SLI - Standard Lithium: A North American Lithium Play Still Far Out From First Revenues

2023-08-04 05:08:19 ET

Summary

• Western countries are prioritizing the need to secure lithium supplies to reduce reliance on China.
• The demand for lithium is increasing due to the transition to renewable energy and electric vehicles, potentially leading to supply constraints and price increases.
• Standard Lithium Ltd (SLI) has high-grade lithium deposits in the US, but its lack of profitability makes it a hold rather than a buy for now.

Investment Summary

Investing in lithium has been on many investors' minds in the last few years as the necessity of it in the transition to renewables and EV vehicles is great. Lithium batteries have long been a market dominated by China but measures are being taken to establish Western supply Chinese instead. Standard Lithium Ltd ( SLI ) is a company with operations in North America and this puts them in a ripe spot to be a major supplier of lithium to US-based EV companies.

But there is a lack of revenues from the company as it is still in its early stages of operations. There has been solid progress on the back of the South West Arkansas lithium project commencing drilling programs. What has investors interested in SLI is the fact that they seem to have some of the highest-grade lithium deposits in the United States. This greatly reduced the capital expenditures and operational costs as the purity is making operations easier as less work is needed. But I can't help to see other more established lithium companies be better opportunities right now. Companies like Albemarle Corporation ( ALB ) are already generating strong revenues and not trading that high. Because of the lack of profitability with SLI, I think they are better viewed as a hold right now.

Lithium Is Becoming A Priority To Secure

There is a notable and widespread effort to secure rare earth minerals supplies outside of China, particularly in Western countries. As industries increasingly shift towards renewable energy sources and the production of electric vehicles (EVs), the demand for various critical materials, including lithium, has surged. However, China still holds a dominant position in the lithium market, which poses a significant concern for Western countries due to the risk of overreliance on a single source.

The transition towards renewable energy and EV adoption has driven a substantial increase in the demand for lithium, a crucial component for battery production. With the EV industry growing at a rapid pace, the demand for lithium is expected to continue its upward trajectory, potentially leading to supply constraints and subsequent upswings in the commodity's price.

In recent years, we have witnessed periodic fluctuations in the lithium commodity price due to shifts in supply and demand dynamics. As the demand for EVs and renewable energy technologies continues to outpace initial expectations, the pressure on the lithium supply chain intensifies. This upward pressure on the commodity price may create challenges for industries reliant on lithium, as higher input costs could impact profitability and supply chain stability.

Diversifying the sources of rare earth minerals, including lithium, has emerged as a strategic imperative for Western countries. Efforts to explore and develop domestic sources of these critical materials are gaining momentum as a means to reduce dependence on foreign suppliers, particularly China. Furthermore, investing in recycling technologies and sustainable mining practices could play a pivotal role in mitigating supply constraints and alleviating the potential impact of future commodity price fluctuations.

Risks

SLI has not yet disclosed the specific capital expenditure required for the construction of the commercial lithium plant or the resources allocated to support the Direct Lithium Extraction (DLE) technology. As such, there remains uncertainty surrounding the financial implications of this ambitious initiative. In light of this, it is reasonable to consider that the company might opt to raise additional capital through stock dilution to fund this critical project.

Stock dilution, while a viable funding option, comes with its own set of considerations. It involves issuing new shares to raise capital, which in turn dilutes the ownership stake of existing shareholders. As a result, the increased number of outstanding shares could potentially impact earnings per share and lead to a temporary downward pressure on the stock price.

Financials

Where I think a lot of the priority for investors should be is the financial state of the business. Maintaining a strict capital allocation program is key here to properly execute the business plan and not risk having to significantly dilute shares to raise capital.

The company has a broad set of projects that they manage and are developing. The total operating income for 2022 was a negative $30.5 million and the TTM has been improved to a negative $24 million instead. Looking at the cash position that SLI has right now it's sitting at $67 million as of the last report . This is creating a pretty scary situation I think as the operating income indicates that SLI has around 2 - 3 years left of funds only. So securing more capital from investors will be a key priority. A failure in doing so will likely send the stock price down.

The hopes for SLI seem quite great given the market cap of $800 million without actually having generated any revenues yet. What I think is supporting the valuation is the fact that lithium prices are likely to grow substantially over the coming years and what SLI might be able to produce today will likely be far higher in 2030 for example. That is also creating a difficult situation for analysts as assessing the true value of SLI is very difficult. I tend to lean on a more risk-cautious side and don’t want to overextend myself and make this company out to be a strong buy. Until we see profitability I wouldn't be an investor. It's an approach I bring with me to all investment opportunities and SLI is no different. But for the more risk-tolerant investor in 20 years SLI if they have successfully executed their plans will have likely produced a fantastic ROI.

Valuation & Wrap Up

Investing into lithium has been a very hot topic and lithium battery makers have been getting a lot of hype as a result. Sometimes going with the more established companies is better or the miners produce the raw materials. Here investors are seeing SLI as such an opportunity.

The market cap sits very high at $800 million without any revenue being generated yet. This is creating a pretty situation where investing based on fundamentals is impossible. SLI is a speculative investment I think and one that I would rather rate as a hold than buy for now.

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