LLKKF - Lake Resources: Speculative Lithium Wager For Untried Technology And Leadership Team

2023-04-10 10:10:26 ET

Summary

• Lake Resources is a A$650M metals and mining venture trying to bring its state-of-the-art flagship Argentinian Kachi Project online.
• To date, the definitive feasibility study (DFS) and Environmental Social Impact Assessment have yet to be finalized.
• The process technology remains unproven at an industrial scale and little has been provided in terms of project financials.
• Its newly appointed CEO, David Dickson, has a poor historical track record of delivering lasting shareholder value.

Company Overview

Lake Resources (LLKKF) is an Australian-listed mining junior looking to prove and bring to market a state-of-the-art ion exchange technology for production of the holy grail of battery minerals - lithium.

Its flagship Kachi Project in the Catamarca Province deep in Argentina’s world class lithium triangle is a viable candidate for technology deployment allowing the firm to harvest sustainably produced lithium. While the technology remains unproven at industrial levels, it’s the perfect marriage of a strategy blending battery mineral production with much sought after ESG accolades.

The A$650M metals and mining venture was founded in Sydney, Australia in 1997 with hopes of delivering battery grade lithium without all the calories, by touting a process technology less resource intensive and more environmentally friendly. It is an enterprise centered on the Kachi Lithium Brine Project that aims at capitalizing on lithium’s enduring popularity while wooing the ESG mob with a new-fangled process technology pitched at saving the environment.

We here at ZMK Capital remain skeptical. Developing an unproven technology while multiple competitors precipitously flood the market appears perhaps too ambitious. The technology remains unproven at an industrial scale and the newly established leadership team, following Steve Promnitz’s removal , is headed by none other than David Dickson of McDermott International notoriety.

David Dickson’s previous track record of empire building (remember the catastrophic $6B acquisition of CB&I anybody?), big leverage, and industry busts , left McDermott equity holders reeling from losses and bond holders scurrying for seniority of claims. Those strategic errors were catastrophic and could well seep into Lake Resources' future playbook.

Australia remains the world’s largest lithium producer which raises questions regarding why Lake Resources would not first deploy the technology back home. Only Argentina’s under-development provides possible answers.

Lower prices longer, more concentrated competition using traditional methodologies, an unproven mass-scale technology, and an untried trophy management team with little lithium experience , facing more experienced players makes this company hard to get excited about. Right now, we will stay on the side lines – neutral.

Current Lithium Prices

Lithium carbonate prices have collapsed by ~50% since the start of the year, slumping to 217,500 RMB ($31,660 USD) – a new low in the past 16 months. Increased production coupled with increasingly defeated demand, particularly driven by an EV price war, continues to put pressure on prices.

Cash subsidies provided by the Chinese government for the purchase of electric vehicles have been slashed, accentuating pricing pressures. A spike in battery inventories at the back end of 2002 driven by Chinese subsidies has wreaked chaos with prices as producers scrambled to up production before an end to the incentive schemes.

Discounts have since ensued with State interventionism creating anomalies in supply/ demand dynamics. Agreement on a price floor between major Chinese battery manufacturers will likely provide some support to prices. Yet, expect more near term price volatility to play out before normalization and a more long-term bullish trend to prices moving forward.

Lithium carbonate prices have continued their move to the downside on the back of dampened economic sentiment and a slowing of automotive sales.

The Kachi Lithium Brine Project – Catamarca Province, Argentina

Lake Resources owns 100% of the Kachi Lithium Brine Project situated in the Catamarca Province, NW Argentina via its Argentine subsidiary Morena del Valle Minerals. It covers a lithium brine bearing basin with 39 mining leases. Additional exploration drilling is underway, with the company hoping to upgrade mineral resources in the area. Current life of mine is 25 years, but this could be extended based on the success of additional exploration drilling.

Thus far, the resource contains measured and indicated resources of 2.2Mt of lithium carbonate equivalent (LCE) defined to a depth of 400m over 81km2. The lithium grade of this measured resource (0m-400m depth) across the salaar is 212mg/L.

Immediately to the southeast of this area grades measure to 178mg/L. Surrounding this area, inferred resources equate to 3.1Mt defined over 117km2 at a depth of 700m, with grades totalling 198mg/L. The exploration drilling program aims to better define the resource extent.

Lake Resources aims to team up with earn-in Californian technology partner, Lilac Resources to engineer an efficient, disruptive clean direct lithium extraction technology (DLE) capable of producing high quality lithium with a smaller environmental footprint.

Under the agreement, Lilac will have an option to acquire 25% equity in the Kachi Lithium Project subject to funding and onsite demonstration of process technology. Elsewhere, Lilac headed by David Snydacker has also secured $150M from Lowercarbon Capital, the venture capital firm “ backing kickass companies making real money slashing CO2 emissions, sucking carbon out of the sky, and buying us time to unf**k the planet .” Mercuria Energy Trading and Valor Equity Partners have also allocated funds to commercialize its proprietary lithium extraction technology to support the global EV industry.

Lilac’s direct extraction ion exchange focuses on recycling water resources rather than traditional evaporation methodologies.

The agreement outlined between the two companies remains a major risk factor – thus far, only a demonstration plant delivering 1,000 consecutive hours of production and producing 40,000 liters of lithium chloride has been achieved. The lithium chloride emulate produced by Lilac is in the process of being shipped to Saltworks for conversion to lithium carbonate after which independent testing will be carried out for purity.

A definitive feasibility study ((DFS)) and Environmental Social Impact Assessment (ESIA) is yet to be finalized. Studies continue with demonstration plant validation required prior to the completion of the DFS which is penned in for some time mid-2023.

It appears that at some stage Morena Del Valle Minerals (Lake Resources Argentine subsidiary) was shopping around for a technology suitor, having also shipped a 20ft container carrying sodium chloride brines to EnergySource Minerals LLC in June, 2021.

Lilac’s DLE technology has similarities with EnergySource Minerals ILiAD technology both boasting recyclability of water resources and a smaller environmental footprint.

Management Team

A plethora of management appointments has recently been made – Sean Miller , was recruited in August 2022 as corporate development officer entrusted with the fast-track exploration across 3 brine projects in Argentina – the Cauchari, Olaroz and Paso projects. While he has covered an impressive range of commodity remits (coal, copper, zinc) little suggests a deep-seated expertise in lithium field development and evaluation.

Following a global 6-month search, former McDermott CEO, David Dickson was appointed as Chief Executive of the Australian lithium outfit with an annual compensation of A$1M. With the company transitioning to a US corporate office to better align production and key customs and markets, Mr. Dickson appears to have reunited himself with the leadership team present during McDermott’s downfall - He is joined by chief counsel John Freeman , chief people officer Gentry Brann , and Scott Munro , senior vice president technology, strategy and risk.

All 3 worked with Mr. Dickson overseeing a strategy that ultimately led to McDermott’s collapse and subsequent restructuring . It is a track record that does not augur success particularly given none of them boast sizable mining & metals or even direct lithium experience.

Financials & Risk

Since FY13, Lake Resources has never delivered any revenues, so funding has solely been dependent on raising equity and debt. The company has managed to do so with multiple stock issuances including $24.6M FY21 and $120.3M FY22.

The company has confirmed that two off-take conditional framework agreements were entered covering 50,000 tpa lithium carbonate with WMC Energy and SK On. Both agreements provide for each company to make strategic investments in Lakes of up to 10% of the Company’s issued capital adding circa A$358M prior to final investment decision and subject to due diligence.

Debt markets have remained off limits given the relatively difficult credit market and riskiness of the company’s debt that would attract sky high premiums. Funds raised have directly gone to cash & cash equivalents ($121.1M FY22) while some funds are being progressively deployed into plant, property, and equipment. Naturally common equity ballooned 5x on new issuances and it's likely that additional share issuances will be the main avenue to fund the project given the volatile state of capital markets and a decline in the global economy.

There is significant risk to this project that needs to be factored in – there is not a lot of hardened lithium mining experience on the executive board and the track record of the recent McDermott International recruits requires further scrutiny.

Physical presence in Argentina remains relatively scarce with most executives electing to reside in the United States. While important markets and sources of capital remain there, boots-on-ground presence in Argentina remains extremely limited while none of the top management team save in country corporate VP Amalia Saenz has any meaningful experience of operating in country.

The technology despite showing some progress has not yet been tested at an industrial scale nor has the company provided any real firm guidance on capital expenditure, project NPVs or even earnings to get this project off the ground. The DFS and ESIA have not yet been completed so for an investor there is not much to go by.

All in, it fundamentally appears the board has elected to install a trophy management team, do a bunch of roadshows touting the ESG credentials of the project, and provide little else to go by.

It is a bit of a Hail Mary that could ultimately pay dividends or massively end in tears. Questions also abound as to why the Australian miner did not elect Australia, a US ally, a secure proven mining jurisdiction, and one of the world’s largest producers of lithium to deploy its technology.

Key Takeaways

Lake Resources is a speculative lithium miner with an Argentinian lease, new unproven process technology and (relatively) inexperienced lithium mining leadership team. There is little to go by in terms of project financials, run-rates, offtake agreements, or even lines of funding. While a general degree of bullishness presently clouds the stock, this is a real Hail Mary , particularly given the track record of the new leadership team.

For further details see: