Stay Informed! 3 Brine Lithium Developers Picked F
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Posted On: 01/13/2018 12:40:16 PM
Stay Informed! 3 Brine Lithium Developers Picked Following A Relative Value Analysis
Jan.12.18 http://www.seekingalpha.com/article/4137045
In this article, I attempt to conduct a reconnaissance of these middle-of-the-pack lithium extractors, using the enterprise value per lithium resource as a yardstick.
Lithium extractors in advanced stage of development
There are approximately a dozen lithium developers, which have come near to the first production (Table 1). They fall into two groups, i.e., the brine (and clay) lithium extractors and hard rock lithium miners.
The brine lithium extractors include Millenial Lithium (OTCQB:MLNLF), Lithium Americas (OTCQX:LACDF), Lithium X (OTCQX:LIXXF), International Lithium (OTCPK:ILHMF), Lithium Power International (OTC:LTHHF), Neo Lithium (OTCQX:NTTHF), Pure Energy (OTCQB
EMIF), and Advantage Lithium (OTCQX:AVLIF), with clay lithium developer Bacanora (OTC:BCRMF) lumped in and Orocobre (OTCPK:OROCF) and SQM (SQM) included for comparison purpose.
The hard rock lithium miners include Kidman Resources (KDR.ASX), Critical Elements (OTCQX:CRECF), Altura Mining (OTCPK:ALTAF), Pilbara Minerals (OTCPK ILBF), and Nemaska Lithium (OTCQX:NMKEF), with producers Neometal (OTCPK:RRSSF) and Galaxy Resources (OTCPK:GALXF) included for comparison purposes.
Table 1. The middle-of-the-pack lithium extractors. Source: Enterprise value and market cap are sourced from gurufocus.com as of midday January 8, 2018.
The dataset
These companies are selected because they are precisely or nearly lithium pure plays, with their assets being dominantly lithium projects. Excluded from this study are those that have other major non-lithium lines of business, e.g., Albemarle (ALB), FMC (FMC), Mineral Resources Ltd. (OTCPK:MALRF), and Eramet (OTC:ERMAF). Chinese and private lithium developers are also excluded, including Chengdu Tianqi, Ganfeng, and Energi.
The reported lithium resource net to company interest is considered to represent the size of lithium assets. The lithium resource for each company is taken from the company websites, the technical, PEA or DFS reports or annual reports, with the links to the information sources listed alphabetically below:
Advantage Lithium (see here and here); Altura Mining (see here); Bacanora Minerals (see here); Critical Elements (see here); Galaxy Resources (see here); International Lithium Corp. (see here); Kidman Resources (see here); Lithium X (see here and here); Lithium Americas (see here); Lithium Power International (see here and here); Millenial Lithium (see here); Nemaska Lithium (see here); Neo Lithium (see here); Neometals (see here); Orocobre (see here); Pilbara Minerals (see here); Pure Minerals (see here); SQM (see here).
For the brine (and clay) lithium projects, the measured and indicated, aka, M&I, resource is collected along with the inferred resource and exploration targets. The Clayton Valley project of Pure Minerals and Cauchari Project of Advantage Lithium are two exceptions, for which the inferred resource is the only reported parameter and is used in place of the M&I resource. For the hard rock projects, the lithia (Li2O) resource is calculated from reported ore reserve and lithia grade before it is converted into lithium carbonate equivalent (LCE).
To account for the upside potential of a project, I calculated its adjusted net lithium resource by adding 50% of the inferred resource and estimated exploration potential to the net lithium resource, data permitting. Where a range of exploration potential is given, the median value is used. Although the conversion of inferred resource and exploration targets into official figures of lithium resource is not well understood, such an adjustment is believed not to be a problem for the purpose of this article, as long as the same methodology is applied uniformly to all studied companies, where data is available.
The enterprise values of the lithium developers/producers are gathered from Gurufocus.com as at mid-day January 8, 2018. The corralled data are presented in Table 2.
Table 2. The basic information, lithium resource and enterprise value of the selected lithium developers/producers. *, Lithium X was acquired by the Chinese firm NextView for US$206 million (see here); SQM farmed in and took 50% of Mt Holland Project for US$110 million (see here). Source: the author's compilation.
Lithium resource vs. EV
The enterprise values of these companies are supposed to correlate with the reported lithium resource. To examine whether this is the case, I plot in Fig. 2 the enterprise values in covariance with the net lithium resource.
Fig. 2. The covariation of lithium resource and the enterprise value of the selected lithium developers. Source: the author.
Here are a few observations:
As expected, there exists a strong correlation between the net lithium resource estimates and the enterprise values, adjusted for exploration potential or not.
There is a big difference between the brine (and clay) and hard rock developers/producers. For the former, one ton of lithium resource LCE is valued at approximately $80 or $65 on an adjusted basis; for the latter, one ton of lithium resource LCE is valued at approximately $365 adjusted or not.
The evolution of projects from development to production has a significant impact on the valuation of the operator. The producers, i.e., SQM, Orocobre, Neometal, and Galaxy Resources, are accorded substantially higher valuation in terms of the EV/Li ratio than those still in the development stage.
The U.S. and Canadian lithium projects receive significantly more generous valuation than those hailing from outside of these two countries. Notable examples are Pure Energy and Nemaska Lithium.
Relative valuation
We now have two linear regression lines, namely EV = 64.935 * Li for brine and EV = 364.55 * Li for hard rock. On the basis of these linear regression lines, predicted EV can be derived at any given adjusted net lithium resource.
By comparing the actual EVs with the predicted ones, I find that some companies are marked down, while others marked up (Table 3). For example, among the brine lithium developers, Bacanora Minerals and Millenial Lithium appear to be trading below predicted EVs, Pure Energy, and Advantage Lithium marked up, while International Lithium Corp., Neo Lithium, Lithium Americas, Lithium X, and Lithium Power International seem to be from fairly valued to slightly overvalued. Among the hard rock developers, Kidman Resources and Critical Elements are marked down, Altura Mining and Pilbara Minerals fairly valued, while Nemaska Lithium seems to be overvalued.
Table 3. Levels of valuation of lithium developers relative to the predicted enterprise value. Source: the author's calculation.
Discussion and investor takeaways
A cautionary note on the use of EV/Li ratio
I have been of the opinion that investors should avoid relying on a single variable in stock picking. I have been actively advocating at The Natural Resources Hub (TNRH) that a value investor should establish a holistic understanding of the business behind a stock, estimate the intrinsic value based on that knowledge, and search for an adequate margin of safety. Such an apparently tiresome approach actually gives the investor the best risk management and consequently the highest rate of return. The practice of this methodology by Laurentian Research is exemplified by the in-depth surveys done on, e.g., Orocobre (see here and here), Lithium Power International (see here), Ardea (see here), and Clean TeQ (see here), among others.
Even though either the EV/Li ratio (Table 2) or the relative valuation based on linear regression (Table 3) should not be used as the endgame in stock valuation, it can be useful for building an initial understanding of an industry. One just has to explore beyond that point of departure, to leave behind the assumption of everything else being equal. The reality is almost invariably more nuanced, richer in complexity, and studded with all sorts of surprises, which a simple tool such as the EV/Li ratio cannot capture.
For example, at first blush, the EV/Li ratio at 355 appears to suggest the gross overvaluation of Advantage Lithium (Table 2). However, a slightly more extensive research would lead to the knowledge that the company is yet to appraise the northwestern flank of its tenements, that even in the southeastern flank only 0.47 Mt LCE of inferred resource in the shallow level have been booked, and that some 0.25 to 5.6 Mt LCE of upside potential exist in the exploration target. This is not surprising at all because sandwiched between the northwestern and southeastern flanks of the Advantage tenements is the Cauchari Project of Lithium Americas, which is reckoned to contain an M&I resource of 11.7 Mt LCE (Fig. 3).
Fig. 3. A map of the Cauchari Project of Advantage Lithium (left) and a schematic cross-section of the Caichari Basin. Source: here.
It is reasonable to expect that, as exploration goes on, Advantage will probably book an increasing amount of lithium resource, just as Lithium Power International has done in the Maricunga Project in Chile (Fig. 4).
Fig. 4. The upgrade of lithium resource in the Maricunga Project of Lithium Power International. Source: here.
Further research would shine a light on another edge Advantage stands to benefit from. It turns out the Olaroz plant of Orocobre, the 25% partner of Advantage, lies just 10km to the north of the Cauchari tenements. Advantage may be able to save millions of dollars in construction costs by choosing to pipe the Cauchari brine to that plant for processing. Additionally, partner Orocobre, itself an entrenched producer, is anticipated to willingly share its knowledge of local geology and hydrology, technical know-how as well as the Toyota-linked marketing channel with Advantage (see here). All of these meaningful benefits are not captured by the EV/Li ratio.
As a project progresses...
A lithium project has a life cycle, progressing from exploration, via appraisal and development, to production. As the project marches from exploration to appraisal, more mineralized zones are appraised, resulting in an expanding lithium resource. As uncertainty tapers off, exploration potential is realized. The risk in the project decreases as the project goes through PEA, DFS, IEA, as construction starts and completes. By the time the project is brought on stream, much of the risk of yester-years has been converted into an economic benefit. The market, therefore, accords increasingly richer valuation as the project progresses along its life cycle.
A look at either the brine or the hard rock lithium projects tells us this is clearly the case (Table 2). The EV of a pre-production company varies according to the net lithium resource it holds, except for some aberrations caused by geography and by how close the project is to the culminating event -- production. However, the first production places a company in a much-elevated level of valuation. Orocobre and SQM receive significantly richer valuation than those still struggling toward the first production. Likewise, Neometal and Galaxy Resources are awarded EV/Li ratios north of 400, while the pre-production brethren average 356, with the exception of Nemaska, the operator of a Quebec mine, which supposedly enjoys a geographical advantage. As a side note, proximity to Tesla Gigafactory can be just another red herring in the electric vehicle craze.
The following equation explains the double blessing enjoyed by a quickly maturing lithium developer:
[EV] = [EV/Li] X [Lithium resource]
Just as the EV/Li ratio expands along with the life cycle, its lithium resource is expanding. The EV/Li ratio can multiply four-fold as a junior developer graduates to the status of Orocobre or 6-fold to that of SQM (Table 2). The lithium resource can expand as many folds, e.g., the M&I lithium resource of Lithium Power International multiplied 3-fold from 2012 to 2017 (see here) and can multiply 7 times by the time the DFS is completed. This double blessing is precisely how a 10-bagger to 30-bagger comes into being.
In this regard, it is perhaps a great idea to focus on picking the pre-production developers with the greatest potential of lithium resource expansion. Advantage Lithium has six times exploration target of its inferred resource, Neo Lithium has 1.8 times as much inferred resource than M&I resource, and Lithium Power International has 1.3 times as much inferred resource than M&I resource, which are highlighted in this article for their prospect of value appreciation. On the other hand, although having booked a huge lithium resource, Lithium Americas may have a rather limited upside for resource expansion (Table 2).
One more thing...
The hard rock lithium developers selected for this study already receive a rich valuation (hence lack of headroom to multiply) and generally lack further resource expansion upside (Fig. 2). According to the above equation, going forward, they probably will not offer as much torque as one would like to have.
I think this probably is because the hard rock lithium developers near in the development stage may have passed the stage of rapid resource expansion.
If that is true, then investors perhaps should search in the cohort of less mature hard rock explorers for the best opportunity. That may lead the investors away from politically stable countries such as Australia and Canada to more volatile land, e.g., the Democratic Republic of Congo where AVZ Minerals Ltd. (OTC:AZZVF) has located pegmatite mines of enormous size (see here).
This trade-off between growth potential and political risk is just another undesirable aspect of hard rock lithium mining besides the relatively high operating costs as compared with the brine lithium developers (see here).
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Expand Portfolio
3 Brine Lithium Developers Picked Following A Relative Value Analysis
Jan. 12, 2018 7:15 AM ET|
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About: Advantage Lithium Corp. (AVLIF), LTHHF, NTTHF, Includes: ALB, ALTAF, AZZVF, BCRMF, CRECF, ERMAF, FMC, GALXF, ILHMF, LACDF, LIT, LIXXF, MALRF, MLNLF, NMKEF, OROCF, PEMIF, PILBF, RRSSF, SQM
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Summary
The pre-production lithium developers are an interesting cohort worth of consideration.
A dataset including enterprise values and lithium resource estimates is assembled and analyzed.
The use and limitation of relative valuation parameter such as EV/Li ratio are discussed.
Major observations are further explored to shine a light on investment in lithium developers.
Critical drivers of value appreciation of lithium developer stocks are identified.
This idea was discussed in more depth with members of my private investing community, The Natural Resources Hub.
“A great company is not a great investment if you pay too much for the stock.” - Benjamin Graham
As the ascent of Global X Lithium ETF (LIT) continues (Fig. 1), investor become increasingly enthusiastic about lithium-related companies. However, as we pointed out in a previous article entitled "Where The Money Is In The Electric Vehicle Supply Chain" (see here),
The suppliers of critical raw materials for battery cells hold strategic chokepoints in the EV supply chain.
This is why the lithium raw material suppliers have received a lot of attention lately. It seems another lithium mining start-up comes into existence every the other week. However, from a balanced risk-reward point of view, it is probably advisable to focus on the companies which have graduated from the early exploration stage, are approaching the first production, or the middle of the pack so to speak among the mining concerns (see here).
Fig. 1. The price chart of Global X Lithium ETF (LIT). Source: here.
In this article, I attempt to conduct a reconnaissance of these middle-of-the-pack lithium extractors, using the enterprise value per lithium resource as a yardstick.
Lithium extractors in advanced stage of development
There are approximately a dozen lithium developers, which have come near to the first production (Table 1). They fall into two groups, i.e., the brine (and clay) lithium extractors and hard rock lithium miners.
The brine lithium extractors include Millenial Lithium (OTCQB:MLNLF), Lithium Americas (OTCQX:LACDF), Lithium X (OTCQX:LIXXF), International Lithium (OTCPK:ILHMF), Lithium Power International (OTC:LTHHF), Neo Lithium (OTCQX:NTTHF), Pure Energy (OTCQB EMIF), and Advantage Lithium (OTCQX:AVLIF), with clay lithium developer Bacanora (OTC:BCRMF) lumped in and Orocobre (OTCPK:OROCF) and SQM (SQM) included for comparison purpose.
The hard rock lithium miners include Kidman Resources (KDR.ASX), Critical Elements (OTCQX:CRECF), Altura Mining (OTCPK:ALTAF), Pilbara Minerals (OTCPK ILBF), and Nemaska Lithium (OTCQX:NMKEF), with producers Neometal (OTCPK:RRSSF) and Galaxy Resources (OTCPK:GALXF) included for comparison purposes.
Table 1. The middle-of-the-pack lithium extractors. Source: Enterprise value and market cap are sourced from gurufocus.com as of midday January 8, 2018.
The dataset
These companies are selected because they are precisely or nearly lithium pure plays, with their assets being dominantly lithium projects. Excluded from this study are those that have other major non-lithium lines of business, e.g., Albemarle (ALB), FMC (FMC), Mineral Resources Ltd. (OTCPK:MALRF), and Eramet (OTC:ERMAF). Chinese and private lithium developers are also excluded, including Chengdu Tianqi, Ganfeng, and Energi.
The reported lithium resource net to company interest is considered to represent the size of lithium assets. The lithium resource for each company is taken from the company websites, the technical, PEA or DFS reports or annual reports, with the links to the information sources listed alphabetically below:
Advantage Lithium (see here and here); Altura Mining (see here); Bacanora Minerals (see here); Critical Elements (see here); Galaxy Resources (see here); International Lithium Corp. (see here); Kidman Resources (see here); Lithium X (see here and here); Lithium Americas (see here); Lithium Power International (see here and here); Millenial Lithium (see here); Nemaska Lithium (see here); Neo Lithium (see here); Neometals (see here); Orocobre (see here); Pilbara Minerals (see here); Pure Minerals (see here); SQM (see here).
For the brine (and clay) lithium projects, the measured and indicated, aka, M&I, resource is collected along with the inferred resource and exploration targets. The Clayton Valley project of Pure Minerals and Cauchari Project of Advantage Lithium are two exceptions, for which the inferred resource is the only reported parameter and is used in place of the M&I resource. For the hard rock projects, the lithia (Li2O) resource is calculated from reported ore reserve and lithia grade before it is converted into lithium carbonate equivalent (LCE).
To account for the upside potential of a project, I calculated its adjusted net lithium resource by adding 50% of the inferred resource and estimated exploration potential to the net lithium resource, data permitting. Where a range of exploration potential is given, the median value is used. Although the conversion of inferred resource and exploration targets into official figures of lithium resource is not well understood, such an adjustment is believed not to be a problem for the purpose of this article, as long as the same methodology is applied uniformly to all studied companies, where data is available.
The enterprise values of the lithium developers/producers are gathered from Gurufocus.com as at mid-day January 8, 2018. The corralled data are presented in Table 2.
Table 2. The basic information, lithium resource and enterprise value of the selected lithium developers/producers. *, Lithium X was acquired by the Chinese firm NextView for US$206 million (see here); SQM farmed in and took 50% of Mt Holland Project for US$110 million (see here). Source: the author's compilation.
Lithium resource vs. EV
The enterprise values of these companies are supposed to correlate with the reported lithium resource. To examine whether this is the case, I plot in Fig. 2 the enterprise values in covariance with the net lithium resource.
Fig. 2. The covariation of lithium resource and the enterprise value of the selected lithium developers. Source: the author.
Here are a few observations:
As expected, there exists a strong correlation between the net lithium resource estimates and the enterprise values, adjusted for exploration potential or not.
There is a big difference between the brine (and clay) and hard rock developers/producers. For the former, one ton of lithium resource LCE is valued at approximately $80 or $65 on an adjusted basis; for the latter, one ton of lithium resource LCE is valued at approximately $365 adjusted or not.
The evolution of projects from development to production has a significant impact on the valuation of the operator. The producers, i.e., SQM, Orocobre, Neometal, and Galaxy Resources, are accorded substantially higher valuation in terms of the EV/Li ratio than those still in the development stage.
The U.S. and Canadian lithium projects receive significantly more generous valuation than those hailing from outside of these two countries. Notable examples are Pure Energy and Nemaska Lithium.
Relative valuation
We now have two linear regression lines, namely EV = 64.935 * Li for brine and EV = 364.55 * Li for hard rock. On the basis of these linear regression lines, predicted EV can be derived at any given adjusted net lithium resource.
By comparing the actual EVs with the predicted ones, I find that some companies are marked down, while others marked up (Table 3). For example, among the brine lithium developers, Bacanora Minerals and Millenial Lithium appear to be trading below predicted EVs, Pure Energy, and Advantage Lithium marked up, while International Lithium Corp., Neo Lithium, Lithium Americas, Lithium X, and Lithium Power International seem to be from fairly valued to slightly overvalued. Among the hard rock developers, Kidman Resources and Critical Elements are marked down, Altura Mining and Pilbara Minerals fairly valued, while Nemaska Lithium seems to be overvalued.
Table 3. Levels of valuation of lithium developers relative to the predicted enterprise value. Source: the author's calculation.
Discussion and investor takeaways
A cautionary note on the use of EV/Li ratio
I have been of the opinion that investors should avoid relying on a single variable in stock picking. I have been actively advocating at The Natural Resources Hub (TNRH) that a value investor should establish a holistic understanding of the business behind a stock, estimate the intrinsic value based on that knowledge, and search for an adequate margin of safety. Such an apparently tiresome approach actually gives the investor the best risk management and consequently the highest rate of return. The practice of this methodology by Laurentian Research is exemplified by the in-depth surveys done on, e.g., Orocobre (see here and here), Lithium Power International (see here), Ardea (see here), and Clean TeQ (see here), among others.
Even though either the EV/Li ratio (Table 2) or the relative valuation based on linear regression (Table 3) should not be used as the endgame in stock valuation, it can be useful for building an initial understanding of an industry. One just has to explore beyond that point of departure, to leave behind the assumption of everything else being equal. The reality is almost invariably more nuanced, richer in complexity, and studded with all sorts of surprises, which a simple tool such as the EV/Li ratio cannot capture.
For example, at first blush, the EV/Li ratio at 355 appears to suggest the gross overvaluation of Advantage Lithium (Table 2). However, a slightly more extensive research would lead to the knowledge that the company is yet to appraise the northwestern flank of its tenements, that even in the southeastern flank only 0.47 Mt LCE of inferred resource in the shallow level have been booked, and that some 0.25 to 5.6 Mt LCE of upside potential exist in the exploration target. This is not surprising at all because sandwiched between the northwestern and southeastern flanks of the Advantage tenements is the Cauchari Project of Lithium Americas, which is reckoned to contain an M&I resource of 11.7 Mt LCE (Fig. 3).
Fig. 3. A map of the Cauchari Project of Advantage Lithium (left) and a schematic cross-section of the Caichari Basin. Source: here.
It is reasonable to expect that, as exploration goes on, Advantage will probably book an increasing amount of lithium resource, just as Lithium Power International has done in the Maricunga Project in Chile (Fig. 4).
Fig. 4. The upgrade of lithium resource in the Maricunga Project of Lithium Power International. Source: here.
Further research would shine a light on another edge Advantage stands to benefit from. It turns out the Olaroz plant of Orocobre, the 25% partner of Advantage, lies just 10km to the north of the Cauchari tenements. Advantage may be able to save millions of dollars in construction costs by choosing to pipe the Cauchari brine to that plant for processing. Additionally, partner Orocobre, itself an entrenched producer, is anticipated to willingly share its knowledge of local geology and hydrology, technical know-how as well as the Toyota-linked marketing channel with Advantage (see here). All of these meaningful benefits are not captured by the EV/Li ratio.
As a project progresses...
A lithium project has a life cycle, progressing from exploration, via appraisal and development, to production. As the project marches from exploration to appraisal, more mineralized zones are appraised, resulting in an expanding lithium resource. As uncertainty tapers off, exploration potential is realized. The risk in the project decreases as the project goes through PEA, DFS, IEA, as construction starts and completes. By the time the project is brought on stream, much of the risk of yester-years has been converted into an economic benefit. The market, therefore, accords increasingly richer valuation as the project progresses along its life cycle.
A look at either the brine or the hard rock lithium projects tells us this is clearly the case (Table 2). The EV of a pre-production company varies according to the net lithium resource it holds, except for some aberrations caused by geography and by how close the project is to the culminating event -- production. However, the first production places a company in a much-elevated level of valuation. Orocobre and SQM receive significantly richer valuation than those still struggling toward the first production. Likewise, Neometal and Galaxy Resources are awarded EV/Li ratios north of 400, while the pre-production brethren average 356, with the exception of Nemaska, the operator of a Quebec mine, which supposedly enjoys a geographical advantage. As a side note, proximity to Tesla Gigafactory can be just another red herring in the electric vehicle craze.
The following equation explains the double blessing enjoyed by a quickly maturing lithium developer:
[EV] = [EV/Li] X [Lithium resource]
Just as the EV/Li ratio expands along with the life cycle, its lithium resource is expanding. The EV/Li ratio can multiply four-fold as a junior developer graduates to the status of Orocobre or 6-fold to that of SQM (Table 2). The lithium resource can expand as many folds, e.g., the M&I lithium resource of Lithium Power International multiplied 3-fold from 2012 to 2017 (see here) and can multiply 7 times by the time the DFS is completed. This double blessing is precisely how a 10-bagger to 30-bagger comes into being.
In this regard, it is perhaps a great idea to focus on picking the pre-production developers with the greatest potential of lithium resource expansion. Advantage Lithium has six times exploration target of its inferred resource, Neo Lithium has 1.8 times as much inferred resource than M&I resource, and Lithium Power International has 1.3 times as much inferred resource than M&I resource, which are highlighted in this article for their prospect of value appreciation. On the other hand, although having booked a huge lithium resource, Lithium Americas may have a rather limited upside for resource expansion (Table 2).
One more thing...
The hard rock lithium developers selected for this study already receive a rich valuation (hence lack of headroom to multiply) and generally lack further resource expansion upside (Fig. 2). According to the above equation, going forward, they probably will not offer as much torque as one would like to have.
I think this probably is because the hard rock lithium developers near in the development stage may have passed the stage of rapid resource expansion.
If that is true, then investors perhaps should search in the cohort of less mature hard rock explorers for the best opportunity. That may lead the investors away from politically stable countries such as Australia and Canada to more volatile land, e.g., the Democratic Republic of Congo where AVZ Minerals Ltd. (OTC:AZZVF) has located pegmatite mines of enormous size (see here).
This trade-off between growth potential and political risk is just another undesirable aspect of hard rock lithium mining besides the relatively high operating costs as compared with the brine lithium developers (see here).
Jan.12.18 http://www.seekingalpha.com/article/4137045
In this article, I attempt to conduct a reconnaissance of these middle-of-the-pack lithium extractors, using the enterprise value per lithium resource as a yardstick.
Lithium extractors in advanced stage of development
There are approximately a dozen lithium developers, which have come near to the first production (Table 1). They fall into two groups, i.e., the brine (and clay) lithium extractors and hard rock lithium miners.
The brine lithium extractors include Millenial Lithium (OTCQB:MLNLF), Lithium Americas (OTCQX:LACDF), Lithium X (OTCQX:LIXXF), International Lithium (OTCPK:ILHMF), Lithium Power International (OTC:LTHHF), Neo Lithium (OTCQX:NTTHF), Pure Energy (OTCQB
EMIF), and Advantage Lithium (OTCQX:AVLIF), with clay lithium developer Bacanora (OTC:BCRMF) lumped in and Orocobre (OTCPK:OROCF) and SQM (SQM) included for comparison purpose. The hard rock lithium miners include Kidman Resources (KDR.ASX), Critical Elements (OTCQX:CRECF), Altura Mining (OTCPK:ALTAF), Pilbara Minerals (OTCPK
ILBF), and Nemaska Lithium (OTCQX:NMKEF), with producers Neometal (OTCPK:RRSSF) and Galaxy Resources (OTCPK:GALXF) included for comparison purposes. Table 1. The middle-of-the-pack lithium extractors. Source: Enterprise value and market cap are sourced from gurufocus.com as of midday January 8, 2018.
The dataset
These companies are selected because they are precisely or nearly lithium pure plays, with their assets being dominantly lithium projects. Excluded from this study are those that have other major non-lithium lines of business, e.g., Albemarle (ALB), FMC (FMC), Mineral Resources Ltd. (OTCPK:MALRF), and Eramet (OTC:ERMAF). Chinese and private lithium developers are also excluded, including Chengdu Tianqi, Ganfeng, and Energi.
The reported lithium resource net to company interest is considered to represent the size of lithium assets. The lithium resource for each company is taken from the company websites, the technical, PEA or DFS reports or annual reports, with the links to the information sources listed alphabetically below:
Advantage Lithium (see here and here); Altura Mining (see here); Bacanora Minerals (see here); Critical Elements (see here); Galaxy Resources (see here); International Lithium Corp. (see here); Kidman Resources (see here); Lithium X (see here and here); Lithium Americas (see here); Lithium Power International (see here and here); Millenial Lithium (see here); Nemaska Lithium (see here); Neo Lithium (see here); Neometals (see here); Orocobre (see here); Pilbara Minerals (see here); Pure Minerals (see here); SQM (see here).
For the brine (and clay) lithium projects, the measured and indicated, aka, M&I, resource is collected along with the inferred resource and exploration targets. The Clayton Valley project of Pure Minerals and Cauchari Project of Advantage Lithium are two exceptions, for which the inferred resource is the only reported parameter and is used in place of the M&I resource. For the hard rock projects, the lithia (Li2O) resource is calculated from reported ore reserve and lithia grade before it is converted into lithium carbonate equivalent (LCE).
To account for the upside potential of a project, I calculated its adjusted net lithium resource by adding 50% of the inferred resource and estimated exploration potential to the net lithium resource, data permitting. Where a range of exploration potential is given, the median value is used. Although the conversion of inferred resource and exploration targets into official figures of lithium resource is not well understood, such an adjustment is believed not to be a problem for the purpose of this article, as long as the same methodology is applied uniformly to all studied companies, where data is available.
The enterprise values of the lithium developers/producers are gathered from Gurufocus.com as at mid-day January 8, 2018. The corralled data are presented in Table 2.
Table 2. The basic information, lithium resource and enterprise value of the selected lithium developers/producers. *, Lithium X was acquired by the Chinese firm NextView for US$206 million (see here); SQM farmed in and took 50% of Mt Holland Project for US$110 million (see here). Source: the author's compilation.
Lithium resource vs. EV
The enterprise values of these companies are supposed to correlate with the reported lithium resource. To examine whether this is the case, I plot in Fig. 2 the enterprise values in covariance with the net lithium resource.
Fig. 2. The covariation of lithium resource and the enterprise value of the selected lithium developers. Source: the author.
Here are a few observations:
As expected, there exists a strong correlation between the net lithium resource estimates and the enterprise values, adjusted for exploration potential or not.
There is a big difference between the brine (and clay) and hard rock developers/producers. For the former, one ton of lithium resource LCE is valued at approximately $80 or $65 on an adjusted basis; for the latter, one ton of lithium resource LCE is valued at approximately $365 adjusted or not.
The evolution of projects from development to production has a significant impact on the valuation of the operator. The producers, i.e., SQM, Orocobre, Neometal, and Galaxy Resources, are accorded substantially higher valuation in terms of the EV/Li ratio than those still in the development stage.
The U.S. and Canadian lithium projects receive significantly more generous valuation than those hailing from outside of these two countries. Notable examples are Pure Energy and Nemaska Lithium.
Relative valuation
We now have two linear regression lines, namely EV = 64.935 * Li for brine and EV = 364.55 * Li for hard rock. On the basis of these linear regression lines, predicted EV can be derived at any given adjusted net lithium resource.
By comparing the actual EVs with the predicted ones, I find that some companies are marked down, while others marked up (Table 3). For example, among the brine lithium developers, Bacanora Minerals and Millenial Lithium appear to be trading below predicted EVs, Pure Energy, and Advantage Lithium marked up, while International Lithium Corp., Neo Lithium, Lithium Americas, Lithium X, and Lithium Power International seem to be from fairly valued to slightly overvalued. Among the hard rock developers, Kidman Resources and Critical Elements are marked down, Altura Mining and Pilbara Minerals fairly valued, while Nemaska Lithium seems to be overvalued.
Table 3. Levels of valuation of lithium developers relative to the predicted enterprise value. Source: the author's calculation.
Discussion and investor takeaways
A cautionary note on the use of EV/Li ratio
I have been of the opinion that investors should avoid relying on a single variable in stock picking. I have been actively advocating at The Natural Resources Hub (TNRH) that a value investor should establish a holistic understanding of the business behind a stock, estimate the intrinsic value based on that knowledge, and search for an adequate margin of safety. Such an apparently tiresome approach actually gives the investor the best risk management and consequently the highest rate of return. The practice of this methodology by Laurentian Research is exemplified by the in-depth surveys done on, e.g., Orocobre (see here and here), Lithium Power International (see here), Ardea (see here), and Clean TeQ (see here), among others.
Even though either the EV/Li ratio (Table 2) or the relative valuation based on linear regression (Table 3) should not be used as the endgame in stock valuation, it can be useful for building an initial understanding of an industry. One just has to explore beyond that point of departure, to leave behind the assumption of everything else being equal. The reality is almost invariably more nuanced, richer in complexity, and studded with all sorts of surprises, which a simple tool such as the EV/Li ratio cannot capture.
For example, at first blush, the EV/Li ratio at 355 appears to suggest the gross overvaluation of Advantage Lithium (Table 2). However, a slightly more extensive research would lead to the knowledge that the company is yet to appraise the northwestern flank of its tenements, that even in the southeastern flank only 0.47 Mt LCE of inferred resource in the shallow level have been booked, and that some 0.25 to 5.6 Mt LCE of upside potential exist in the exploration target. This is not surprising at all because sandwiched between the northwestern and southeastern flanks of the Advantage tenements is the Cauchari Project of Lithium Americas, which is reckoned to contain an M&I resource of 11.7 Mt LCE (Fig. 3).
Fig. 3. A map of the Cauchari Project of Advantage Lithium (left) and a schematic cross-section of the Caichari Basin. Source: here.
It is reasonable to expect that, as exploration goes on, Advantage will probably book an increasing amount of lithium resource, just as Lithium Power International has done in the Maricunga Project in Chile (Fig. 4).
Fig. 4. The upgrade of lithium resource in the Maricunga Project of Lithium Power International. Source: here.
Further research would shine a light on another edge Advantage stands to benefit from. It turns out the Olaroz plant of Orocobre, the 25% partner of Advantage, lies just 10km to the north of the Cauchari tenements. Advantage may be able to save millions of dollars in construction costs by choosing to pipe the Cauchari brine to that plant for processing. Additionally, partner Orocobre, itself an entrenched producer, is anticipated to willingly share its knowledge of local geology and hydrology, technical know-how as well as the Toyota-linked marketing channel with Advantage (see here). All of these meaningful benefits are not captured by the EV/Li ratio.
As a project progresses...
A lithium project has a life cycle, progressing from exploration, via appraisal and development, to production. As the project marches from exploration to appraisal, more mineralized zones are appraised, resulting in an expanding lithium resource. As uncertainty tapers off, exploration potential is realized. The risk in the project decreases as the project goes through PEA, DFS, IEA, as construction starts and completes. By the time the project is brought on stream, much of the risk of yester-years has been converted into an economic benefit. The market, therefore, accords increasingly richer valuation as the project progresses along its life cycle.
A look at either the brine or the hard rock lithium projects tells us this is clearly the case (Table 2). The EV of a pre-production company varies according to the net lithium resource it holds, except for some aberrations caused by geography and by how close the project is to the culminating event -- production. However, the first production places a company in a much-elevated level of valuation. Orocobre and SQM receive significantly richer valuation than those still struggling toward the first production. Likewise, Neometal and Galaxy Resources are awarded EV/Li ratios north of 400, while the pre-production brethren average 356, with the exception of Nemaska, the operator of a Quebec mine, which supposedly enjoys a geographical advantage. As a side note, proximity to Tesla Gigafactory can be just another red herring in the electric vehicle craze.
The following equation explains the double blessing enjoyed by a quickly maturing lithium developer:
[EV] = [EV/Li] X [Lithium resource]
Just as the EV/Li ratio expands along with the life cycle, its lithium resource is expanding. The EV/Li ratio can multiply four-fold as a junior developer graduates to the status of Orocobre or 6-fold to that of SQM (Table 2). The lithium resource can expand as many folds, e.g., the M&I lithium resource of Lithium Power International multiplied 3-fold from 2012 to 2017 (see here) and can multiply 7 times by the time the DFS is completed. This double blessing is precisely how a 10-bagger to 30-bagger comes into being.
In this regard, it is perhaps a great idea to focus on picking the pre-production developers with the greatest potential of lithium resource expansion. Advantage Lithium has six times exploration target of its inferred resource, Neo Lithium has 1.8 times as much inferred resource than M&I resource, and Lithium Power International has 1.3 times as much inferred resource than M&I resource, which are highlighted in this article for their prospect of value appreciation. On the other hand, although having booked a huge lithium resource, Lithium Americas may have a rather limited upside for resource expansion (Table 2).
One more thing...
The hard rock lithium developers selected for this study already receive a rich valuation (hence lack of headroom to multiply) and generally lack further resource expansion upside (Fig. 2). According to the above equation, going forward, they probably will not offer as much torque as one would like to have.
I think this probably is because the hard rock lithium developers near in the development stage may have passed the stage of rapid resource expansion.
If that is true, then investors perhaps should search in the cohort of less mature hard rock explorers for the best opportunity. That may lead the investors away from politically stable countries such as Australia and Canada to more volatile land, e.g., the Democratic Republic of Congo where AVZ Minerals Ltd. (OTC:AZZVF) has located pegmatite mines of enormous size (see here).
This trade-off between growth potential and political risk is just another undesirable aspect of hard rock lithium mining besides the relatively high operating costs as compared with the brine lithium developers (see here).
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3 Brine Lithium Developers Picked Following A Relative Value Analysis
Jan. 12, 2018 7:15 AM ET|
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About: Advantage Lithium Corp. (AVLIF), LTHHF, NTTHF, Includes: ALB, ALTAF, AZZVF, BCRMF, CRECF, ERMAF, FMC, GALXF, ILHMF, LACDF, LIT, LIXXF, MALRF, MLNLF, NMKEF, OROCF, PEMIF, PILBF, RRSSF, SQM
Laurentian Research
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Summary
The pre-production lithium developers are an interesting cohort worth of consideration.
A dataset including enterprise values and lithium resource estimates is assembled and analyzed.
The use and limitation of relative valuation parameter such as EV/Li ratio are discussed.
Major observations are further explored to shine a light on investment in lithium developers.
Critical drivers of value appreciation of lithium developer stocks are identified.
This idea was discussed in more depth with members of my private investing community, The Natural Resources Hub.
“A great company is not a great investment if you pay too much for the stock.” - Benjamin Graham
As the ascent of Global X Lithium ETF (LIT) continues (Fig. 1), investor become increasingly enthusiastic about lithium-related companies. However, as we pointed out in a previous article entitled "Where The Money Is In The Electric Vehicle Supply Chain" (see here),
The suppliers of critical raw materials for battery cells hold strategic chokepoints in the EV supply chain.
This is why the lithium raw material suppliers have received a lot of attention lately. It seems another lithium mining start-up comes into existence every the other week. However, from a balanced risk-reward point of view, it is probably advisable to focus on the companies which have graduated from the early exploration stage, are approaching the first production, or the middle of the pack so to speak among the mining concerns (see here).
Fig. 1. The price chart of Global X Lithium ETF (LIT). Source: here.
In this article, I attempt to conduct a reconnaissance of these middle-of-the-pack lithium extractors, using the enterprise value per lithium resource as a yardstick.
