Summary
- Sigma’s Grota do Cirilo Project has a Reserve of 54.8Mt (P&P) and a Resource of 85.6Mt (M&I&I).
- The Project is being rolled out over multiple phases and will eventually produce up to 811ktpa of SC5.5 and have a 13-year mine life.
- The high rates of production over a shorter timeframe will allow Sigma to benefit from tight lithium markets and elevated prices.
When I last covered Sigma Lithium Corporation ( SGML ) in August of last year, it was still in the midst of building Phase 1 of its Grota do Cirilo Project in Brazil. Construction was progressing nicely while management kept reiterating their Q4/22 target for the start of commissioning. The stock price had also begun to reflect greater investor interest and would continue rising until it peaked at over $37/share in late October.
Since then, progress at the mine has kept rolling along. Sigma began commissioning the facility in December, right on schedule, and anticipates beginning commercial production in April. The company has also made considerable progress on Phases 2 and 3 of the project which was outlined in a Production Expansion Study released in December. In the study, the company announced a higher Reserve Estimate as well as a debt financing agreement. The stock price, however, failed to respond to the announcements and soon after even begun trending downwards. In this article, we'll review the progress being made on Sigma’s Grota do Cirilo project and what that may mean for Sigma’s stock price.
Company Background
Over the last year, shares of Sigma Lithium have gone on quite a tear. The stock is one of the best performers in the lithium space and is up over 200%; easily outpacing senior producers such as Albemarle Corp ( ALB ) and Livent Corp ( LTHM ) as well as promising developers such as Lithium Americas Corp ( LAC ).
And while Sigma’s stock was already an industry leader at the beginning of last summer, what really seems to have catapulted it to a whole other level was a resource upgrade. In the spring of last year, the company’s Grota do Cirilo Project had a Measured and Indicated Resource of 50.3Mt with an additional 8.6Mt classified as Inferred , giving it a total of 58.9Mt (M&I&I) at an average grade of 1.41%.
Sigma Resource Size in April 2022 (Investor Presentation)
However, at the end of June the company announced a substantial increase to its Resource size, raising the total by 46% to 85.7Mt (M&I&I). The upgrade turned Grota do Cirilo into a truly world class deposit with the potential to become the largest hard-rock lithium mine in the Americas.
Sigma Resource & Reserve - June 2022 (Investor Presentation)
But in spite of the good news, the stock price didn’t respond to the announcement immediately. At the time, lithium stocks were experiencing a pullback due to a negative Goldman Sachs report; Goldman issued a sector-wide downgrade in May of last year forecasting that a steep decline in lithium prices would occur towards the end of 2022. Needless to say, that never happened, and as memory of Goldman’s downgrade faded, Sigma's stock began an upward march that would crest in October.
In early December, the company announced a Reserve expansion as well as a massive upgrade to its NPV 8% . The Reserve is the economically viable part of the Measured and Indicated Resource and is what the NPV is based upon. Sigma increased its Reserve by 63%, taking it from the previous 33.6Mt to 54.8Mt, and simultaneously increased the project’s NPV 8% to a very impressive $15.3 billion from the already very respectable $5.1 billion.
Sigma Resource & Reserve Jan 2023 (Investor Presentation)
The market's response to the big news, however, was rather lackluster. The stock price rose for a couple of days before beginning a slow decline. This may have partly been a reaction to news that Sigma was going to finance part of Phase 2’s construction by using debt. The company had announced an agreement with Synergy Capital, one of its current shareholders, for up to $100 million in senior secured pre-export financing.
A second reason for the market’s less than enthusiastic response was that the Reserve expansion may have already been priced in. That’s because expanding the Reserve does not expand the underlying Resource’s size; it only reclassifies it from Measured and Indicated to Proven and Probable . Also, the news of an updated NPV calculation that would now include Phase 3 had long been anticipated.
Front-Loaded Production
The Production Expansion Study, however, does contain some news that may not yet have been fully priced in. Sigma continues to do exploratory drilling on the Eastern side of its property, it drilled over 7,000 meters last year, and management has indicated that there’s still significant potential to grow the total Resource size which would be extracted in a fourth phase of the project.
Another factor that needs to be taken into consideration is the pace at which the company plans to extract most of the lithium-bearing spodumene concentrate. Sigma wants to bring both Phases 2 and 3 online in 2024. That’s one of the reasons why it’s taking on debt instead of waiting for cash flow from Phase 1 production to eventually cover construction costs. Using leverage will allow the company to reach peak production much sooner than if it waits for each Phase to generate sufficient cash flow to fund the construction of the next Phase. As can be seen below, using this strategy will see all three phases of the mine producing in the second year after the start of commercial production. Production will peak in year 5 at 811kt.
Sigma Project Production Profile (Investor Presentation)
Downside Risks
Using such a strategy does have its risks though. Taking on leverage obviously leaves the company exposed to sharp drawdowns in the price of lithium. Also, unpredictable events such as mine accidents, strikes, or mechanical failures could potentially leave the company in a delicate position where it has to pay interest on debt while no revenue is coming in.
Another risk comes from Brazil’s newly elected government. Oversight over the mining sector is likely to increase as the government has already announced the establishment of a new mining council with the intention of driving greater sustainability in the industry. While the risk of outright expropriation is low, Sigma may face more red tape under the new administration and that may slow their efforts to get production up as quickly as possible.
Takeaway
Getting Grota do Cirilo to full production quickly will allow Sigma to take advantage of tight conditions in the lithium market. Many analysts predict that lithium will remain scarce, and prices will remain elevated right up until the end of this decade. But, of course, at some point the lithium deficit will subside and prices will pull back.
By front-loading production and extracting its lithium over a shorter mine life, Sigma appears to be making every effort to take advantage of these tight market conditions and elevated prices; management wants to make hay while the sun shines.
Sigma trades at an enterprise value of about $3.1 billion or just over 20% of its revised $15.3 billion NPV. This substantial discount will likely narrow as commercial production at Phase 1 begins and construction starts on Phase 2. The stock’s recent pullback is likely to be short lived and shares in SGML will probably again begin trending upwards.
For further details see:
Sigma Lithium's Shorter Mine Life Is An Advantage