CA - Lithium Americas: A Green Banana

2023-11-07 11:40:46 ET

Summary

• Lithium Americas is on track to become the largest lithium project in America, producing up to 80,000 t of lithium carbonate annually.
• Demand for lithium is expected to outstrip supply for at least ten years, making lithium producers like LAC potentially profitable for a long time.
• LAC's Thacker Pass project is unique as it is the only known deposit of lithium-bearing illite in the world, which could make processing the clays into lithium carbonate easier and more cost-effective.
• The key question for an investor is, "How Long Will this Project Take to Get Into Production?"

I was recently listening to the Hardcore History podcast. I don't usually turn to Dan Carlin for investing advice, but he said something interesting. There are two kinds of investments: green bananas and yellow bananas. Yellow bananas are investments that are ready to pay off quickly. You have to wait for green bananas.

Lithium Americas ( LAC ) has been in the news, and for good reason. After years of delays, LAC finally started construction at their Tacker Pass projected. Their goal is to produce up to 80,000 t of lithium carbonate annually. Their resources are in the state of Nevada. Being in America means LAC are eligible for IRA tax credits. The only lithium currently being mined in America is the Silver Peaks mine . This company has a great team and a great resource. If you are interested in the battery metal space, LAC is a standout company.

I believe that this project will get into production, but it is a green banana. The key question for any investor is, "How green is this banana?" How long will this take to get into production? If you invest in LAC it might take some time (~2027) before they are producing cash.

There Will Be Great Future Demand for Lithium

I have written extensively in this article about the future demand for lithium. The growth in the EV market translates directly into demand for lithium chemicals like lithium hydroxide and lithium carbonate. The graph below comes from McKinsey . They are predicting a 55% supply shortfall by 2030.

In the last few years, the price of lithium has been a large spice. Lithium carbonate went from under $10/kg to over $80/kg. It's come back down, but it's now stable around $25/kg. With $25/kg as a floor lithium produces will make a lot of money for a long time.

The Thacker Pass Project

LAC seeking to build a mine on Thacker Pass, an area in Nevada. This project is unique in a few aspects and investors should know something about this. Most lithium in the world is extracted from either brine sources (like Albemarle ( ALB ) in Chile) or hard rock sources, primarily spodumene. Thacker Pass is a clay deposit.

Thacker Pass is a section of the McDermitt mountain in northern Nevada. This area has clays throughout the geography that are rich in lithium. As far as I'm aware, no lithium clay deposits are being mined currently. However, Tacker Pass is the premium clay deposit in the world. It is both large in scale and rich in lithium.

Thacker Pass has a mineral reserve of 3.7 Mt and a resource of another 3.0 Mt. The resource has over 3,000 ppm lithium, which is a very high grade for clays.

A Special Clay

There was recently a paper in Science Advances by Dr. Tom Benson about the Thacker Pass deposit. This paper was picked up by the media and made a splash . The paper is pretty complicated, but Dr. Tom Benson recently did a podcast explaining what the paper really was trying to say. The summary is that there are two main types of lithium-bearing clays. The common type of clays are smectites. Tacker Pass has a mix of smectites and illites. The important thing to underline is that the illites are able to be much denser in lithium. Smecitites have a max lithium density of about 2500 ppm. Illites have been found with a density of 13,000 ppm.

The point of the paper is that Thacker Pass is special because it is the only known deposit of lithium-bearing illite in the world.

Possibly Simpler Operations

In this podcast, Dr. Tom Benson claims that processing lithium-bearing clays should be easier than processing spodumene into chemicals. Because lithium is bound less tightly with clays, it requires less chemicals and heat.

The end result is that processing the clays into lithium carbonate should be easier and more cost-effective. Though this is a new technology, LAC has a great team, including Dr. Tom Benson and Dr. Rene Leblanc. They have had a pilot plant operating for a while now, creating lithium carbonate.

Financial Summary

Because LAC is both mining the clays and processing them into lithium carbonate, the CAPEX for the project is quite high. Their CAPEX is estimated at $2.3 billion, for the first phase. This will bring the operation up to 40,000 tpa of LCE. A second phase will double that capacity to 80,000 tpa LCE.

Fortunately, LAC will not need to raise all this CAPEX in dilutive share raising. GM has signed an offtake agreement which includes a $650 million equity investment. Further, LAC has received notice that the DOE will fund up to 75% of the CAPEX through a loan with the ATVM Loan Program. With the ~$276 million of cash on hand, LAC has enough money to build phase 1, unless they have a major cost blowout.

Their operation costs are estimated at $6,743/tonne LCE. This puts them in the mid-lower part of the cost curve.

LAC is not the cheapest operation out there, but they are competitive. It's important to remember that the lowest operation on the cost curve is Chilean Brines at the Atacama, which are subject to a whopping 40% royalty.

Made in America

While there are several American lithium companies, significant producers like Albemarle ( ALB ) and Livent (LTHM) have substantially most of their operations outside of America. LAC will be the first lithium major to have all of its operations inside America. They have already received notice of the DOE loan. The material from LAC will qualify for the 30D tax credit that allows consumers to get $7500 of their EVs. The material from LAC is important in securing the American battery supply chain.

Getting into Production

I cannot find an estimate of when LAC will get into production from their site. Their presentation says that they have ordered long items. Mines can take around two years to go from construction to production and at least a year to complete ramp-up to nameplate capacity.

We need to make some assumptions about the future to get a handle on how much the company is worth. I hear that the team at LAC is great, so let's assume they can be online in late 2025 and at a nameplate capacity of 40,000 tpa carbonate by late 2026. And they are at 80,000 tpa by early 2028. How much should they be worth?

We can do a simple comparison analysis. First, we can compare them to a similar company. We need another company that makes lithium carbonate at scale, and that's SQM ( SQM ). SQM produced around 180,000 t carbonate last year. They have between $15–$31 billion market cap in the last year, let's call the midpoint $23 billion. If SQM is producing 180,000 t carbonate, then LAC might be ~22% of the FCF of SQM by late 2026 and ~44% of the FCF by 2028.

LAC would still need to pay off some debt, so it wouldn't quite be at parity. But this says that LAC might be somewhere near a $5 billion market cap by 2026 and $10 billion by 2028. If we discount for debt payments it might be $4 billion by 2026 and $8 billion by 2028.

Is LAC a Good Investment?

This is a very rough estimate of value. It assumes that LAC will deliver on its promise of a productive mine, and ignores a lot of the differences between SQM and LAC. For instance, SQM has a large political risk in Chile. SQM also has a diversified set of products outside lithium.

Nonetheless, this does give us a good handle on LAC's potential value. LAC is currently trading around $1.2 billion market cap. If they do get to a $4 billion market cap in three years, we can discount the shares by a 15% rate, then LAC has about a $2.6 billion value today.

This implies that LAC has a big upside here. However, it must be said that LAC has execution risks that must be taken into account. LAC has already been delayed due to environmental protests. Further, as this is a new technology LAC may not be able to deliver on their production targets quickly.

The idea of McNulty curves says that the newer a technology is the longer that ramp-up will take. If this is correct, it might be that LAC takes longer than late 2026 to get to 40,000 tpa.

Conclusion

I believe that LAC will get into production, the only question is when. LAC has a great asset and a great team. Because they are located in America the project is viewed as important to American supply chains and should continue to receive political support.

If you invest in LAC you will need to think as a long-term investor rather than a trader. The price recently went up, after the split with LAAC ( LAAC ). The market currently believes in LAC. If there are any delays or problems it will be reflected in the short-term price of the stock.

To me, this feels like a 'safe bet' if you're willing to wait. There are other lithium developers that have much more upside, but also more downside. This is like the 'vanilla' lithium developer play.

For further details see: