SQM - Lithium Americas: My Favorite Stock For 2023

Summary

• Lithium Americas Corp. will transition from a junior mining company into a lithium producer this year as it begins ramping production of its Cauchari-Olaroz mine with Ganfeng.
• Recent acquisitions of Millennial Lithium and Arena Minerals don’t seem to have been fully appreciated by the market yet, leaving significant room for upside as potential is quantified.
• Yesterday's Lithium Americas announcements regarding Thacker Pass were incredibly strong and removed a number of uncertainties regarding the project.

I’ve been following Lithium Americas Corp. ( LAC ) since 2017. Back then, its Cauchari-Olaroz project was a 50/50 joint venture between Lithium Americas and Sociedad Química y Minera de Chile S.A. ( SQM ), with a production target of 25,000 tonnes per year of lithium carbonate. Oh, how the times have changed. The, now, 46.7/44.8/8.5 venture between Ganfeng ( GNENF ), Lithium Americas, and JEMSE is targeting phase 1 production of 40,000 tonnes per year, with an expansion to add another 20,000 tonnes per year.

But, more importantly, Lithium Americas has transitioned from a meek junior lithium company seeking the deep pockets and mining experience of companies like Ganfeng, to an emerging lithium powerhouse. Now, without any lithium production to date, that may seem like an unfair classification, but let’s look at some recent events.

South America

In November of last year, Lithium Americas made an offer to acquire Millennial Lithium. The deal closed earlier this year, allowing Lithium Americas to begin the process of homologating the Pastos Grandes project. Under Millennial Lithium, production was expected to be 24,000 tonnes of battery-grade lithium carbonate per year.

Sure, it’s no Cauchari-Olaroz, but not much else is. 24,000 tpa LCE is not something to shy away from. But, in December, Lithium Americas announced that it had moved to acquire Arena Minerals ( AMRZF ). Arena’s Sal de la Puna project also resides in the Pastos Grandes salar, significantly expanding Lithium Americas’ holdings in the area.

In October, Arena disclosed that it had started the design and permitting process of a 40,000 tpa lithium chloride facility, which, at 35% lithium chloride, is equivalent to 12,194 tpa LCE. Simply combining these two estimates, 24,000 tpa and 12,000 tpa, brings us to a new production output of 36,000 tpa. But there are sure to be synergies to gain by merging the projects, not to mention the fact that Arena Minerals’ resource still has significant exploration upside ( see my previous article ).

As such, this project now looks to be on par with Cauchari-Olaroz. And Lithium Americas owns it 100%. I’m not sure this scale has truly been appreciated by the market yet.

Thacker Pass

Finally. The wait is over. No, there still hasn’t been a decision regarding the Record of Decision for Thacker Pass, but Lithium Americas has finally completed its DFS and made a major step toward financing the project. General Motors ( GM ) has agreed to make two investments of $320 million and $330 million in Lithium Americas in two stages.

The first tranche must be paid only if Judge Du upholds the Record of Decision, Lithium Americas is able to convert its agricultural water rights to industrial rights, and “other customary conditions.” Shares of the first tranche will be bought at $21.34 per share and, upon completing the investment, GM will own a 9.999% equity interest in Lithium Americas.

The second tranche will be completed after Lithium Americas completes its business separation and $330 million will be invested in the remaining North American business. Shares will be purchased at the market price on the date of subscription, though will not exceed $49.082 per share (pre-split value). I like this far more than a direct project investment, as it actually results in far less dilution overall.

As per yesterday’s investor call, Lithium Americas expects General Motors to hold no more than 30% of the North American business after the split. Had they gotten a direct project investment, the company likely would have lost ~50% of its North American business. As such, after a low-interest loan, this is the cheapest form of financing for investors.

Wonderful! That’s a lot of money, at not too crazy of a price. But the news isn’t all great. Looking at the DFS highlights, we can see that costs have ballooned, with production costs now estimated to be $7,198/tonne for the life of the mine ($6,743/tonne for year 1 - 25). As of the company’s 2018 PFS, production costs were expected to be just $4,088.

Capital costs have jumped even higher, up from $581 million for Phase 1 to $2.268 billion. Yes, $2.268 billion for Phase 1 alone. Phase 2 capital costs have risen from $478 million to $1.729 billion. That means, even after GM’s $650 million investment, Lithium Americas is $1.618 billion short of raising the capital needed to finance Thacker Pass.

Even if the company were able to utilize all of its $392 million cash balance ( as of September 30 ) to fund Thacker Pass, which it won’t, there is still a $1.226 billion shortfall. To help relieve this, Lithium Americas has made an application to receive funding from the DOE’s ATVM loan program that it hopes can alleviate up to ~60% of the construction cost.

Even if Lithium Americas does get a loan, which isn’t a guarantee, there’s no telling how much it will be for. If it is the 60% that they’re targeting, that would provide the company with $1.361 billion. This would put them in reach of their final goal, but it relies on a lot of “ifs.” Instead, Lithium Americas may still need to sell off a portion of the Thacker Pass mine, in addition to this General Motors investment, in order to finance construction of the project.

Though, in fairness, this seems to be something the company is keen on avoiding. After seriously considering over 50 different potential partners, according to yesterday’s investor call , it’s unlikely that Lithium Americas would put itself in a position where it would need to raise significantly more money. I’ve long touted the strength of this management team; it’s highly unlikely that they would make such a significant blunder on such a critical issue.

To be honest, my review may be a bit on the pessimistic side of things. This deal really is quite strong for Lithium Americas, both in terms of the monetary value and the significance of having General Motors as the offtake partner. Jon Evans, Lithium Americas’ President and CEO, highlighted how this should help the company’s ATVM loan application.

According to Mr. Evans, one of the major considerations for the DOE is who a given company is selling its lithium to, and in which country. To keep it 100% in America, with the nation’s largest automaker (by units sold), is about as good as it can get from the DOE’s perspective. This has significantly boosted the company’s confidence, not only that it will receive a loan, but that it will be within their targeted range.

According to Mr. Evans, an ATVM loan could finance 55% to 75% of the project, excluding mine costs. At Thacker Pass, the mine only contributes $58 million toward the $2.268 billion total Phase 1 price tag. So, best case, Lithium Americas receives $1.658 billion from the DOE. But, with limited funding for the program, I think Lithium Americas would do well to get the aforementioned $1.361 billion.

Investor Takeaway

Look, Lithium Americas isn’t without its risk. While the company’s strong Argentinian resource portfolio offers a strong support against downside risk, investors will almost certainly get burned in the short term following an unfavorable ruling in Nevada. Even still, Lithium Americas is my favorite stock heading into 2023.

First of all, it seems extraordinarily unlikely that Lithium Americas will suffer a complete loss in Nevada. But even if that were to happen, I believe that the strength of Lithium Americas’ South American lithium portfolio is significantly overlooked. I expect that investors will be able to more than recoup any losses by the end of the year, thanks to Cauchari-Olaroz coming online. Regardless, to limit risk, it may also be prudent to purchase some hedging puts.

Now, in the event that Lithium Americas is able to begin construction following the ROD decision, and it receives a significant loan from the DOE’s ATVM program, I don’t think there’s much that can keep shares of Lithium Americas below $40. With short interest in excess of 10%, I expect a moderate short squeeze to aid in a potential near-term rally. This is really where the opportunity, in my opinion, lies.

From my perspective, even in the absolute worst case with Thacker Pass (permits are revoked), there is enough support in South America for Lithium Americas Corp. investors to still make money. Yes, you may be overpaying a bit in this scenario, but remember that this is the bear case. The bull case offers >60% upside. Due to my belief that Lithium Americas has a very asymmetric risk/reward profile, it is my favorite investment for 2023.

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