LAC - Sigma Lithium May Be For Sale

Summary

• Recent reports indicate the company is being shopped around, and Tesla may be interested.
• Tesla may want Sigma’s 54.8Mt (P&P) Reserve and 85.6Mt (M&I&I) Resource for its Corpus Christi Refinery.
• Sigma is about to begin commercial production and expects to generate cash flow in Q2.

Over the last year, I wrote a series of articles discussing Sigma Lithium Corporation’s ( SGML ) progress in building out its Brazilian lithium mining operations and outlining the reasons why I believed the company had tremendous potential. The stock has all the hallmarks of becoming a go-to name in the lithium space and certainly looked set to become a core holding for many fund managers wanting to gain lithium exposure.

For those reasons, it wasn't much of a surprise to hear that the company is attracting attention from potential suitors; after all, the recent surge in lithium prices has brought with it a never-ending stream of rumors involving all the major lithium players. But what was different in this case, was a report that Sigma’s largest shareholder may be shopping the company around. In this article, we'll discuss what that may mean and how it can increase the probability of a deal going through.

Company Background

Finding quality names in the mining space isn’t easy, and Sigma Lithium is a high-quality name in the lithium world. Granted, the stock has recently been trading off from the highs it reached in late October, but that appears to be more a consequence of changing macro factors and softness in lithium prices, rather than the reflection of any company-specific issues.

In fact, the company is in the final stages of preparing its Brazilian Grota do Cirilo Project for the beginning of commercial production in April. Investors are looking forward to the start of positive cash flows in Q2 which management intends to reinvest into the company; they released an ambitious Production Expansion Study in December outlining Phases 2 and 3 of the project, which will lead to sizeable increases in the production of lithium concentrate.

Grota do Cirilo has a Reserve of 54.8Mt (P&P) and a Resource of 85.6Mt (M&I&I), and management plans to get a lot of that ore out of the ground quickly. As was detailed in my previous article , the combined three phases of the project will have a 13-year mine life, and by Year 2, Grota do Cirilo’s production run-rate is projected to hit 766ktpa, or about 104ktpa LCE. Given those numbers, along with the low costs outlined in the exhibit below, it's rather unsurprising that Sigma’s NPV _8% is $15.3 billion.

Up until very recently, the company had been led by Co-Chairpersons and Co-CEOs Calvyn Gardner and Ana Cabral-Gardner, but a management shuffle in late-January saw Calvin Gardner relinquish those roles and move to the position of Director. Ana Cabral-Gardner will continue in the role of CEO as well as Co-Chair of the Company's Board of Directors along with Gary Litwack, an Independent Sigma Board Director who moved to the position of Non-Executive Co-Chair of the Board. Ana Cabral-Gardner is also the Co-Founder of A10 Investimentos, a Brazilian private equity fund that holds a 46% stake in Sigma.

Possible Deal

The aforementioned report that broke news of a potential deal, cited unnamed sources as saying that A10 Investimentos has been exploring a potential sale of Sigma and gauging interest from miners and carmakers; the article mentions that Tesla Inc. ( TSLA ) is considering making a bid for the company.

Such a deal would certainly make sense given Elon Musk’s calls for a faster build out of the battery-metal supply chain. And one can easily picture how Sigma’s lithium concentrate could eventually be used as feedstock for Tesla’s Corpus Christi lithium refinery, which began construction in early January.

However, investors shouldn't be too quick in assuming that this is a done deal; after all, it's worth remembering that the day before news broke announcing the start of construction at Tesla's refinery, Piedmont Lithium Inc. ( PLL ) put out a press release announcing a renegotiation of the offtake agreement it has with Tesla. That agreement will see Piedmont begin delivering 125kt of SC6 to Tesla in H2 2023, so even if the deal with Sigma is not consummated, Tesla will be able to find feedstock for its refinery.

Although, even if a deal with Tesla doesn’t go through, it’s not the only player out there. Reports say that Rio Tinto Group ( RIO ) lost interest in Sigma believing the asking price to be too high, but one can easily imagine how Sigma might interest fellow Brazilian miner Vale S.A. ( VALE ) or even Ford Motor Company ( F ); especially now, given General Motors Company’s ( GM ) recent deal to buy a piece of Lithium Americas Corp. ( LAC ).

Takeaway

What is clear, however, is that Sigma's stock will be viewed differently now that the market believes Sigma’s owners are looking for the exit. The shares will probably trade at a bit of premium relative to the shares of its peers in the coming weeks and months. The possibility of a potential buyout should help the stock’s relative performance.

The consummation of a deal could push the stock even higher and provide a nice exit for long-time shareholders. However, investors need to remain cognizant of the risk that if a deal doesn't materialize within a reasonable amount of time, any takeover premium baked into the stock price may disappear, and the share price could decline quickly.

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