November 06, 2017 - 9:43pm EST by
2017 2018
Price: 1.87 EPS NA NA
Shares Out. (in M): 437 P/E NA NA
Market Cap (in $M): 643 P/FCF NA NA
Net Debt (in $M): -6 EBIT 0 0

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  • Lithium
  • Commodity exposure


partner, Sociedad Quimica y Minera de Chile SA (SQM), is developing the Cauchari-Olaroz (Cauchari)
Lithium Project, located in Jujuy, Argentina, through its 50% interest in Minera Exar S.A. In addition,
Lithium Americas owns 100% of the earlier-stage Lithium Nevada Project in the U.S. The Cauchari mine
is expected to reach commercial production in 2019 and will ramp in two stages, ultimately to 50,000
tons per year of lithium carbonate equivalents (LCE) at the very low end of the cost curve ($2,500/ton).
Australia-listed Orocobre Ltd (ORE AU) has a contiguous brine project in Argentina called Olaroz with
similar geo-chemical characteristics and is currently ramping up, with expected annual production in
FY18 (ending 6/30/18) of 14,000 tons of LCE at a cash cost of just under $4,000 per ton (on its way down
to $2,500 per ton as well, ultimately). As it ramps up towards capacity of 17,500 tons per year, it points
the way forward for Cauchari and to some extent de-risks the execution phase.
This is a pretty simple story, one of the few pure-play lithium companies, and in terms of resource size,
this should be on par with the majors including SQM, FMC, Ganfeng Lithium (002460 CH) and Albemarle
(ALB). From our perspective as investors, we are right in the sweet spot for the best gains just over a
year before commercial production, fully permitted, financing fully in place, partnered with a number of
very well respected industry players, and at a time in the commodity cycle where supply is barely able to
keep up with demand.
Lithium Supply and Demand:
Lithium Americas has a great corporate presentation, last updated in September, and we’ll steal a
couple slides, but in a nutshell, the electrification of the world’s fleet of vehicles would lead to a massive
3 million tons of LCE, versus today’s market of 180K tons (well some would argue it’s currently more like
220K tons when adding up all hard rock and brine production globally). Based on current plans by major
auto OEMs for EVs, the lithium market is expected to grow over 15% per year until 2025.
If you look at the new supply that could potentially come onstream in the next 5 years or so (some
earlier stage projects may slip into the 5-10 year time frame), it adds up to another 425K tons per year,
which sounds like a lot considering that we’re running at about 220K tons currently, but think about the
demand trajectory, and the need to double production every 5 years at a 15% compounded growth rate.
Depending on how quickly we electrify the world’s fleet, there could be a shortfall for years. In most
supply/demand models, we’ll find a potential shortage sometime in 2018-2020.
All this may be baked into the current price ($24K/ton spot price for lithium carbonate and $21K/ton for
lithium hydroxide) but we don’t know that for sure. We just know that there is a potential shortage that
will not likely go away until 2019-2020 at the earliest.
Cauchari-Olaroz Project:
Cauchari-Olaroz is located in the Jujuy province in north-west Argentina, and it is one of the largest
lithium brine resources in the world. It is fully permitted, with recent affirmation (March 2017) by the
secretary of Mining and Hydrocarbons of the Province of Jujuy. In early 2016, SQM purchased a 50%
ownership stake in Minera Exar SA, the local operating business of Lithium Americas. In addition to
some much needed cash ($25 million, a steal), this gave Lithium Americas access to one of the best (if
not the best) lithium operators in the world, significantly derisking future mine development. Note that
actual ownership of Cauchari is split at 45.75% each for Lithium Americas and SQM, with the remaining
8.5% going to the Jujuy provincial government. In early 2017, the companies provided an update which
outlined a two stage ramp-up to 50K tons per year of battery grade lithium carbonate. Stage 1 calls for
an investment of $425 million (at 100%) for average annual production of 25K tons per year LCE at cash
cost of $2,495/ton for 40 years. Average annual EBITDA at 100% ownership, using a LCE price deck of
$12,000/ton would be $233 million, for an after-tax NPV at a 10% discount rate of $803M, after-tax IRR
of 28% and a payback period of 3.4 years. Sustaining capital beyond that would be just $5 million per
In terms of financing, the company announced a financing agreement with Ganfeng Lithium ($9.5 billion
market cap in China) in January 2017, where Ganfeng paid C$64 million for 19.9% ownership of the
company. Ganfeng also agreed to a US $120 million construction financing loan at a pretty reasonable
interest rate of about 8%. Ganfeng also secured the option to buy up to 70% of Lithium America’s share
of Stage 1 production at Cauchari. The company also signed an agreement with Bangchak Petroleum
($1.7 billion market cap in Thailand), where Bangchak paid C$42.5 million for 16.4% ownership of the
