CA - Lithium Americas: Trading At An Outstanding Discount With Significant Catalysts Looming

• Ongoing litigation continues to weigh on Lithium Americas’ share price, but it poses little risk to the company’s operation and its upcoming resolution should be a significant catalyst.
• Lithium Americas currently trades far below an estimate derived from a recent comparable transaction, which estimates current upside of 41%.
• Additional catalysts with end-of-year targets should bring the company closer to its fair value, unlocking significant value for investors in the coming months.

Lithium Americas ( LAC ) is the first company I invested in within the low-carbon economy and, having sold only a few shares since 2017, it has grown to be my largest position. But despite any sentimental attachment, there are many reasons why I’ve held onto most of my shares. I covered most of those in a past article, which you can find here . This article will aim to demonstrate why current pricing reflects such a strong buying opportunity, especially given significant catalysts with near-term implications.

Legal Battle and Environmental Issues

Following the legal battle around Thacker Pass has been difficult, to say the least. The introductions of new parties, and dismissals of old ones, has muddied the waters between frivolous claims and those that appear to hold some substance. Let me try to quickly move through the more trivial claims so that we can then look at the more serious accusations.

I should briefly note that the ongoing litigation consists of multiple suits brought against the Bureau Of Land Management (“BLM”), which have been consolidated into one case, Bartell Ranch LLC, et al., to simplify proceedings. Seeing as the crux of the case is centered around land that the BLM had approved for development by Lithium Americas, they too have joined the case as a defendant.

The general claim is that the BLM did not engage in enough consultation of stakeholders, including other government agencies, or conduct a satisfactory review of the provided documents. Within this general claim, the various parties are seeking to prove that this lack of effort by the BLM could harm the environment and the plaintiffs themselves. I’ll look to examine each area of focus within the case to determine whether or not these concerns hold any merit.

I’ll begin this discussion with the various tribal allegations. The People of Red Mountain are an unrecognized Tribe with affiliations the Fort McDermitt Paiute and Shoshone Tribes. The Fort McDermitt tribe has contributed to the development of Thacker Pass, with the goal of eventually employing some of its respective members.

Without many local employment opportunities, many tribespeoples end up moving away seeking employment. Thacker Pass may allow more members of the Tribe to remain in the area by providing job opportunities. The Fort McDermitt Tribe has even offered its Tribal student center and gym for the company to train future employees. As a sign of good faith, Lithium Americas is also working with the community to build a preschool, which would enable both parents of a household to seek employment.

The People of Red Mountain alleged that the proposed mine would desecrate an old burial ground, the site of an 1865 massacre of the Paiutes committed by the US military. But some minimal investigative work will find that these claims hold little merit. Take a look at the image below from court documents released last September. The alleged Native American massacre sites don’t even fall within the BLM-administered land, much less the proposed mine site of Thacker Pass. That’s a pretty big hole in the allegation.

Additionally, while the plaintiffs allege that they weren’t consulted in the BLM’s decision, the court noted that there was no effort made by the plaintiffs to be involved prior to the permit finalization. This includes the window that the BLM opened for comments to be made by concerned parties. The Reno-Sparks Indian Colony (“RSIC”) and the Burns Paiute Tribe are also listed as plaintiffs for this cause.

The People of Red Mountain were officially dismissed from the case, due to an inability to retain legal counsel, on May 5th. On June 10th, the judge also ruled that the RSIC had been unable to provide enough evidence for the court to overturn the record of decision (“ROD”) published by the BLM. Thus, I don’t think investors should concern themselves much with the Native American allegations.

Moving onto environmental arguments, I believe we have a healthy mix of nonsense and valid concerns. Let’s start with the nonsense first. The Western Watersheds Project lists its concern as the potential harm that could come to the local “sage-grouse and other wildlife.”

A noble cause, though there doesn’t appear to be much substance to the argument. A fellow Seeking Alpha contributor, Austin Craig, covered the sage-grouse concerns in one of his previous articles . Additionally, let’s take a look at the origins of the Western Watersheds Project, which was founded as “a campaign to stop livestock abuse of the public domain.” The founder, Jon Marvel, was deemed an “environmental terrorist” by the Idaho Department of Lands for his radical anti-grazing stance and, unsurprisingly, he isn’t very popular among ranchers.

The Great Basin Resource Watch , Basin and Range Watch , and Wildlands Defense all filed their initial suit with the Western Watersheds Project, meaning they have, largely, the same concerns. Brian Ertz , the Litigation Director of Wildlands Defense, previously served as Media Director for Western Watersheds Project. The Wildlands Defense website also states that Mr. Ertz is currently in his final year of law school, though his LinkedIn indicates that he graduated in 2015 and left Wildlands Defense in 2016. Regardless, it seems that the primary concern of these groups is that Thacker Pass serves as a connection point for the Double H Mountains and the Montana Mountains.

As we can see by the figure below, the proposed mine plan leaves significant space open between the two mountain ranges. Lithium Americas is also leaving much of the area undeveloped, despite the presence of mineralized zones, for this very reason. The mine design and layout has been very intentional, utilizing the least inhabitable parts of the land. The company has spent over $100 million developing Thacker Pass so far, $8 million of which has gone towards environmental and cultural studies. They’ve dotted their i’s and crossed their t’s.

This leaves us with the allegations of Edward Bartell, a local Nevada cattle rancher . According to his original lawsuit , the Lahontan Cutthroat Trout , a threatened species with habitats in the nearby Pole Creek and Crowley Creek, could be adversely affected from lower water levels caused by Lithium Americas’ proposed groundwater pumping. But findings of Lithium Americas and relevant government organizations indicate otherwise.

According to the U.S. Fish & Wildlife Service (“USFWS”), the two closest habitats for Lahontan Cutthroat Trout to Thacker Pass are Pole Creek and Crowley Creek. Yet, despite being the closest to Thacker Pass, both habitats are .75 miles and 2.5 miles north of the maximum extent of groundwater drawdown respectively. Based on groundwater model simulations, the mine is expected to impact less than 1% of each stream’s flows, starting around 2055. It’s also worth noting that, as of 2019 , only one population of Lahontan Cutthroat Trout was recorded in Pole Creek and more recent state stocking efforts indicate it no longer remains. Given these observations, and more, the USFWS and the BLM each determined that Thacker Pass “may affect, but is not likely to adversely affect” Lahontan Cutthroat Trout.

While this may not sound like the most favorable conclusion, I assure you it’s positive. Under the Endangered Species Act , there are three distinctions that a project can receive. “No effect” is typically the best but, given the less than 1% impact the project is estimated to have on flows, it isn’t appropriate for Thacker Pass. “May affect, but is not likely to adversely affect” is the next-best determination and means that “all effects are beneficial, insignificant, or discountable.”

Despite this highly positive determination by the relevant governing bodies, the groundwater pumping in the area is a bit of an issue. The Orovada Subarea basin has an annual water yield of 60,000 acre-feet per year, but is currently permitted for extraction of up to 89,913 acre-feet per year. Historically , only 70.5% of permitted water rights are actually utilized, but that still leaves the basin over-extracted by 3,391 acre-feet per year.

Thacker Pass seeks to pump another 5,200 acre-feet from groundwater at full operative capacity (2,600 acre-feet for each phase). This could cause some concern among existing rights holders, such as Edward Bartell, who rely upon the basin’s output to support crops and livestock. But water rights are a bit of a tricky issue, especially in Nevada where they’re governed by something known as “prior appropriation.”

This doctrine essentially dictates that water rights are “determined by priority of beneficial use.” Determining what exactly qualifies as “beneficial use” is where things can start to get a bit less clear and it opens the door to oversubscribed water basins. This is also why water rights can have a “use it or lose it” feeling in the state.

According to the American Bar Association , “while junior users cannot oversubscribe the resource such that they deny the senior user its allotment, they are not required to protect fully that user’s ability to access the water.” Put another way, if the water rights are granted, having been deemed to be a beneficial use, it is not the responsibility of one rights holder to ensure that its water usage doesn’t impact the water usage of another holder.

So any arguments that Lithium Americas’ water usage could further strain an already oversubscribed basin, potentially impacting other rights holders, hold no merit if the company has water rights. And it does. Lithium Americas obtained its water rights from two ranchers in the area, which means it’s not adding any excess strain to the basin. One could even argue that it reduces strain put on the basin, as Lithium Americas will be extracting water year-round at a fairly constant rate. This is not the case for agricultural water usage, which is quite seasonal. Additionally, the transfer of the water rights from agricultural use to industrial use will reduce their size by 22.5% to make up for the fact that agricultural use tends to return more water to the basin.

While the transfer application has not yet been approved, the decision is expected later this year, I expect few issues. The company plans to reuse and recycle all water it pumps an average of 7.2 times, a clear indication to the state that it intends to maximize the utility of allocated resources. The water rights “ are expected to be sufficient for Phase 1 of the operations and a portion of Phase 2.” New water rights can only be acquired through the acquisition of land from those that hold water rights or through a direct purchase of the rights themselves because of the basin’s current level of utilization.

Lithium Americas does like to play down its water usage by saying , “Approximately 350,000 acre-feet per year are pumped from wells in Humboldt County. Thacker Pass will make up less than 1% of this total.” This is technically true, but there are multiple basins to cover the entire 9,658 square-mile county. So, I’d say that this statistic is largely irrelevant, especially when considering how much larger Humboldt County is than most US counties .

If I’m being frank, I’m not too sure Mr. Bartell really cares all that much about the Lahontan Cutthroat Trout. Instead, I’d wager he’s more concerned about any potential damage caused by the project as it relates to his land. Knowing how water rights are governed, it seems the plaintiffs may have used the Lahontan Cutthroat Trout argument as a means to indirectly fight the alleged depletion of the basin and nearby water sources. It’s a clever way to go about it but, given the above information, the argument is unlikely to be won. Though, alongside water usage concerns, Mr. Bartell and the environmental groups take issue with potential water contamination and air pollution.

In February, Lithium Americas received its final key state permits, the Water Pollution Control Permit, Mine Reclamation Permit, and Class II Air Quality Operating Permit. The reclamation permit is definitely the least controversial of the three, as it summarizes the land most likely to be affected by the mine and requires Lithium Americas to set aside $47.6 million to guarantee revitalization of the affected areas. Though, the company already planned to perform its reclamation duties concurrent to its operations to minimize its environmental disturbance, leaving no more than 35% of the planned mine pit open at any one time.

The granting of the Water Pollution Control Permit and the Class II Air Quality Operating Permit, while the trial is still ongoing, is fairly significant. These state-granted permits maintain even more stringent qualifications than the federal permits that the BLM is being sued over. The Nevada Division of Environmental Protection (“NDEP”) said of the approvals :

“Approval for these permits comes after an extensive application review and revision process, as well as months of public engagement with the Orovada community and the Fort McDermitt Paiute and Shoshone Tribes. All three permits, which are required for Lithium Nevada (a wholly-owned subsidiary of Lithium Americas) to start construction and operate the mine, come after NDEP determined the project can operate in a way that protects public health and the environment.”

Great Basin Resource Watch appealed the NDEP Water Pollution Control Permit on April 15 , alleging that Lithium Americas doesn’t have adequate plans in place in case there are “adverse observations,” such as seepage. The group argued that such plans are necessary because Thacker Pass will be the first mine in the state to utilize its proposed method of clay tailing filtration. However, on June 28 , the NDEP affirmed the permit in a unanimous decision on the grounds that the completed review was sufficient. With no other appeals launched before the March 7th deadline, all three key state permits are now secure.

Still, ignoring this and looking at the concerns from the ongoing litigation regarding the ROD, the risk seems quite small here. Thacker Pass was designed as a zero liquid discharge (“ZLD”) facility, which prevents any regional water contamination by purifying, and recycling, all wastewater. All of the company’s waste tailings will also be completely dry-stacked, significantly improving the mine’s environmental safety, and pH neutralized.

Simply put, Lithium Americas’ goal is to mine the clay, extract the lithium, and return the soil exactly as it was - minus the lithium. This ZLD design is far above the minimum water contamination standards, and should eliminate concerns regarding contamination. So, again, not something I’m particularly worried about.

