LTHM - Piedmont Lithium: Poised To Be A Major Player In The Lithium Value Chain

2023-08-09 13:43:19 ET

Summary

• Piedmont Lithium is working on establishing lithium hydroxide manufacturing plants in Tennessee and North Carolina to address the potential lithium resource challenges in the US.
• The company's projects could potentially produce 60,000 metric tons of domestic lithium hydroxide per year, contributing roughly a third of the planned capacity in the US.
• Relative to its peers, Piedmont is priced at a very low price to sales multiple.
• We like the risk-reward on offer, both on the standalone chart, as well as the relative strength chart.

Why Piedmont Lithium Should Be On Your Watchlist

Electric vehicles have their fair share of critics, and whilst they may not necessarily be universally loved, it’s hard to overlook the rapid pace at which they’ve been taking over the highways of the world. According to Rho Motion, in less than 10 years, the penetration rate of new EVs could expand by almost 3x from where it stands currently and approach levels of 50%. This is all very well, but do we have a resilient battery supply chain in the works, that could support this mammoth level of growth?

Well, buoyed by favorable federal policies in recent years, the US in particular has been making a concerted effort to emerge as a radiant EV and battery manufacturing hub. Whilst the construction of new EVs and battery manufacturing units may only take a few years, there are still plenty of question marks over the adequate procurement of domestic lithium resources through this next decade with many studies pointing to severe shortfalls.

The company in focus- Piedmont Lithium Inc. ( PLL ) is likely to play a key role in helping address these lithium resource challenges, as it is currently laying down the groundwork to come up with a lithium hydroxide manufacturing plant in Tennessee (Tennessee Lithium), and another fully integrated spodumene concentrate-to-lithium hydroxide project in North Carolina (Carolina Lithium).

When operational, both these plants could potentially produce 60,000 metric tons of domestic lithium hydroxide per year. Put another way, that production capacity would be 3.5x the estimated level of the current US annual production capacity! At 60k metric tons, PLL alone could be contributing roughly a third of the planned capacity in the US!

Management also believes that in a steady state, these two projects could potentially be generating $835m of EBITDA in aggregate.

As implied earlier, these projects are still some way from coming to fruition, and the latter half of the image below will provide some clarity as to what to expect.

In April this year, the Tennessee project received a construction stonewater permit from the TDEC (Tennessee Department of Environment and Conservation), and last month, it finally received an air permit from the same institution which now enables the company to begin construction, which they plan to start in 2024 over a two year period.

Developments related to the North Carolina project are likely to cause some volatility to the share price, as the regulator has been coming back with multiple information requests on testing and wastage plans (PLL has time to respond by November and this may prove to be a catalyst of sorts one way or the other). Needless to say, delays here could reflect poorly on the share price.

Nonetheless, the payoff with this project could be a lot more, as this will be a fully integrated project (unlike Tennessee) with mining, spodumene concentrate production, and lithium hydroxide manufacturing all taking place in a single site. Management mentioned that their goal will be to procure all necessary permits by the end of next year with construction of the site expected to start in FY25, and lithium hydroxide production expected to start in 2027.

Forward Valuations Look Cheap

If all goes to plan, PLL could be in a position to generate ample resources of lithium hydroxide (potentially 60kmt pa) by FY26/FY27, making it a big player in this space, which is after all the company’s strategic goal . We can appreciate that for some investors this timeline may be too far out, but do consider that even though PLL hasn’t generated any topline until now , it is still on course to generate a decent level of topline through useful spodumene concentrate sales (mainly through its strategic investments) that will start getting reflected in the P&L soon enough, as shipments started earlier this month .

In fact management noted that in the near term, the restart of their NAL site operations would account for the only major new source of spodumene concentrates in North America.

Do consider that till the lithium hydroxide conversion plants get operational, PLL still has some useful 3–4-year spodumene concentrate supply agreements with some esteemed clients such as LG Chem and Tesla

All in all, consensus estimates show that the company could close the current year- FY23 with $245m of topline, and this could potentially grow at 39% CAGR through the next two years.

Considering that you're likely to get 39% topline growth over the next two years, we think a forward price-to-sales multiple of just 2.15x (this current multiple represents a 10% discount to the stock's average multiple) feels criminally low.

To provide some wider perspective, let’s also review how some of the other peers in this space are priced relative to the respective topline growth on offer (as per YCharts estimates). We’ve considered the likes of Sigma Lithium ( SGML ), Core Lithium ( OTCPK:CXOXF ), Lithium Americas Corp ( LAC ), and Livent ( LTHM ) all businesses that are competing with PLL in either Spodumene concentrate space or the Lithium chemical space.

Even here we can see that the value narrative burns bright with PLL’s P/sales multiple coming in as the lowest, a 50% discount to the peer set average. Admittedly PLL’s 39% topline growth runway isn’t as monumental as Core Lithium’s or Lithium Americas’, but it is still better than Livent’s expected growth (20%), and is yet priced at a 28% discount to the latter.

Technical Considerations- Is PLL's Stock A Good Buy Now?

As far as the technicals are concerned, we like what we see at this juncture. If one focuses on the weekly chart of the Piedmont Lithium ADR, we can see that for close to two years now, it has been leaving price imprints in the shape of a wedge pattern.

Currently the price is trending closer to the lower end of the wedge; if one were to contemplate a long position at these levels, using the two boundaries as potential barriers, the reward-to-risk equation works out to a very promising figure of 5x! You may either consider getting in now or if you have a more conservative risk appetite, you may want to wait for a further correction to the $42-$43 level where the lower boundary is currently set.

We’d also like to think that the PLL ADR may potentially benefit from rotational interest within the metals and mining space. The chart below highlights PLL’s current positioning relative to its peers from the metals and mining universe (as represented by the XME ETF).

Currently, this relative strength ratio is a long way off (around 40% off ) the mid-point of its range, and it wouldn’t be the biggest surprise in the world to see this ratio mean-revert in some capacity.

All things considered, we believe PLL's stock is a good BUY now.

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