CA - Patriot Battery Metals: An Amazing Lithium Deposit

2024-01-01 01:29:15 ET

Summary

• Patriot Battery Metals has a tier-one lithium deposit in Quebec, Canada, making it a significant player in the North American lithium market.
• Their Maiden Resource at CV5 is 109 Mt, and there is much potential for growth.
• The potential upside catalysts are at least six months away, so I expect the stock to trade sideways for the short term.
• Patriot is well capitalized.

There has been something of a lithium gold rush happening. As the price of lithium has been through a massive spike collapse in the last three years, many lithium explorers have come onto the scene. There are now many companies looking for lithium. A few of the geographical hotspots are Quebec Canada, Western Australia, and Brazil. Most of these companies have a few tenements, lots of hope, but nothing real to show so far. There have been a handful of companies that have made outstanding lithium discoveries. Patriot Battery Metals ( OTCQX:PMETF ; PMET:CA ) is a company that has found one of the largest lithium-bearing spodumene deposits in the world.

The stock has garnered a larger retail following on Twitter, with many excited about the drill results. The company reached a high of CAD 17.53 in June 2023, before the price of lithium started crashing. Though Patriot is many years away from producing lithium and earning revenue (my guess is 2028-2029), its market cap was ~ CAD 2.3 billion. The shares are now trading around ~$9.90. Many will wonder if this is a good time to get in. On the one hand, the current market cap of CAD 1.3 billion is very large for a company in the exploration stage. On the other hand, the shares are down 56% from their highs.

While there are some upside scenarios here, there are also some potential downsides in the short term. In the short term, this could be rated a speculative buy, as I will explain in the article, but I consider it a hold. I think some catalysts are starting around mid-summer 2024 which would turn this stock into a buy then.

Patriot has an Amazing Resource

Patriot Battery Metals has the Corvette project, located in the James Bay Region of Quebec, Canada. They have found a large spodumene deposit, one of the two key sources of lithium in the world. They have been drilling the deposit for about three years and in July 2023 announced a maiden resource of 109 Mt at 1.42% Li2O. This makes the deposit the largest hard rock lithium deposit in North America.

This maiden resource is taken from only one of the segments of the Corvette tenement, Corvette 5. The resource is large and high-grade. The company is expanding this resource even larger. Further, as you can see from the picture below, this is one large continuous block of spodumene, which is ideal for mining. The mine should have a low strip ratio and be relatively low cost.

This is a large deposit with high-grade lithium in an ideal arrangement, making it a tier-one deposit. The term 'tier-one' is a loose term, but it is generally considered that anything over 100 Mt would be tier-one. Other tier-one deposits include Greenbushes and the Pilgangoora in Australia, Manono in the Congo, and Goulamina in Mali. The first two of these are currently being produced. Corvette ranks among these as a tier-one asset.

Corvette 5 was rated the Discovery of the Year for 2023 by the Quebec Mineral Exploration Association. At the current estimate, you can see that the deposit is ranked the eighth largest in the world. This deposit certainly will grow with further drilling, we don't know how much. As the exploration continues, the market is excited to see if Corvette can surpass a deposit like Wodgina and get into the category of Greenbushes.

Ken Brinsden

In Aug 2022 Patriot appointed Ken Brinsden as Managing Director of the project. This was a significant move, considering who Brinsden is. He was the MD for the Pilgangoora lithium project for Pilbara Minerals ( OTCPK:PILBF ). You can see my article on Pilbara here .

Pilbara has one of the great spodumene mining success stories of the last six years. Mr. Brinsden is the person who led this project through construction to becoming a lithium major. After he retired from Pilbara, he didn't take any job for a while.

The fact that Mr. Brinsden took this position is an affirmation of the quality of the project. He could have taken just about any position in the lithium mining space, and he took this one. If he has faith in the quality of this project that is a good sign.

North American Lithium Play

One reason that this deposit is significant is the location. Corvette is located in Quebec, and thus part of the emerging North American battery supply chain. North America is undergoing a rapid move towards green energy, batteries, and EVs. The slide below shows all the announced projects located in NA that will need lithium.

While the price of spodumene has declined in the last few months this is a short-term thing. Demand for lithium is growing fast, and there will continue to be a deficit . The fact that Patriot's project is in Quebec makes it eligible for IRA credits.

An important point to consider is that Patriot has a partnership with lithium major Albemarle ( ALB ). Albemarle has experience in downstream conversion, turning spodumene concentrate into lithium hydroxide, one of the chemicals that go into EV batteries. Currently, there is very little LiOH being made in NA and the Patriot/Albemarle partnership could be a major local supplier.

Another point to consider is that being in Quebec, the project is in a tier one jurisdiction. It is better to have a deposit in Canada than in Mali or the Congo, like the deposits of Leo Lithium ( OTCPK:LLLAF ) and AVZ Minerals ( OTCPK:AZZVF ).

Is there an Upside in the Stock?

So, Corvette is an amazing lithium deposit in a tier-one jurisdiction. We are in the middle of a lithium super cycle, so this stock should be a no-brainer right? Well, Charlie Munger said you should only buy a company at a price that makes sense. Even though there has been a pullback, CAD 1.3 billion is a lot for an early-stage mining company.

Patriot are not in construction. They do not have a DFS, a PFS, or a scoping study of any kind. They recently submitted their first application, but if they are in construction within three years that would be fast.

I think if we look around at peers, we can see that there is potential upside here. I am thinking of three peers in particular.

First, Azure Minerals ( OTCPK:AZRMF ) has the Andover spodumene project in Australia. They also have a tier-one asset that is currently being drilled. They recently announced a binding takeover offer by SQM ( SQM ) and Hancock Prospecting for AUD 1.7 billion.

What's interesting is that Azure doesn't even have a maiden resource yet. They announced a resource target of 100-240 Mt.

Second, AVZ Minerals has the Manono project in the Congo. This project has been put on a trading halt as the company is in a dispute with the government of the country. The project is currently on hold as they have not received permits.

Before the trading halt the stock was on a tear. It reached a high of AUD 1.23 in April 2022, evaluating the company at AUD 4.3 billion. The Manono deposit is enormous , at 400 Mt at 1.65% Li2O.

Third, Leo Lithium has the Goulamina project in Mali. This project has also come under a trading halt , as it is having problems with the local government. This stock reached a high of AUD 1.14 in July 2023, evaluating the company at AUD 1.37 billion. The project has a maiden resource of 211Mt at 1.37% Li ₂ O.

With these three comparables in mind, if Patriot manages to increase the scale of their resource through further drilling past Goulamina and Andover then Patriot can rerate higher. If, however, the resource does not change much in size then the stock should enter the orphan period. More on that in a bit.

Potential Catalyst One: Resource Increase

Patriot is undertaking an aggressive drill campaign, both for infill drilling of CV5 and to expand their resource. Infill drilling is required for Patriot to submit for their studies. Expanding the resource would increase the value of the resource. In this interview, CEO Blair Way said Patriot is aiming to finish their PFS by the end of 2024. The infill drilling helps towards this milestone.

The other kind of drilling is expansion. There are several places for them to expand their resource.

The first way is for them to expand CV5. The maiden resource was simply their first publication. It accounted for all the drilling up to April 2023. They have already expanded the strike length from 3.7 km to 4.35 km by Sept 2023, an increase of 18% implying approximately a deposit of 128 Mt. The deposit is still open at both ends. They continue to find lithium as they step out to the west.

CV5 is not the only place Patriot is drilling. You can see from the picture below that Patriot has a long claim which is prospective for a long way.

There are two deposits in this claim that they are actively drilling, apart from CV5. They are drilling CV9, which has the potential to be another large deposit. They have drilled a hole with 100m of spodumene. This deposit is not the focus of their drilling for now.

The other highlight is the CV13 deposit. This is another large deposit that has been drilled a little bit. They have found spodumene at depth there but to a lesser extent. The true promise of CV13 is that it lies 3.5 km to the west of CV5. It might be that CV5 continues to CV13, making it one massive deposit. This would mean that CV5 would about double in size.

So, there is potential for Patriot to discover more here. In the interview mentioned, CEO Blair Way said that starting in January their main drill program will be the infill drilling. They will start looking at the space between CV5 and CV13 in Q2 2024 and we can expect a resource update in July/August 2024. CV5 certainly has expanded, but we don't know how good the rest of the property is.

It's important to mention that Patriot is well capitalized. They raised a $109 million investment from Albemarle, in Aug 2023. This money will be able to fund their drilling program and studies. They hope to have ten drill rigs on site in the new year.

Potential Catalyst Two: Take Over

There has been MnA action in the lithium space recently. Large deposits in tier-one jurisdictions have been the focus of take-over offers. As mentioned, Azure Minerals has just accepted a takeover offer. Albemarle put in a ~ AUD 4 billion offer to purchase Liontown ( OTCPK:LINRF ), though this did not eventuate . Also, Sigma Lithium ( SGML ) may receive an offer soon. I have an article on that company here .

As Patriot is a tier one deposit in a tier jurisdiction, it does make them a takeover target. This does not mean any offer would eventuate in the near term, but it is a factor worth considering! The most obvious takeover candidate is Albemarle. They are a stakeholder in Patriot, and they just tried to take over Liontown and were blocked.

The Orphan Period: The Downside Risk

The reason to be nervous about investing in this company now is the orphan period. Often mining companies follow the Lassonde curve. As a mining company makes its discovery there is excitement and the stock price rises. After the discovery, the company needs to go through several hurdles like permitting, environmental studies, and raising financing. This period has several risks and investors lose the shine. If the company gets into production the stock will rise as the company nears revenue generation.

The question for Patriot is, "Are we entering the orphan period?" If so, then the stock may trade sideways or down for years.

A few hurdles are particular to Patriot to keep in mind. First, though Quebec is considered a tier-one jurisdiction, mining permits have taken longer here than in a place like Western Australia. It might be that Patriot could take longer than three years to receive their permits.

Second, there is a large lake in and around the CV5 property. Deep in the disclosures on CV5, you can see this statement.

This lake may cause some difficulties with environmental permitting.

Third, the price of spodumene has decreased. The price may decrease in the short term, and Patriot will trade with the price of spodumene. This factor alone could put some downward pressure in the short term.

Conclusion

Patriot has an amazing deposit with potential upside. However, there are also short-term risks. I am fairly confident that this company will go into production at some point, but it is a green banana-like Lithium Americas ( LAC ). The question is what should investors do in the short term?

Sometime in the late summer, there will be a resource update. If the drilling between CV5 and CV13 is good then there could be new excitement about the stock.

Further, the pride of spodumene is reaching new lows since its run-up in the last few years. My prediction is that the price of spodumene will recover, but I don't think we will have a V-shaped recovery. There have been several factors that have brought the price down, including the destocking of the supply chain and marginal supply coming online. These two factors are beginning to reverse due to the low price of lithium, but the restocking cycle will take time. I guess this will happen between six and eighteen months away, so there is no rush to get in.

There is every reason to invest in Patriot, but I think now is not the right time. The stock may trend lower in the next few months as the price of lithium stays low.

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