Concerns regarding air quality come from the dust produced from the open-pit digging, as well as the influx of vehicles, primarily large trucks, that will be traveling to and from the mine. However, research shows that mining dust typically only travels about 750 meters. That’s not even half a mile. For a location as remote as Thacker Pass, it’s difficult to see how this will be an issue.

The closest resident of the town closest to the proposed mine site, Orovada , lives about 20 miles away from Thacker Pass. This town has a population of just 155 people spread across 45.30 square miles, the vast majority of residents being ranchers. It may not surprise you to learn that 80% of land in Humboldt county is public land and 97% of privately-owned land is used for agriculture. Only .52% of land in the entire country is classified as urban, given how sparsely populated it is.

What’s the relevance of me sharing this? Well, considering the broad spread of civilization in the area, it’s unlikely that there would be anyone close enough to be impacted by dust production, even if the mine was located in the heart of Orovada. Though, granted, the roads will see quite a bit more usage.

As you can see from the map above, the main road that will be used to transport materials and equipment to and from the mine travels directly through Orovada. While the NDEP notes that the Orovada community was heavily consulted prior to the issuance of the permits, it is still interesting to consider the increase in traffic along the highway. Inside Climate News estimates that there will be 75 semi-trucks making deliveries to the site every day.

But Lithium Americas has done what it can to limit that interference. The decision to produce sulfuric acid on-site from molten sulfur isn’t just a play at economics, it also seeks to limit the facility’s footprint. To truck in sulfuric acid, rather than molten sulfur, would require three times as many trucks, thus increasing traffic even further.

By limiting traffic, the company has been able to significantly reduce its Scope 3 emissions, which it hopes to quantify in an upcoming study. Scope 1 and 2 emissions are expected to be in line with Argentinian brine projects, as opposed to carbon-intensive hard rock projects in Australia. This is an impressive feat, given Thacker Pass will be an open pit mine, such as those in Australia.

Ignoring potential disturbances, the use of sulfuric acid may stir some fear given its acidic strength. However, its use at Thacker Pass will be largely benign. The decision to produce sulfuric acid on-site doesn’t only reduce traffic, but it also limits the danger posed by transporting it, as molten sulfur is a safer chemical to transport. Additionally, as Thacker Pass is designed to be a ZLD facility, there is very little risk of sulfuric acid making its way out of the designed flowsheet and, as mentioned earlier, the waste tailings are pH neutralized. The heat generated by sulfuric acid production will also limit the mine’s environmental footprint by producing up to 45 megawatts of low-carbon electricity (total of 90 MW in Phase 2), enough to power 7,380 homes .

As of July 28, briefings are scheduled to conclude on August 11, this Thursday, and a final decision is “expected shortly thereafter.” This phrasing is purposefully vague, as there isn’t really any way to know for sure how long it will take to receive a decision. My expectation is that a decision should be made public within two months, maybe less, but probably no more than 90 days .

Company Impact

If Lithium Americas were to receive a favorable ruling, which I believe is quite likely, investors stand to be rewarded rather handsomely. Back when the ROD was first issued , the news sent shares soaring by 30.6% in just one day. While they would drop the following day of trading, this was due to an equity offering that diluted shares by 15%. Even after this significant dilution event, shares retained an 8.3% premium from the day before the ROD was issued.

A confirmation of the ROD should be similarly powerful and could result in single-day gains in excess of 15%. This could be further improved by a moderate short squeeze. As the figure below notes, Lithium Americas has significantly higher short interest than its peers which indicates that the market is bracing for, or hedging, a company-specific event, i.e. an ongoing court case involving a key asset. Thus, a favorable ruling would likely cause many shorts to cover, further raising the share price.

Should the ruling return unfavorably, investors can expect a similar reaction in the opposite direction. But, contrary to what many investors seem to fear, this wouldn’t spell the end of Thacker Pass. Instead, Lithium Americas would be forced to redraft its application and go through the NEPA process again. Only the part(s) that are outlined by the court would need to be reworked.

