SLI - Standard Lithium: An Exciting Market To Enter

2023-09-22 08:21:35 ET

Summary

• Standard Lithium is focused on exploring and developing lithium brine properties in the US, offering a domestic supply of lithium.
• SLI has promising projects in Arkansas and stands to benefit from the increasing demand for lithium in the EV industry.
• The company has potential for expansion both domestically and internationally, with the prospect of transforming the global lithium extraction landscape.

Investment Rundown

Lithium is one of the most talked about topics in the EV space and likely will continue to be as the commodity is the lifeline essentially for advancing the battery capabilities of the cars. Companies are gathering to find bigger and better supplies of this lucrative resource. In the sector, there are some very large players like Albemarle Corporation (ALB) for example which has restructured their business to focus more heavily on lithium and ensure their global position in it. Then there are also smaller companies like Standard Lithium Ltd (SLI) which are yet to produce any revenues and are instead in the works of establishing operations.

The appeal of SLI is that it can offer a domestic set of lithium sources in the US. The company has been acquiring more land which most recently was in South West Arkansas. Investing in SLI is for the long-term and I think that investors are wise to have a small amount of exposure to this industry. The pipeline of projects that SLI has seems solid and I think they will be able to realize production eventually. I am rating SLI a buy and think allocating a smaller percentage, around 0.5% of a portfolio seems advisable with the company right now. When revenues start to be greater perhaps a larger portion is justified.

Company Segments

SLI is actively engaged in the exploration, development, and processing of lithium brine properties within the United States. At the forefront of its endeavors is the Lanxess project, which encompasses a vast expanse of approximately 150,000 acres of brine leases situated in the southern region of Arkansas. Notably, the company underwent a name change in December 2016, transitioning from Patriot Petroleum Corp. This strategic shift reflects its firm commitment to pioneering advancements in lithium resource development and underscores its dedication to meeting the evolving demands of the energy storage and electric vehicle industries.

The main attraction of SLI continues to be the domestic production capacities and opportunities that it has. SLI has sites in Arkansas where they hope to one day start generating significant amounts of capital. Many major tailwinds are pushing US lithium production forward right now. One of the more significant ones recently was certainly the Inflation Reduction Act providing a total of $369 billion in funding for various sectors. Since EV cars need lithium to produce the batteries, SLI sits in a great position to benefit from this in the long term I think.

Markets They Are In

The story of the company gets even more appealing when thinking about the expansion possibilities. To put this into perspective, the opportunity within Arkansas alone holds immense global significance. As an enthusiastic investor, I eagerly anticipate witnessing SLI replicate its cutting-edge technology by establishing extraction facilities not only across South Arkansas but also venturing into international territories. The prospect of SLI's innovative approach gaining traction on a broader scale holds the promise of transforming the lithium extraction landscape worldwide.

SLI has several projects in the pipeline and I think as we approach 2026 and beyond there will be a significant increase in the coverage of the company. We are still quite early on for it and the share price will continue to trade quite specifically. The Lanxees 1A is the first site to start seeing productions in 2026, and not long after the other two are beginning as well. I would expect there to be more projects announced up until 2026. This could add more fuel to the share price for SLI. It should be mentioned that the sites that SLI has are quite highly concentrated as well, which makes the company even more appealing as the profit is higher, and the operating costs lower, as less time and energy will be spent separating it. In the Smackover sites the average concentration is 563 mg/L.

Risks

SLI has yet to unveil the precise details of the capital expenditure essential for the construction of its commercial lithium plant or the allocation of resources designated to bolster the Direct Lithium Extraction technology. Consequently, an aura of uncertainty surrounds the financial intricacies of this ambitious endeavor. Given this scenario, it's plausible to entertain the notion that the company could resort to raising extra capital via stock dilution as a means to secure the necessary funding for this pivotal project.

Stock dilution, while a feasible avenue for raising funds, introduces a host of factors that merit careful consideration. This financing approach entails the issuance of new shares to secure capital, a move that inherently diminishes the ownership percentage of current shareholders. Consequently, the augmented count of outstanding shares may exert downward pressure on earnings per share, potentially culminating in a transient decline in the stock price.

Given that the first revenues aren't expected to come in 2026 I think we still have several years left of dilution right now. The operating expense remains high and this is to maintain the development of the mines and sites that SLI has of course. Now, there is of course a certain point when the expenses become too high and investors are getting unreasonably diluted. I think that SLI has done a pretty decent job in this regard. The company maintains similar expenses as in 2021 and compared to 2022 it has decreased the last 12 months.

Final Words

SLI is an exciting company that could benefit significantly from higher demand in the EV space as it offers a domestic supply of lithium. More and more companies are moving their operations and production facilities to the US and this includes EV manufacturers too. This gives SLI a great opportunity to be a major supplier of lithium to these companies. I like the business and the projects in Arkansas are exciting. Allocating a smaller portion of a portfolio to this seems reasonable right now and a good way to benefit in the long term from lithium demand. This of course results in me rating SLI a buy.

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