Crow emphasized that it was business as usual. He discussed the company's various operational areas and briefly talked about the company's plan to relocate to the US. He didn't provide much additional information about the candidates being considered except to say that the, "quality and the calibre of these people that we're looking to shortlist are nothing short of exceptional."

Importance of Leadership

While Crow's interview answered many questions, the company is still in a state of limbo and shareholders don't know who will be running it two or three months from now. And that's a major source of uncertainty.

He has promised "exceptional" people, and that may very well turn out to be the case. But investors should bear in mind the circumstances under which this executive search is being carried out. Top-tier candidates may see a strong company with solid assets in a growing industry, a company that has great potential to change the industry through the employment of new technology. Or, they may see the circumstances under which the former CEO exited and wonder if that will be their fate someday. Something which could lead to some A-list candidates having doubts about signing on.

Given how important senior management's role will be in the next phase of Lake's development as it moves to production, the new CEO and executive team will have an outsized impact on the company's long-term prospects. For that reason, I'm rating the stock a Hold as investors would be well-served in waiting until a new CEO is named before adding to existing positions or initiating new ones.

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