SLI - Standard Lithium: Focus On Lithium Future

2023-12-08 17:31:06 ET

Summary

• Standard Lithium Ltd. has promising lithium projects in the Smackover formation in Arkansas and East Texas.
• The lithium miner is facing serious pressure with lithium prices collapsing and a lack of capital to develop a couple of new mine projects.
• The company has attractive financial targets, but investors should pause investments until Standard Lithium has project financing terms outlined.

Lithium prices have fallen dramatically, placing lithium mining stocks under pressure. Standard Lithium Ltd. ( SLI ) is not in the greatest position with the development stage mining company looking for partnerships to explore lithium assets in Texas and Arkansas while electric vehicle ("EV") demand is in a temporary slump. My investment thesis is Neutral on Standard Lithium stock until more details on potential financing arrangements are outlined.

Lithium Demand

While General Motors ( GM ) has pushed back on a shift to all-electric vehicles by current government mandates in the next 10+ years, the global vehicle market still appears headed to an all-electric solutions over time. Whether or not the lithium market has a supply surplus in 2024 isn't completely relevant to the long-term story of soaring demand for the key metal for EV batteries.

The Inflation Reduction Act mandated >40% of critical minerals must be rationally sourced, with a shift to 80% in 2027. Standard Lithium has desirable assets in the U.S.

According to Fraser Institute, 388 new mines need to be developed in North America in order to meet EV demand in Canada and the U.S. The U.S. will need lithium, copper, nickel, cobalt and other mines to meet the surge in demand, and Standard Lithium has multiple projects under works in Southwest Arkansas to help meet the lithium portion of the demand equation.

The Smackover formation has some of the largest lithium concentrations in the U.S. and might match regions in South America. Standard Lithium has plans for lithium production of 30,000 to 35,000 tpa with the 2 ongoing projects in South West Arkansas with ultimate goals of topping 100,00 tpa with the addition of projects in East Texas.

The initial project is a small scale Phase 1A development called Lanxess. The project has a goal for production of 5,700 tpa with a production start of 2026.

The big projects will be the SWA with production slated for at least 30,000 tpa with a start day in 2027. The East Texas project opportunities have already tested at the highest brine rates in the country.

The opportunity in the Smackover formation remains massive, with Exxon Mobil Corporation ( XOM ) and other energy giants entering the space to open up lithium mines in the area. Exxon Mobil paid $100 million for 120K acres, with a capacity to produce enough lithium for 1 million EVs annually by 2030.

Financing Concerns

Standard Lithium only has a cash balance of $27 million while the initial Phase 1A project requires up to $365 million in capex to start lithium brine production. The biggest risk to the stock is project financing with the stock at only $2 now after trading at nearly $5 earlier in 2023. In addition, the SWA project will cost $1.3 billion, and the company clearly doesn't have the capital for these projects yet.

The stock only has a market cap in the $350 million range. Standard Lithium is working with Citi to find strategic partnerships due to the massive opportunities in the Smackover formation and the high demand for domestic supplies of lithium.

The Phase 1A deal has a listed NPV of $772 million while the SWA project is valued at a massive $4.5 billion. The valuations are based on lithium carbonate prices of $30,000/t and current prices have plunged to only $13,000/t with SWA operating costs in the $4,073/t of lithium.

The huge key to lithium is that the prices far exceed the costs to mining companies to extract the mineral. The issue is the lack of available lithium supply and time to market with the new projects in the Smackover formation from both Standard Lithium and Exxon Mobil taking until the 2026/27 time frame to reach production.

Takeaway

The key investor takeaway is that Standard Lithium Ltd. has promising lithium mining projects in the works with appealing financial targets. The problem is that slumping lithium prices and limited capital place the lithium miner in a peculiar position of needing financing from outside sources. Investors should watch from the sidelines until more details exist on the any financing terms.

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