SBSW - Lithium Americas: GM Sees Thacker Pass As The Key

Summary

• Lithium Americas inks a deal with General Motors.
• This equity deal could result in GM owning a position in LAC while providing partial funding of the Thacker Pass project in northern Nevada.
• Project costs due to inflation have exploded.  More funding is needed to meet Thacker Pass project capital needs (and meet GM deal requirements).
• We explore other U.S. based projects that do not suffer from environmentalist lawsuits that should also snag funding with time (be it private or government loans).

I had a friend ask me last year "Why are you buying all of these lithium companies in this bad market"? Twas a valid question. Maybe it would be smarter to just go cash heavy and avoid the pain with those 20/20 rearview glasses, but in my 32 years' in this game I've learned what works for me. This may not work for you, however, but I'm more than content to buy good assets at cheap distressed prices and then just wait for the markets to turn around.

I'll take a slapped around and beaten up company that has solid management and a good project any day over some high-flying popular company that might crash and burn. Granted, I might be picking over the pieces at such said burn site to invest in, but the point is I like special situations or value plays. Lithium Americas has been such a play somewhat. While not exactly crashing and burning, they have been slapped around a little bit this last year if you pull up a stock chart.

The caveat is they are most definitely a "special situation" with all the legal delays surrounding the lithium project in northern Nevada called Thacker Pass. However, today we see Lithium Americas becoming an even richer "special situation".

The Crux of Thacker Pass

We all knew Lithium Americas ( LAC ) Thacker Pass project would require massive funding, but it is still somewhat of a surprise to suspect something is in the works and then see a deal pan out. Just this morning (1/31/23) LAC announced a whopper of a deal with GM having inked an agreement to invest $650 million in LAC in two tranches if conditions are met to fund the Thacker Pass project. Yet more funding will be required as costs due to inflation have gone through the roof. Lets compare how costs have risen:

Old phase 1 and 2 costs were $581 million and $478 million. New phase 1 and 2 costs per todays PR are: $2.27 billion and $1.73 billion. Inflation has taken quite a toll but the U.S. government should step in to help fund the bulk of the project and I think LAC hints at that below.

My interpretation of the paragraph is this points to future government loans: U.S. government loans we know they are pursuing because frankly the company has told us so in the past. We might assume those loans will be for $1 billion which would leave LAC to find one more partner to pony up roughly $620 million. Note we do not know exactly how the company will split the existing capital at LAC once the company splits in two parts. Per today's PR the GM capital comes in two tranches and tranche one goes to LAC and tranche two goes to Thacker Pass. It is possible that LAC will need slightly less than the remaining $620m as they can put up present company money post split or inflation might actually decrease over the course of building out the project. We can guess that the additional funding will come from the U.S. Government in 2023 via a loan. This would not result in any dilution of the stock. When that potential news is announced, we could see a share price reaction much like ioneer ( IONR ) experienced, when their challenged project landed massive U.S. government loans (subject to conditions being meet).

Thacker Pass Legal

Looking at Pacer this morning (1/31/23) we see no new significant updates or news to report via the court system. Hence we continue to wait for Judge Du to make her decision. Best guess is a February - April decision. Granted, the case may go to the court of appeals after this which might be why in the above picture LAC says "The escrow release is expected to occur no later than the end of 2023.

Lithium Americas Risk Assessment and Protective Puts

Even with today's news and share price rise I think we are still early in the LAC game. If Thacker Pass is approved, we might suspect a violent share price appreciation. Long term the company will split into two parts with associated ticker symbols: A pure play in Nevada and a pure play in South America. Looking at past actions of Lithium Americas (and how aggressive they are with acquisitions) I think the possibility exists they get further in bed with Australian based Canadian miner Green Technology Metals (GT1 on the ASX market).

Yet, If Thacker Pass is denied, one might argue that a rapid and sudden decompression would happen in the stock. While we do not know the exact dates, one might guess that Judge Du makes a decision sometime in February to April. I lean more on March.

One approach for investors wanting to pay to limit downside exposure is to buy some protective puts as probable time frames near. Granted, I would most likely buy the deep out of the money puts to limit how much capital I had to spend (as I am willing to incur losses) but I do not need massive decreases. Hence, some cheap puts might be in order as time frames for a decision shrink., the South American assets hold immense value which should in theory place a floor on the stock. Yet, people are emotional beings and when stocks move rapidly people can over react with the buying or selling.

Project Funding Ponderings

Something to ponder concerning LAC: If Lithium Americas can get $650 million for Thacker Pass via GM (with all of Thacker Passes pending environmentalist lawsuits) and Ioneer with its endangered Tiehm's Buckwheat problem can snag a $700 million loan from the U.S. government [Plus an additional $490 million via Sibanye Stillwater Limited ( SBSW )], what might other companies that are not plagued by environmentalist lawsuits like LAC and endangered species problems like IONR, obtain? The point is, we should see good U.S. based projects obtain funding with time, but what lithium projects should we be speculating on?

Alternative Lithium Project Speculation

Narrowing our search down to only U.S. projects, who might a few top contenders be? We need to avoid the microscopic plays first. While they might pan out one day, bureaucrats typically are risk adverse. Hence, we need to avoid the microscopic plays and focus on plays that while small to moderate size, have good odds of pulling lithium out of the ground. My top two contenders to receive additional private and U.S. government loans are:

Standard Lithium ( SLI ) - With projects based in mining friendly and water rich Arkansas, Standard Lithium is one of my top picks. Powerhouse Koch invested $100 million into the company last year. The project is located on an existing industrial site on private land. Thus the BLM does not have to be involved which removes a potential hurdle. With Koch backing and the project using Koch supplied DLE technology, along with a subsidiary of Koch conducting the engineering study, it is not a mental leap to see a future where the U.S. government backs the company and Koch is awarded the engineering portion to actually build the facility.

Century Lithium ( OTCQX:CYDVF ) (LCE:CA) - The recently renamed Century Lithium, (formerly Cypress Development) is a lithium clay play in Nevada. While Lithium Americas is using sulfuric acid, Century Lithium has gone down the arguably superior road of Hydrochloric acid and achieved enhanced battery grade results of 99.94% which exceeds the battery grade specification of 99.5% purity. It is curious to note that in Clayton Valley only three companies hold meaningful water rights - Albemarle ( ALB ), Scorpio Gold, and surprise, Century Lithium.

Per public comments, investors have been told that Century Lithium is pursuing U.S. government loans. They will, however, also require private funding. Frankly, it is only a matter of time before this happens and with the definitive feasibility study ((DFS)) due to arrive in Q2 (or Q3 if Mr. Murphy has a say) we can assume that funding via private sources will arrive somewhere before or after those time frames.

Hundreds Of Billions Of Demand

Following the money, you will note hundreds of billions flowing into lithium investments and the associated support infrastructure. Ponder a few and the impact it has. Note: Some of these are not total values; those will be higher. I've tried to keep all links from 2022 and those above $1 billion. Otherwise, this list would be very long indeed.

Volkswagen $180 billion .

Ford ( F ) $50 billion .

Mercedes-Benz $44 billion .

Tesla to build a Gigafactory in Mexico .

GM $7 billion (for just Michigan).

BlueOval SK (a joint venture between SK On and Ford) began to construct two new battery plants in Glendale, Kentucky, US for $6.46 billion .

$4.9 billion in EV upgrades for Ontario per Stellantis & LG Energy Solution.

$3.5 billion via Redwood Materials for a SC plant .

$2.9 billion via California for EV .

$2.36 billion in a Michigan battery component plant via Goition.

$1.6 billion per the Canadian gov .

$1.5 billion for Ottawa and Ontario per Umicore .

$1.4+ billion over five years for Ontario per Honda .

$1 billion in Mexico via GM .

$717 million for Tesla to expand Austin Gigafactory.

Lastly, Tesla is cutting the price of cars in the U.S. and Ford is expanding production of the F-150 Lightning .

Conclusion

The news today is positive and we should expect further loans via the U.S. Government to arrive at LAC. Sister lithium clay plays located in Nevada (such as Century Lithium) should benefit and with time snag loans along with Standard Lithium obtaining loans from both private and government sources. Given the overwhelming number of projects moving forward that will demand lithium, the future for the white metal is bright.

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