TSLA - Standard Lithium: Chasing $437 Billion

2023-05-11 11:30:34 ET

Summary

• We can expect battery producers and carmakers to begin equity investments into lithium companies as the top choices get picked over.
• The entire lithium ecosystem has been changed by General Motors' funding of Lithium Americas.
• We should expect SLI to see a deep-pocket partner arrive in time as well as government IRA loans.
• The Texas expansion program makes Standard Lithium all the more favorable for an entity with deep pockets to partner up with.
• KOCH gets deeper in bed with Standard Lithium.

Lithium Is Bigger In Texas

They say everything is bigger in Texas. When it comes to lithium this adage is truth. Standard Lithium (SLI) announced very favorable results from a Texas drilling program and I was a bit surprised as I thought they would be drilling in western Arkansas. Instead the company announced results from drilling in Texas that ranged between 298 to 634 mg/l average grade lithium . Per SLI:

It has sampled, to the best of its knowledge, the highest confirmed lithium grade brine in North America, with a grade of 634 mg/L lithium. In Standard Lithium's experience, the grade of lithium in brine used for Direct Lithium Extraction (DLE) has a meaningful impact on both capital expenditures and operating costs in connection with the extraction process, with a higher grade typically resulting in lower overall costs.

In this article we examine the results, the company, and the big picture to see if we should be making Standard Lithium a standard part of our portfolio.

Drill Results and Company Expansions

As we start the dive into Standard Lithium, we need to get a grasp of where they are located, where the assets are located, and what is going to move this stock. First realize that Standard Lithium has a few different lithium assets: The Lanxess Project in Arkansas, The Southwest Project by Magnolia, Arkansas, now the Texas property, and lastly a dormant California project. The Lanxess project is the first one that will come online. The landscape is changing however, money is flowing into lithium projects as we shall see.

GM and Lithium Americas Alter The Game

Thus far, carmakers have put off direct investments into mining companies, but news of General Motors ( GM ) investing $650 million in Lithium Americas ( LAC ) certainly changes the entire lithium ecosystem. No longer can other automakers sit back. No longer can Elon Musk say:

"I would really like to encourage, once again, entrepreneurs to enter the lithium-refining business. You can't lose."

While it is true that lithium-refining might be the golden ticker, you need something to actually refine. Hence, lithium miners come into play. Additionally, if car and battery companies do not act, they could be left at the mercy of Mr. Market to determine if they receive supply. We wrote about this issue and how Tesla ( TSLA ) might be forced into mining .

The Challenge (or Why Carmakers Have Avoided Mining)

The lithium industry is struggling to meet demand: Mines take 10 years or more on average to mature from discovery to production and that is assuming they do not run into legal issues with locals or out of state environmentalists.

Acknowledging the long timeframes and the challenges miners face, why have carmakers not entered the mining fray sooner? We could guess at various reasons from the aforementioned long lead times for maturing a mine, but the largest reason generally remains capital costs.

Developing a lithium mine during an inflationary environment is expensive and why bother if you can simply purchase lithium? That is, till you can't due to high prices, your competition locking up supply, or just fast forward a few years and demand is gobbling up all supply. Granted, prices have come down quite a bit in the last few months. This might be partially from lower car demand or Chinese lithium price manipulation. It is hard to say. Yet, long term, the demand that is coming is going to require a tremendous lithium supply.

For carmakers, investing in a lithium miner comes down to, do they want the ability to control their futures? If they do not, they will continue to let the market gods determine their fate.

Putting the "Or" in Ore

Or maybe the competition starts buying chunks of lithium companies and all of a sudden those that have not secured supply via long-term agreements and equity buy-in are at a large competitive disadvantage. The competition could start to achieve cost savings via vertical integration and direct discounts. Note that GM will receive a discount on lithium from Thacker Pass and they can potentially lock it up for 15 years and secure Phase 2 of the project if they so choose.

This circles us around to the question of what are the most logical United States lithium mining companies that automotive companies should acquire/invest in? I see it as two choices: Century Lithium (CYDVF) and Standard Lithium.

Lithium Big Picture Demand

Looking at the big picture we can see the U.S. currently mines less than 1% of the world's lithium. With a worldwide shift to EV, this presents quite a problem. It simply is not wise to have critical elements mostly in the domain of potential hostile powers. While various areas of the world mine lithium, the bulk of lithium refining occurs in China.

Benchmark Mineral Intelligence places lithium refining in China at 44% and battery cell production at 70%.

In response, the U.S. government has opened quite a few funding options for lithium (and hydrogen sector) that total $437.6 billion. Note: This does not include what the Canadians are offering up to support lithium mining and refining in Canada.

Government Intentions and New Projects

Here are a few developments to ponder with our overall theme of lithium demand increasing.

1. The EPA wants 2/3rds of car sales to be electric by 2032 .

2. VW to invest $7 billion in lithium battery plant in Canada .

3. Tesla ( TSLA ) to open a $375 million dollar lithium refinery on the Texas coast.

4. Panasonic to build $5 billion dollar lithium battery plant in Oklahoma .

The So What

So why does the matter? It matters because the industry is ramping up in anticipation of the ongoing shift to EV. Politicians are on board. Governments are on board; money is in the air; the shift is ongoing, though some of this shift is in far-off lands that you will not see directly. Hence out of sight is out of mind for some long term investors. A portion of the lithium movement is slow, somewhat like a glacier, but the shift is happening now. A window of opportunity is present but it will close as the industry starts to mature. Granted, we still have several years, but by 2027 we should start to see some of the smaller players mature to production. By 2030, the landscape will be populated by many lithium companies but with higher demand too. Coming back to Standard Lithium we should see various projects get to production and then expansions.

Sodium-based batteries will have a role but most likely confined to the low end due to sodium weighing 3x more than lithium and the low energy content sodium is capable of. Granted, sodium energy capability will improve; so will lithium. Nano One ( OTCPK:NNOMF ) is one such company pushing lithium technology forward but I'll leave that discussion for a future article.

Dark Auspices - A Section on Risk

Follow the money. While lithium might one day encounter some magical solution that dethrones it, the bulk of Federal and private funding is going into lithium and hydrogen. We shall however practice continuous evaluation by keeping tabs on potential lithium contenders.

The biggest threat to your portfolio is the market itself. You have heard about inflation ad nauseam along with interest rates: The threat is valid. Inflation rages on. Interest rates continue to rise. Banks continue to fail. The economically challenged and the middle class are being squeezed via rent costs blasting off while housing stubbornly continues to be high in my opinion. I do not see any easy out. Rather I feel like we are looking down the barrel of a 2008 event. Yet, even if these dark auspices pan out, long term America will prevail economically. The Federal tinkering often results in disaster but this may present long-term opportunity for the patient investor that has time to buy and hold while the lithium industry continues to mature. Long term the economy will improve.

Standard Lithium is the Standard

Circling back to Standard Lithium, the company is in a very favorable geographic region. Plenty of infrastructure be it rail, road, or power. Zero water issues unlike most lithium miners in locations such as Nevada. A huge chemical industry exists in Louisiana as well. A deep and growing partnership with KOCH adds weight to Standard. KOCH owns 7-8% of Standard Lithium and invested $100 million into the company along with offering up its DLE technology to Standard. Deep pocket backing bodes well to getting an Inflation Reduction Act loan (much like Lithium Americas is going after).

Below we can see the projects are deemed to start small, but once proven up we could surmise additional funding will come forth for their expansion. Hence, take these figures as initial target production figures before a ramp. Note: Some of these expansions are years down the line before they hit production with one close to a DFS and another an FPS.

We surmise that once the DFS wraps up we see additional details flow out concerning potential partnerships, funding, and then future IRA loans or tax credits. Per Standard Lithium's IR slide deck page 18:

Inflation Reduction Act ("IRA") provides multiple tax credit opportunities to fund the development of domestic battery supply chains. Section 48C provides tax credits equal to 30% of project capital expenditures. Section 45X is a 10% tax credit for operating expenses for the life of the asset.

Additionally, geographically, much lithium demand is close to Standard Lithium via the below graphic.

Conclusion

Given the strong cash position of Standard Lithium, favorable logistics, and lack of Federal permitting requirements, I find Standard to be very favorable with high odds of success. Glancing at the SEDAR filing from February, we can see the current cash to liabilities. Cash $107+ million CDN vs accounts payable and accrued liabilities of $4+ million CDN. It is very interesting to note they list "Asset under construction - Commercial plant." Burn rate was $8 million for the three months ending December 31, 2022. Another interesting note is interest income ($952k) should rise given rising interest rates which might offset some monthly burn rate. Lastly, the KOCH partnership gives this additional weight of long term success. For the patient investor willing to brave these economic short term pains, the long term payout could be very lucrative based on the long term EV/lithium outlook with Federal funding of projects and lithium industrial demand. The Texas discovery of lithium brine is a new development that may very well pan out. Short term focus is proving the Standard Lithium-KOCH DLE process works commercially and then we might see a ramp up as additional money flows in for project expansions.

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