There’s no doubt that this would delay the mine even further, likely in excess of a year. This is not ideal, but also not exactly the end of the world. At this point it’s also fairly clear that Thacker Pass has the support of the BLM, and the White House , so I wouldn’t expect to see many delays in the NEPA process itself.

Furthermore, the company’s progress at Cauchari-Olaroz should be sufficient in sustaining value growth in light of further delays at Thacker Pass, especially at the company’s current value. Because of this, as well as the higher probability of a favorable ruling, there is an asymmetric opportunity surrounding the ROD.

Financing Thacker Pass

After submitting a draft loan application to the DOE’s Advanced Technologies Vehicle Manufacturing (“ATVM”) Loan Program in February, Lithium Americas followed through by submitting its formal application in April. The ATVM has $17.7 billion that the White House plans to leverage to “ support the domestic battery supply chain .”

Earlier this year, Syrah resources became the first company to receive funding from the program since the 2021 White House directive, putting the funds towards expanding an anode manufacturing facility. The $107 million loan will cover 60.8% of the project’s estimated capital cost; Lithium Americas is targeting a similar level of support. However, 60% of the Thacker Pass project will be far more than $107 million. Phase 1 costs may close in on $1 billion and, at that level, 60% of the project would be 3.4% of the ATVM program’s total budget.

Given the timing of Lithium Americas’ April application, investors should ideally expect an update from the DOE between October and January, though this could slide if the DOE is forced to wait on information from the company’s DFS expected later this year. Interestingly, the ATVM cannot technically provide funding for new mines. But, because Thacker Pass also plans to refine and produce battery-grade lithium carbonate, it is eligible to receive funding for all expenses not directly related to mining. So the goal is to receive 60% of the funding for roughly 90% of initial capital costs.

The company’s application does not guarantee DOE funding, but I do feel that it is quite likely to receive it. While it may seem improbable for just one project to receive such a significant loan, on July 25, Reuters announced that Ultium Cells LLC, the joint venture between General Motors ( GM ) and LG Energy Solution responsible for GM’s battery manufacturing efforts, was awarded a $2.5 billion loan to help finance the construction of three new battery manufacturing facilities. GM and LG expect to spend in excess of $7 billion across all three facilities and this loan indicates a willingness from the DOE to spend big on big projects.

To get an idea of project impact, I’ve decided to look at annual EV contributions from each facility. Across the three Ultium facilities ( Ohio , Tennessee , and Michigan ), GM aims to ramp up to a total capacity of 115 GWh, which would support the production of 1.9 million EVs per year (assuming a 60 kWh battery). If we’re looking to quantify the impact of the ATVM program funding as the number of EVs served, the $2.5 billion would effectively be responsible for 679,000 EVs per year. The lithium from Thacker Pass will support the production of 1.11 million per year, or 556,000 in Phase 1 (Using the same 60 kWh assumption). If the DOE were to fund 60% of Phase 1 construction, it would directly support 333,000 EVs per year.

333,000 EVs is below Ultium’s potential contribution towards 679,000 EVs, but it also comes at a much lower cost. Consider the following: per one million dollars loaned through the ATVM program, Thacker Pass would support the production of ~556 EVs per year. Alternatively, each million loaned to Ultium will only support the production of 272 EVs per year. By this metric, Thacker Pass is the more impactful project by a significant margin.

Furthermore, with a prolonged lithium shortage expected, battery capacity shouldn’t be prioritized over lithium resources. After all, it doesn’t matter how many batteries a facility could produce if the lithium isn’t there to support it. Thacker Pass is, in my opinion, by far the most significant lithium project in the United States and, despite ongoing litigation, it is one of the most environmentally responsible projects globally. With reports that Biden will declare a climate emergency in the near future, and the recently announced Inflation Reduction Act of 2022 , which includes $30 billion for solar panels, wind turbines, batteries, and critical minerals processing, there may be even more funding available to the sector.

But even with the possibility of DOE funding and $441 million in cash, as of June 30 , the company is looking to find a partner for Thacker Pass. Though, its strong balance sheet does give Lithium Americas a much stronger bargaining position relative to when it started development of Cauchari-Olaroz in 2018. So, instead of looking purely for a source of funding, the company can instead look for a partner capable of bringing operation and design optimizations. Ideally, this is a relationship that creates additional value for both companies involved.