company and agreed to a US $80 million construction financing loan at a similar interest rate to
Ganfeng’s. Bangchak has the option to buy up to 15% of Lithium America’s share of Stage 1 production
at Cauchari. Lithium Americas has now secured more than enough working capital to fund its share of
the Stage 1 initial capex at Cauchari.
Lithium Nevada Project:
Based on the 132 page NI 43-101 compliant technical report dated May 31, 2016, the Lithium Nevada
project is located in Humboldt County, Nevada on 15K hectares and has a measured, indicated and
inferred resource of 5.3 million tons (100% owned). This is lithium-bearing clay-rich volcaniclastic
sedimentary rocks, and to date there are no analogous deposits in operation worldwide we do know
that this has some of the highest grade lithium claystones in North America. A resource of this size
could support a mine life of 20 years for the first phase of 20-25K tons per year LCE. Based on an update
provided a couple weeks ago, the company expects to complete a preliminary feasibility study by the
end of 2Q18. All preliminary drilling is focused on just one of 5 zones, so there is a real possibility that
the resource will end up being far larger, supporting a capacity increase and longer mine life.
To get a sense for valuation, there is a small Canadian company called Bacanora Minerals with a single
project in Mexico called the Sonora Lithium project. This project has a similar size, with a net measured,
indicated and inferred resource of 6.0 million tons, and is at a similar stage. With a market cap of
roughly $170 million, that’s about $28 per ton in value, pegging Lithium Nevada at a value of about $150
million. It could certainly end up being far more valuable as we get farther along, but that is in the right
range in terms of NPV for a project that’s still a few years out (first production likely by end of 2022), has
20-25K tons per year of production at a cash cost of say $4K/ton, pricing of $12K/ton, capex of $15-
20K/ton and a 15% discount rate.
Junior miners always seem to trade at a discount to fair value for a whole bunch of reasons: execution
risk (ORE AU is a good case study, they had major execution issues that were not explained well to the
market, hence their extreme underperformance ultimately we think it will prove to be far less a case
about poor assets than about poor management of those assets but time will tell), timing risk (the
longer the time to peak production, the more risk of adverse pricing), financing risk (self-explanatory)
and commodity risk (also self-explanatory). The classic valuation method: run an NPV under a few
different scenarios, apply different discount rates, and take a weighted average of those scenarios. The
problem: garbage in, garbage out too many inputs means wide ranging NPVs. The more comps with
established production histories (ie majors) you have, the more the market will start to play a relative
value game.
We now have a few established majors (SQM, Ganfeng, FMC, ALB). Because they are at different points
in their growth trajectories, their EBITDA multiples will probably be more homogeneous if we go out a
few years. Let’s take CY19 estimates and take an average EV/EBITDA multiple for this peer group: we
get 14.5X. Sounds high but remember we’re looking at a demand CAGR of 15% for lithium over the
foreseeable future, and supply will struggle to meet demand for the next few years at least. We can
assume that the average price deck used is $12,000 per ton, although that’s a guess (we’ve checked
consensus and it’s close). How do we take this information and apply to a late-stage junior miner? Go
out a few more years and discount back. Cauchari-Olaroz should be pretty easy: 4 year ramp-up from
2019 assume we’ll hit peak rates in CY23 50K * $12,000/ton - $2,500/ton * 45.75% = $217M.
Lithium Nevada is more of a wild guess but given what we know, we’ll assume $150M (remember it’s
100% owned) and first full year of production at CY23. Combined that’s $367M. Discounted back at
15% to 2019 we get $210M. Let’s compare to the enterprise value: at a US price of $1.47, with 437.2
million fully diluted shares outstanding, and net cash of $6.4 million, the enterprise value is currently
about $635 million. If we assume the company draws down the revolvers to fund their portion of Phase
I capex (beyond which this becomes self-funding given minimal sustaining capex) the enterprise value
increases to $840 million. $840 million / $210 million is 4.0X. It takes time to re-rate towards multiples
on par with the majors, but by 2019, it’s probably fair to assume we re-rate to a higher multiple. You
can do the math, but let’s start with a fair value of $5.00 for LACDF (a bit under C$4.00 for LAC CN).


I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


  • Preliminary feasibility study for Lithium Nevada Project: 2Q18
  • Production update on Cauchari-Olaroz Project: quarterly through 2018
  • Initial commercial production at Cauchari-Olaroz (Phase 1): 1Q19
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