CA - Lithium Americas: Game Time

2023-08-24 18:04:09 ET

Summary

• Lithium Americas recently started lithium production and its stock is trading at multi-year lows.
• The company has de-risked its investment thesis with the opening of a mine in Argentina and the start of construction on the Thacker Pass mine.
• The major risk now is the price of lithium, but the company is in a good position with production in hand.

In an ironic twist typical of the stock market, Lithium Americas ( LAC ) recently started lithium production and the stock now trades at multi-year lows. The stock market has a long history of valuing a concept at higher valuation multiples than a company shifting to the production phase. My investment thesis remains ultra bullish on the stock due to the long-term demand equation on lithium and the stock trading at the lows.

Production Phase

With the Cauchari-Olaroz mine in Argentina producing the first lithium back in June, investors should be able to relax on the risk of whether Lithium Americas can effectively construct a mine. The whole investment thesis surrounds whether the management team can construct and operate lithium mines in Argentina and the U.S.

The major risk to the investment thesis is mostly de-risked now with the opening of the mine in Argentina and the Thacker Pass mine starting construction after a lengthy legal battle. The major risk now is just the price of lithium.

Lithium Americas now projects 5,000 tonnes of lithium carbonate production this year. The new mine has total capacity of 40,000 ktpa by mid-2024 with the ability to further expand the mine another 20,000 tonnes via Phase 2.

Thacker Pass has the same production capability in Phase 1 at 40 ktpa LCE with the ability to double capacity another 40 ktpa LCE. In essence, Lithium Americans can quickly go from 5 ktpa LCE in 2023 to a couple of mines topping 140 ktpa LCE by the end of the decade.

The issue going forward is much more about timing and financing then meeting production goals. Due to the expected lithium supply gap issues in the years ahead, any company like Lithium Americas with current lithium supply will benefit from project delays.

In essence, if Lithium Americas fails to hit production targets with new mines, lithium will just enter further under supply scenarios and the price of lithium will rise. The company is in a win-win situation with production in hand now.

Production Picture

The revenue picture starts opening up with the start of lithium production. Lithium Americas obtains 49% of Caucharí-Olaroz Phase 1 mine output suggesting 2,450 tonnes in the 2H of the year.

The consensus analyst (only 2) estimates have the lithium miner reaching $117 million this year. The current lithium prices of ~$30K won't support those revenue levels, but the ultimate key is the 2024 production levels and future plans for Thacker Pass to open in 2026.

The Argentina mine alone with production of ~19,600 tpa for Lithium Americas (future Lithium Argentina). At this current price, the company will generate 2025 revenues closer to $600 million compared to the $700 million targets for analysts, though the price of lithium could easily rebound from the current lows.

The company is highly profitable with lithium prices at only $24K. In fact, the Thacker Pass project will deliver $1.15 billion in adjusted EBITDA from at the start of Phase 2 production in year 5.

The stock has fallen to a market cap of only $2.8 billion despite the very positive economics of lithium due to strong demand from EVs and renewable energy projects. Lithium Americas has a cash balance of $500 million with limited costs remaining to finish the capex on the Argentina mine.

The company is working with the U.S. DOE on the ATVM Loan Program to fund 75% of the costs of the Thacker Pass Phase 1 project. The split up of the business into two companies will alter some of the investment thesis on whether one wants to own the Argentina company turning to positive cash flows here or the Americas division taking on a loan for a huge project in Nevada.

Takeaway

The key investor takeaway is that Lithium Americas is very appealing on dips. The stock starts trading at only 2x to 3x adjusted EBITDA targets for the Thacker Pass mine alone, assuming even lower lithium prices in the future despite supply concerns.

Investors should use weakness to load up on a lithium miner starting production with the stock trading at the lows.

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