This could come in the form of a partner with technical experience, though the company has already gained quite a bit of that through its work with Ganfeng ( GNENY ) ( GNENF ) and its own management team. Instead, Lithium Americas may look at partnering with companies that could unlock additional synergies. Given the various reagents the company plans to deal with, perhaps it will look for a partner that has extensive experience in manufacturing and handling sulfuric acid for example.

The terms of the partnership could also be a wide range of options. Whether it's royalties, project equity, offtake arrangements, a combination of these, or something else entirely, Lithium Americas continues to evaluate its options. A solid example of a mutually beneficial partnership is the company’s partnership with North American Coal for the mining portion of the project. This arrangement allows North American Coal to begin transitioning away from a shrinking industry and provides Lithium Americas with an experienced contractor.

Additional Catalysts

While progress at Thacker Pass has been positive, it’s not the only thing that investors have to look forward to in the coming months. In South America, Lithium Americas, and its partner Ganfeng, are still on track to begin production by the end of the year with construction over 90% complete. The companies have also opted to delay construction of a purification circuit to early 2023 in favor of advancing production volume, which should allow them to net greater profit earlier. There isn’t much else to report regarding Cauchari-Olaroz and, at this stage, no news is good news.

The company has also been fairly quiet about the Pastos Grandes project since it acquired Millennial Lithium earlier this year. But investors can expect an update regarding the project before the end of the year, with potential for a positive surprise. Under Millennial’s control, the mine was expected to enter production as early as 2024. And while that target is no longer feasible, Lithium Americas may seek to update the original DFS following a recent announcement that it would be collaborating with Arena Minerals ( AMRZF ) to develop the salar.

As you can see from the map above, Arena shares the Pastos Grandes salar with Lithium Americas. Arena Minerals has developed a proprietary solvent for the salar’s brines that it claims will enable the direct production of 35% lithium chloride. This collaboration agreement, along with Lithium Americas’ significant stake in the company, should contribute to some flowsheet optimizations at Pastos Grandes.

More recently, the company disclosed that it had a $30 million development budget for the project. Given how much the project advanced under Millennial Lithium’s ownership, I can think of nothing short of a new DFS that would require this budget. As such, I count this as a speculative upcoming catalyst for Lithium Americas.

While Cauchari-Olaroz is definitely the headline here, keep an eye on Pastos Grandes as well. If the company does embark on updating its DFS, it may disclose revised production targets beforehand. So both of the company’s South American projects could produce positive updates by the end of the year, but the commissioning of Cauchari-Olaroz looks to be more impactful as the most significant step the company has made towards commercialization.

Investor Takeaway

The company’s current market value baffles me. Following GCL Energy’s recent acquisition of a 54.3% stake in the Chinese Dechenonba mine for $437 million, we have a new baseline to value lithium projects. The offer values the project’s reserves (economically recoverable portion of a resource) at $1,112/tonne of lithium carbonate. Applying the same metric to Lithium Americas’ three projects, the company’s implied valuation is $5.507 billion.

While there are some premiums paid for an acquisition, all three of Lithium Americas’ projects are significantly higher quality, more advanced, and better located than the Dechenonba mine. I don’t advise taking the $5.507 billion figure directly at face value but, implying a 72.1% premium to the company’s current value, the disconnect is indicative of the company’s explosive short-term upside. As seen from the figure below, the Wall Street consensus price target also provides significant upside with a 48% implied premium.

With a number of significant end-of-year catalysts, including a ruling on the ROD, a DFS for Thacker Pass, a partner for Thacker Pass, an update regarding Pastos Grandes, and the start of production at Cauchari-Olaroz, the company should receive the momentum needed to trade closer to its fair value. A decision on DOE funding for Thacker Pass may also come by the end of the year, though I believe that has the greatest chance of slipping into next year. So, despite a weak macro environment, Lithium Americas offers an attractive investment opportunity as major business developments linger on the horizon.

For further details see: