SLI - Standard Lithium: Down But Not Out

2023-03-14 03:54:50 ET

Summary

• I believe that Standard Lithium is on course to deliver a blueprint of its commercial lithium plant before the end of FY 2023.
• The price of lithium carbonate in China has dropped 40% (QoQ).
• SLI received its Notice of Allowance for its Direct Lithium extraction (DLE) technology in Q2 2023.

Standard Lithium ( SLI ) has dropped 23.14% (YoY) and is trading 58.83% below the 52-week high of $9.28. Lithium prices have been on a free fall, after Chinese Battery Company, CATL reportedly offered rare discounts on the commodity to automakers. The market is set for an additional 25% price decline in the coming months since CATL controls 37% of the global EV market share.

Thesis

Despite the 13.7% (QoQ) decline in its cash balance, Standard Lithium believes that it is on course to deliver a blueprint of its first commercial lithium plant before the end of 2023. The company's management stated that they finished the necessary agreements that would enable the lithium plant to kick-start operations. Additionally, SLI believes that it will augment its competitive advantage by using its Direct Lithium Extraction (DLE) technique from lithium brines and its "Carbon Capture pilot plant" (intended to lower emissions).

Data from the US Geological Survey stated that as of 2022, only one brine operation located in Nevada produced lithium in the US. The Silver Peak mine is run by Albemarle Corp and accounts for about 1% of the global lithium supply. Countries such as Australia, Chile, and Canada produce the bulk of this commodity with China dominating lithium processing and battery manufacturing.

There are multiple potential lithium mines in both the US and Canada but these projects are mainly in the developmental stages. This mineral is gaining wide attention as the transport and energy industries rush to wean themselves off fossil fuels. Other end-use markets for lithium include glass/ ceramics, lubricants, polymer production, air treatment, and mold flux powders among others. In 2021, the global lithium market was valued at $4.65 billion and is forecast to grow at a CAGR of 13.5% from 2023 to 2028. By 2028, this market is expected to be worth $10.6 billion mainly fueled by the rising demand for lithium-ion batteries.

In its Q2 2023 results, SLI's CEO Robert Mintak stated:

Most notably, we completed the necessary agreements to begin working on the ground at our first commercial lithium plant - the most advanced lithium brine project in the U.S. This development enables us to conduct all required fieldwork to support the Definitive Feasibility Study ((DFS)), paving the way toward efficient and scalable domestic lithium production."

Recent Developments

South Korea's LG Chem ( LGCLF ) recently undertook a $75 million commitment to Piedmont ( PLL ) in exchange for a 5.7% stake (or 1,096,533 shares) in the mining company. Under this equity investment deal, Piedmont whose customers include Tesla Inc. will supply LG Chem with 200,000 metric tons of raw lithium also known as spodumene. This four-year agreement means that Piedmont will supply 50,000 metric tons (of spodumene) a year and an additional 10,000 tons a year (of processed lithium) once LG Chem completes its refining facilities in the US- specifically in Tennessee in North Carolina. This supply is expected to commence in Q3 2023, with the first 50,000 metric tons to be mined from Quebec's North American Lithium mine (where Piedmont has a 25% stake) in Canada.

LG Chem's target is to extract 30,000 MT of spodumene that will be used to make lithium hydroxide. Such an amount is enough to support the production of 500,000 EV batteries. Like SLI, Piedmont believes that its North American lithium mine will be the only commercial mine in North America beginning from H1 2023. Towards the end of 2022, LG Chem agreed to invest up to $3.2 billion to construct a cathode manufacturing plant in Tennessee, the largest such facility in the US. This facility is expected to produce 120,000 tons of cathode material by 2027 (on annual basis) enough to power 1.2 million EV batteries.

It is vital to consider that more companies are taking advantage of the Inflation Reduction Act (IRA) passed into law by the Biden Administration in August 2022. Of the $750 billion overall budget, the Fed is allocating $369 billion towards clean energy and climate change. Here, it will provide incentives for the domestic production of battery EVs, reduce imports of vehicles and their components as well as open new EV infrastructures.

SLI stated in December 2022 that the required property had been secured after the agreement with Lanxess (the site owner). Q3 2023 will see SLI gather data that will then help the Optimized Project Design [OPD] team to design and recommend necessary commercial plant logistics. In my view, SLI intends to have the facility blueprint before the end of FY 2023.

New Lithium extraction technology

What SLI aims to achieve in my view is fundamental considering that it has already finished site access agreements at its Lanxess South Plant (for its first commercial lithium facility). Following the commencement of the site work, the company also indicated that it was issued a Notice of Allowance for its patent application by the U.S. Patent and Trademark Office (USPTO). This notice affirms SLI's new lithium extraction technology as it steps closer to commercialization.

In its Q2 2023 report, SLI stated that the Notice of Allowance was issued for its Direct Lithium Extraction (DLE) proprietary technique. This technique includes the carbon capture pilot plant designed to reduce greenhouse gas emissions and improve SLI's competitiveness.

Current studies indicate that lithium is extracted from ores of hard rocks and continental brines. Brines have more lithium resources as compared to hard rock ores. Lithium mining companies all over the world are sourcing economically-sound technologies that will aid in extracting lithium resources with environmental considerations in play as well. The DLE helps lithium miners to process continental brines that are generally diluted without the need for installing evaporation ponds. Processes included in the DLE include thermal, electrochemical, and now SLI has introduced carbon capture.

Valuation

SLI's price-to-book ratio stands at 4.29 [TTM] about 159.01% above the industry average of 1.66. According to me, the stock's price is overvalued as it is trading above the value of its assets.

Risks to the downside

March 2023 has seen lithium carbonate prices (in China) to drop to its 14-month low of 337,500 yuan per ton.

China is a significant player in the lithium production and is currently sixth in the global ranking. However, the 44% value loss in lithium since November 2022, has been attributed to demand pullback and the Chinese government's decision to cut related incentives such as cash rewards to EV purchases and subsidizing manufacture of batteries in January 2023. These incentives had forced an overproduction of batteries leading to a strong supply followed by a weak demand in 2023.

SLI is yet to publish capital expenditure needed to build the commercial lithium plant as well as the resources to be used for the DLE technology. In my view, the company will have to dilute its stock to fund this initiative. Additionally, SLI's cash balance has dropped 13.7% (QoQ) to $107 million while working capital also dropped 13.2% (QoQ) to $105 million indicating reduced cash flows getting into Q3 2023.

Additionally, SLI has declined 55% since it announced the $100 million direct investment from Koch Strategic Placement in November 2021. It will be interesting to see if Koch will continue with the investment in 2023.

Bottom Line

Standard Lithium has made meaningful progress in breaking ground for its first lithium commercial facility in the US. It also installed its carbon capture technology after receiving a notice of allowance for its DLE technique for lithium brine mining. In my view, the company is on course to deliver the blueprint of the project before the end of FY 2023. However, I find the company has been overvalued and will also need to raise money through equity to fund the intended project. Still, I believe this stock has a solid growth potential if it follows through its plan and I recommend a hold rating for the stock.

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