CA - Thacker Pass: Unpacking The Massive Exploration Upside

2023-11-08 10:00:00 ET

Summary

• The McDermitt Caldera is one of the most significant lithium resources globally due to past supervolcano activity.
• The caldera contains high concentrations of lithium in illite clays, with an estimated 20-40 million tonnes of lithium (106 - 213 million tonnes LCE).
• Thacker Pass represents just a portion of Lithium Americas' total mining claims within the McDermitt Caldera, potentially inviting significant expansion for long-term investors.

A recent research publication , co-authored by Lithium Americas' (LAC) Vice President of Global Exploration, Dr. Tom Benson , made a number of headlines after calling out the McDermitt Caldera as one of the most globally significant lithium resources in the world. While this wasn't news for long-term investors of LAC, it brought a lot of new eyes to the company. This article seeks to provide an overview of the upside at Thacker Pass so investors can fully understand what the excitement is about.

Lithium and Volcanos

The high lithiation of the McDermitt Caldera, like every other lithium deposit, is a result of past volcanic activity. The reason for this goes back billions of years ago.

When the earth's crust used to be a sea of magma, heavy metals such as nickel and iron sank to the core. But lithium, the lightest metal, rose to the top. Every element has a preferred state of matter - for lithium, it's liquid. This caused significant quantities of it to remain in magma, even as the earth's crust began to harden.

Old volcanic eruptions are now responsible for the world's largest lithium deposits, after they expelled lithium in high concentrations. If you're interested in learning more about how this works in brine projects, check out this article from my Investing Group.

Thacker Pass, situated in the southern tip of the McDermitt Caldera, is benefiting from the supervolcano that now sits under Yellowstone National Park (due to tectonic plate movement). The Caldera is full of volcanic tuff which, in this instance, is deposited in various clays.

In their paper , Benson and his colleagues (Matthew Coble & John Dilles) write about the McDermitt explosion that took place 16.3 million years ago, where approximately 1,000 cubic kilometers of lithium-rich rhyolitic magma erupted. Over the course of ~600,000 years after the explosion, the volcanic tuff cooled and degassed, allowing for significant quantities of lithium to be leached from the glassy volcanic material.

This leaching was done into a smectite clay but, south of the Oregon border, hot (up to ~300°C) water channels running alongside the deposit were able to convert the smectite clay into illite. The hydrothermal fluids stemmed from resurgent, small, eruptions that persisted following the initial burst and, due to their close magmatic contact, contained substantial concentrations of lithium.

The hydrothermal fluids in the northern area of the caldera weren't hot enough (below 200°C) to transform the smectite clay into illite. Their lower lateral footprint also allowed for less lithium diffusion into the surrounding clays.

The figure below demonstrates the extraordinarily high lithium concentrations in the caldera's illite clays, relative to the smectite clays and other sedimentary deposits.

Of the 1,000-square-kilometer caldera, these lithiated areas cover 70%. Within the entire caldera, it is estimated that there is between 20 - 40 million tonnes of lithium (no more than 120 million tonnes). In terms of lithium carbonate equivalent, this would be approximately 106 - 213 million tonnes (no more than 639 million tonnes).

LAC's Expansion Potential

The most recent resource estimate for Thacker Pass places total (measured & indicated, not including inferred) lithium content at 13.7 million tonnes LCE. While LAC plans to put out a new resource estimate for the project later this year, Thacker Pass covers just a small portion of the overall caldera (as seen above).

However, taking a look at the map below (from this document ), we can see LAC's mining claims within the McDermitt Caldera extend well beyond just the Thacker Pass area.

These mining claims along the western border of the caldera align rather nicely with the deposition of lake sediments within the caldera, especially those with recorded samples of high lithium content.

The other thing you may have noticed from this map, is that Lithium Americas isn't the only company looking to develop land in the McDermitt Caldera for the extraction of lithium. Jindalee ( OTCQX:JNDAF ) and Aurora Energy Metals ( OTC:AEMLF ) also have projects, though both are north of the Nevada border.

Not only might this present a number of challenges when it comes time to secure permits, but this land further north also suffers from lower-quality lithium deposition. As seen in the figure below, and explained above, the high-quality illite clays don't extend to the northern area of the caldera.

In fact, it may interest readers to know that Lithium Americas previously held mining claims within the current project areas of Jindalee and Aurora. They dropped them due to expected challenges reaching commercialization, which include permitting and high production costs due to the lower-quality resource. While the current lithium environment makes the latter point less relevant, the concerns around permitting remain present.

Focusing on the resource though, even with relatively little exploration, it's rather evident that LAC's holdings along the western border of the caldera are of a higher quality than Jindalee's project. In its most recent resource estimate, Jindalee reported an average lithium grade of 1,420 ppm. This is in line with grades noted in the figure above, the vast majority being below 2,000 ppm.

Historical drilling results demonstrate that LAC's western caldera holdings average anywhere from 2,000 to 6,000 ppm in lithium concentration, with several samples in the sub-2,000 ppm mark. In terms of resource development, this bodes well for the company's additional land packages in the McDermitt Caldera.

It may also be worth noting that, in its 2021 resource estimate , Lithium Americas used a cut-off grade of 1,334 ppm - just 86 ppm greater than Jindalee's reported average grade.

Company Risks

As the company continues to progress Thacker Pass toward construction, investors should keep in mind the risks that the junior miner carries. Fundraising is always a challenge, though Lithium Americas has made solid progress on that front so far.

Earlier this year, the company announced that General Motors ( GM ) would invest $650 million in the company to help finance the Thacker Pass project. This covers 29% of the expected $2.268 billion capital budget of Thacker Pass. Lithium Americas is currently engaged in a process with the Department of Energy to secure a low-interest (1% - 3%) loan to finance up to an additional 70% of the project.

While I do feel that Lithium Americas has a solid case for receiving support from the DOE's Advanced Technology Vehicles Manufacturing ("ATVM") loan program , there is no guarantee that the company will be approved. In this case, the company would be in a significantly weaker financing position and would likely be forced towards significantly more expensive sources of capital to raise the remaining $1.618 billion.

Furthermore, LAC endeavors to be the first company to bring a sedimentary lithium deposit into production. The company has taken steps to mitigate this risk, utilizing many of the same processing steps that hard-rock lithium miners use and borrowing processes from other industries than extract resources from sedimentary deposits. The company has also been running a scaled version of its proposed flowsheet at its technical development center in Reno for well over a year now.

Still, even hard-rock producers can sometimes struggle to hit the ground running with production, so investors may need to have patience as the company works to ramp production assuming it does reach commercialization. As with most investments that offer strong returns in the case of a success, the risk associated is certainly far greater than average.

Investor Takeaway

At its current value, Lithium Americas is trading at just 20.1% of its Thacker Pass NPV (8% discount rate). Keep in mind, the NPV calculation is started with construction, which has already begun at Thacker Pass.

The project is expected to start ramping in H2 2026 with Phase 1, eventually reaching a total output of 80,000 tpa lithium carbonate. With my long-term lithium price forecast of $24,000, assuming supply reconvergence, Thacker Pass would generate a gross profit of ~$1.34 billion annually.

Even at a conservative multiple of 6x, this would net the company a valuation of just over $8 billion. Seeing as the company has the opportunity to dramatically expand its operations down the line, without needing to acquire any additional assets, I feel that the company's current value of ~$1.18 billion offers an incredibly attractive entry point for long-term investors.

At the very least, this article should give investors confidence that the company's exploration is in extremely good hands with Dr. Benson. There are only a handful of people in the world that have his level of understanding of lithium deposits, and far fewer anywhere close to his intimate knowledge of the McDermitt Caldera. That's a tremendous asset for Lithium Americas, which should bode well for its long-term growth.

For further details see: