2023-11-22 08:31:20 ET
Summary
- ioneer Ltd. owns the low-cost Rhyolite Ridge Lithium-Boron Project in Nevada, which is expected to have industry-leading economics.
- The project is backed by institutional partners and has strong institutional support, including potential investments from Sibanye Stillwater and loans from the U.S. Department of Energy.
- Despite the recent crash in lithium carbonate prices, ioneer's stock appears undervalued and could offer significant upside potential for long-term investors.
As a resource investor, I am constantly looking for beaten up commodities and stocks in search of tomorrow's '10-baggers'. I believe ioneer Ltd. (IONR) has the potential to be such an investment.
ioneer owns the low-cost Rhyolite Ridge Lithium-Boron Project in Nevada. Once permitted and built, Rhyolite Ridge is expected to have industry-leading economics due to its attractive Boron credits.
The Rhyolite Ridge project is backed by institutional partners like Sibanye Stillwater (SBSW) and the U.S. DOE, so I believe it will ultimately get built. Assuming ~US$20,000 long-term lithium carbonate prices, I believe there is 170% upside in the stock price.
Since commodity prices are highly cyclical, once Rhyolite Ridge gets built and lithium prices go on a 2021/2022-esque run, investors in ioneer could see asymetric upside returns. I rate ioneer a speculative buy and would use weakness to start building a long-term position.
Company Overview
ioneer is a development-stage lithium-boron producer that is set to become a globally significant producer of two critical minerals, lithium and boron. The company owns the Rhyolite Ridge Lithium-Boron Project ("Rhyolite Ridge") in Nevada.
Rhyolite Ridge is an advanced lithium mining project currently working on obtaining the necessary permits before construction can begin (Figure 1).
Rhyolite Ridge Has Industry-Leading Economics
Rhyolite Ridge is one of only two known large lithium-boron deposits globally. ioneer completed a Definitive Feasibility Study ("DFS") on Rhyolite Ridge in 2020 which confirmed the project's scale and potential to be a global producer of both lithium and boron minerals.
Operationally, the Rhyolite Ridge project is expected to deliver 22,000 tpa of lithium and 174,000 tpa of boron once it is completed with an initial capex of US$785 million (Figure 2). This gives the project an NPV of US$1.3 billion and 20.4% IRR at US$11,740/t Lithium Carbonate and US$710/t Boric Acid.
Figure 2 - Rhyolite Ridge is highly economic based on DFS study (IONR investor presentation)
The Rhyolite Ridge project has industry-leading all-in sustaining cost ("AISC") of US$2,510/t Lithium Carbonate due to the unique nature of the deposit where ioneer can receive credits for the boric acid produced (Figure 3).
Figure 3 - Rhyolite Ridge is expected to have industry-leading costs (IONR investor presentation)
Boric acid is an industrial chemical that has been used for centuries in cleaning, food preservation and other applications and has fairly stable prices (Figure 4). Therefore, Rhyolite Ridge's AISC estimates are realistic and should be fairly stable.
ioneer Has Strong Institutional Backers
Unlike other small-cap mining companies, ioneer has a very strong list of institutional backers including Sibanye-Stillwater, a leading South African mining company, that agreed to invest US$490 million to be a 50% JV partner in the Rhyolite Ridge project (Figure 5). Furthermore, ioneer has secured up to US$700 million in loans from the U.S. Department of Energy as part of President Biden's Advanced Technology Vehicles Manufacturing ("ATVM") program.
Figure 5 - ioneer has institutional backers (IONR investor presentation)
Finally, ioneer has signed binding lithium offtake agreements with Ford, Toyota/Panasonic and EcoPro (a Korean battery manufacturer).
ioneer IPO'd At The Peak Of The Lithium Boom
ioneer listed its American Depository Receipts ("ADRs") on the Nasdaq in mid-2022 amidst a lithium frenzy when the price of lithium carbonate soared to over 500,000 CNY/t (equivalent to ~US$70,000) (Figure 6).
However, so far in 2023, lithium carbonate prices have crashed back to earth, recently trading at 142,500 CNY/t (~US$20,000), as the supply of lithium batteries is outstripping demand to the tune of ~300 GWh, according to a recent article from Wood Mackenzie (Figure 7).
Figure 7 - Lithium batteries are in oversupply (Wood Mackenzie)
This has caused ioneer's stock price to crash, with its ADRs recently trading at US$4.00, barely a fifth of what the shares fetched at its peak in August 2022 (Figure 8).
Figure 8 - ioneer is trading at 1/5 of its 2022 peak (stockcharts.com)
Lithium Bear Market Could Be An Attractive Long-Term Entry
However, the current lithium bear market could be a great long-term entry point for those with a strong stomach and long-term outlook. As long-time resource investors should be well aware, the best solution to low commodity prices is low commodity prices, as high cost producers are forced into bankruptcy and eventually supply rationalizes.
ioneer, with its peer-leading cost advantage, should remain solidly profitable in most lithium price scenarios. As a reminder, ioneer's Rhyolite Ridge DFS was completed in 2020 assuming a long-term lithium carbonate price of US$11,740. According to the DFS, a 10% increase in lithium price assumption to US$12,900 increases the project's NPV by $234 million to $1.5 billion (Figure ).
Figure 9 - DFS NPV sensitivity (Technical Report Summary of the Rhyolite Ridge Lithium-Boron Project)
At current lithium carbonate price of ~$20,000, with the other parameters from the DFS constant, I estimate the project's NPV could be closer to US$2.9 billion (US$234 million / 10% increase in lithium price x 70% increase in price from US$11,740 to US$20,000).
As commodity markets are highly cyclical, today's lithium price crash could very well lead to tomorrow's '10-bagger', just like how many oil and gas producers crashed during the COVID pandemic when oil prices briefly dipped negative but have since returned over 10x to shareholders who bought near the lows.
Valuation Is An Attractive Real Option
Currently, ioneer has an enterprise value of ~US$200 million (Figure 10).
As I understand the company's economics, Sibanye had agreed to invest US$490 million for 50% of the Rhyolite Ridge project. Sibanye's funds would have covered 62% of the project's initial capex of US$785 million based on the DFS. However, given strong inflation in the past few years, I fear the initial US$785 million capex is no longer realistic. For example, if we look at the Producer Price Index, Mining Machinery and Equipment, the index is approximately 35% higher than the level in mid-2020 (Figure 11).
Figure 11 - PPI, Mining Machinery & Equipment (St. Louis Fed)
Therefore, I estimate the project capex may well turn out to be over US$1 billion in today's dollars. Assuming a US$1 billion capex, ioneer will have to fund the difference of US$510 million, most likely from a combination of equity and debt capital raised from the U.S. Department of Energy.
Assuming IONR raises ~US$120 million in equity (50% equity dilution) at current prices and US$400 million in debt, that should increase the company's enterprise value (assuming the funds raised are spent in constructing Rhyolite Ridge and current cash is used to advance the project to final investment decision) to ~US$750 million.
On the other hand, at long-term US$20,000 lithium carbonate prices, I estimate 100% of Rhyolite Ridge has an NPV of US$2.7 billion (US$2.9 billion NPV less US$200 million increase in capex). Therefore, 50% of the project could be worth US$1.35 billion. Less $400 million in expected debt, the resulting equity may be worth US$950 million when Rhyolite Ridge is built, compared to ~US$350 million currently (assuming ~US$120 million equity raise). Therefore, the equity could have 170% upside.
In fact, using this math above, the breakeven point on the equity would be if long-term lithium carbonate prices are only ~US$14,000, which would imply a project NPV of US$1.5 billion (assuming capex remains US$1 billion) and future equity value of US$350 million. As long as expectations for long-term lithium carbonate prices stay above ~US$14,000, I expect Rhyolite Ridge will be built.
Risks To ioneer
Of course, much of the potential 'value' in ioneer's stock is correlated to the long-term price of lithium carbonate. Therefore, if lithium carbonate prices continue to weaken, we should expect ioneer's stock price to continue to decline.
Also, the timing of the Rhyolite Ridge project is still highly uncertain. Initially, the company was expecting construction to start in 2023 with production in 2025, however permitting has taken longer than expected so first production has been pushed out to 2026. If additional delays occur, then we can expect further decreases in ioneer's stock price from additional capex inflation and the time value of money.
Conclusion
ioneer is a development-stage mining company that owns 50% of the Rhyolite Ridge Lithium-Boron Project, assuming Sibanye comes through for its 50% stake. While the ultimate timing is still uncertain, given the project's peer-leading costs, I believe Rhyolite Ridge should ultimately be constructed, especially as it has the backing of the U.S. government with geopolitical considerations to push for the U.S. to be self-reliant in advanced battery materials.
The recent lithium carbonate price crash have caused ioneer's stock price to plummet 80% from its 2022 peak. At current valuations, ioneer's stock appears deeply undervalued relative to what current lithium carbonate prices of ~US$20,000 imply for ioneer's 50% stake in the Rhyolite Ridge project.
I believe investors bullish on lithium prices in the long-term may wish to take advantage and start building positions in cost-advantaged lithium projects like ioneer. Today's 80% crash could be tomorrow's 10-bagger. I rate ioneer a speculative buy .
For further details see:
ioneer: Call Option On Lithium Prices