LAC - Lithium Americas: Buy The Slump

2023-12-12 17:34:53 ET

Summary

• Lithium Americas Corp. is a promising lithium play with a large domestic mine in construction and financing close to being fully secured.
• Slower demand for EVs has caused lithium prices to slump, but long-term demand remains strong.
• The stock is cheap based on the strong fundaments of the Thacker Pass mine, though one must expect lithium prices to rally again.

An investor interested in playing the long-term growth in the electric vehicle ("EV") market should dive into lithium plays now. Lithium Americas Corp. ( LAC ) is one of the more intriguing lithium plays, with a large domestic mine in the construction phase and financing lined up. My investment thesis is ultra Bullish on the stock of the lithium miner, which is now trading close to the lows with collapsing lithium prices.

Lithium Doubts

Several domestic automakers are pushing into hybrid electric vehicles, with consumers pushing back on all-electric vehicles. Between higher costs and range anxiety, buyers remained concerned about buying EVs that aren't a Tesla, Inc. ( TSLA ).

The slower demand has pressured lithium demand and caused prices to slump, though lithium supply hasn't surged, and long-term demand doesn't appear altered. Albemarle Corporation ( ALB ) has already suggested some operations are being reduced , which is exactly what helps drive prices higher.

When Lithium Americas updated market projections back with Q3 results in early November, the mining company kept large demand forecasts. EV battery packs are using more and more lithium, and vehicle production is forecast to ship 45 million EVs in 2030, up from just under 15 million this year.

The EV market is forecast to surge 3x the rest of the decade, with lithium demand possibly exceeding EV production. Right now, China is already producing close to 9.5 million EVs annually with a goal of hitting 11.5 million next year. A lot of the range anxiety issues in the U.S. should be resolved over time considering China has generally solved the problems.

Funding Mostly Secured

Regardless of the price of lithium, Lithium Americas is poised to generate solid profits in the future. The company estimates the Thacker Pass mine will have operating costs of $6,743 per tonne of lithium carbonate, placing the mine in the middle of the pack on the global cost curve.

Even at current costs, Lithium Americas would generate sales double the costs. With a current market cap of only $950 million, the stock currently trades at less than 1x the average EBITDA forecast for the majority of the mine's operating life at $1.15 billion annually, starting in Year 5 with the Phase 2 mine starting.

Of course, this value depends on a rebound in lithium prices to $24,000/t for lithium carbonate equivalent, or LCE. The best part is that the company lays out the adjusted EBITDA targets based on the price of LCE, letting investors decide the correct price and apply a valuation.

Unlike other lithium miners in the development phase, Lithium Americas has deals in the works for financing the project. The company expects to secure a DOE loan for 75% of the capital cost for the mine allowing the General Motors Company ( GM ) tranche 2 investment of another $330 million to close. Though, the biggest issue with this funding is the conversion price will be the current price when Lithium Americas obtains the DOE financing approval leading to unexpected dilution with the stock slumping to below $6.

In total, the Thacker Pass mine is forecast to cost $2.3 billion to construct Phase 1 with Lithium Americas having access to the necessary cash via these financing options. The company ended Q3'23 with a cash balance of $276 million and already spent $51 million during the quarter.

The major risk is the company failing to obtain the DOE loan covering up to 75% of the construction costs. Considering the federal government wants to secure U.S. produced lithium, a move to block a loan for the Thacker Pass and Phase 1 production capacity of 40,000 tpa going to GM would appear illogical.

Takeaway

The key investor takeaway is that Lithium Americas Corp. stock will always trade wildly based on current lithium prices, but investors should use weakness as a buying opportunity. The long-term push into EVs doesn't appear altered from some short-term deferrals into hybrids. Not to mention, Lithium Americas isn't even producing lithium now, causing a limited impact on the long-term NPV of the Thacker Pass mine when the market expects lithium prices to rise again on growing lithium demand.

Investors should use weakness to build up a position on Lithium Americas Corp. stock trading far below NPV.

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