Lithium extractors in advanced stage of development
There are approximately a dozen lithium developers, which have come near to the first production (Table 1). They fall into two groups, i.e., the brine (and clay) lithium extractors and hard rock lithium miners.
The brine lithium extractors include Millenial Lithium (OTCQB:MLNLF), Lithium Americas (OTCQX:LACDF), Lithium X (OTCQX:LIXXF), International Lithium (OTCPK:ILHMF), Lithium Power International (OTC:LTHHF), Neo Lithium (OTCQX:NTTHF), Pure Energy (OTCQB
EMIF), and Advantage Lithium (OTCQX:AVLIF), with clay lithium developer Bacanora (OTC:BCRMF) lumped in and Orocobre (OTCPK:OROCF) and SQM (SQM) included for comparison purpose. The hard rock lithium miners include Kidman Resources (KDR.ASX), Critical Elements (OTCQX:CRECF), Altura Mining (OTCPK:ALTAF), Pilbara Minerals (OTCPK
ILBF), and Nemaska Lithium (OTCQX:NMKEF), with producers Neometal (OTCPK:RRSSF) and Galaxy Resources (OTCPK:GALXF) included for comparison purposes. Table 1. The middle-of-the-pack lithium extractors. Source: Enterprise value and market cap are sourced from gurufocus.com as of midday January 8, 2018.
The dataset
These companies are selected because they are precisely or nearly lithium pure plays, with their assets being dominantly lithium projects. Excluded from this study are those that have other major non-lithium lines of business, e.g., Albemarle (ALB), FMC (FMC), Mineral Resources Ltd. (OTCPK:MALRF), and Eramet (OTC:ERMAF). Chinese and private lithium developers are also excluded, including Chengdu Tianqi, Ganfeng, and Energi.
The reported lithium resource net to company interest is considered to represent the size of lithium assets. The lithium resource for each company is taken from the company websites, the technical, PEA or DFS reports or annual reports, with the links to the information sources listed alphabetically below:
Advantage Lithium (see here and here); Altura Mining (see here); Bacanora Minerals (see here); Critical Elements (see here); Galaxy Resources (see here); International Lithium Corp. (see here); Kidman Resources (see here); Lithium X (see here and here); Lithium Americas (see here); Lithium Power International (see here and here); Millenial Lithium (see here); Nemaska Lithium (see here); Neo Lithium (see here); Neometals (see here); Orocobre (see here); Pilbara Minerals (see here); Pure Minerals (see here); SQM (see here).
For the brine (and clay) lithium projects, the measured and indicated, aka, M&I, resource is collected along with the inferred resource and exploration targets. The Clayton Valley project of Pure Minerals and Cauchari Project of Advantage Lithium are two exceptions, for which the inferred resource is the only reported parameter and is used in place of the M&I resource. For the hard rock projects, the lithia (Li2O) resource is calculated from reported ore reserve and lithia grade before it is converted into lithium carbonate equivalent (LCE).
To account for the upside potential of a project, I calculated its adjusted net lithium resource by adding 50% of the inferred resource and estimated exploration potential to the net lithium resource, data permitting. Where a range of exploration potential is given, the median value is used. Although the conversion of inferred resource and exploration targets into official figures of lithium resource is not well understood, such an adjustment is believed not to be a problem for the purpose of this article, as long as the same methodology is applied uniformly to all studied companies, where data is available.
The enterprise values of the lithium developers/producers are gathered from Gurufocus.com as at mid-day January 8, 2018. The corralled data are presented in Table 2.
Table 2. The basic information, lithium resource and enterprise value of the selected lithium developers/producers. *, Lithium X was acquired by the Chinese firm NextView for US$206 million (see here); SQM farmed in and took 50% of Mt Holland Project for US$110 million (see here). Source: the author's compilation.
Lithium resource vs. EV
The enterprise values of these companies are supposed to correlate with the reported lithium resource. To examine whether this is the case, I plot in Fig. 2 the enterprise values in covariance with the net lithium resource.
Fig. 2. The covariation of lithium resource and the enterprise value of the selected lithium developers. Source: the author.
Here are a few observations:
As expected, there exists a strong correlation between the net lithium resource estimates and the enterprise values, adjusted for exploration potential or not.
There is a big difference between the brine (and clay) and hard rock developers/producers. For the former, one ton of lithium resource LCE is valued at approximately $80 or $65 on an adjusted basis; for the latter, one ton of lithium resource LCE is valued at approximately $365 adjusted or not.
The evolution of projects from development to production has a significant impact on the valuation of the operator. The producers, i.e., SQM, Orocobre, Neometal, and Galaxy Resources, are accorded substantially higher valuation in terms of the EV/Li ratio than those still in the development stage.
The U.S. and Canadian lithium projects receive significantly more generous valuation than those hailing from outside of these two countries. Notable examples are Pure Energy and Nemaska Lithium.
Relative valuation
We now have two linear regression lines, namely EV = 64.935 * Li for brine and EV = 364.55 * Li for hard rock. On the basis of these linear regression lines, predicted EV can be derived at any given adjusted net lithium resource.
By comparing the actual EVs with the predicted ones, I find that some companies are marked down, while others marked up (Table 3). For example, among the brine lithium developers, Bacanora Minerals and Millenial Lithium appear to be trading below predicted EVs, Pure Energy, and Advantage Lithium marked up, while International Lithium Corp., Neo Lithium, Lithium Americas, Lithium X, and Lithium Power International seem to be from fairly valued to slightly overvalued. Among the hard rock developers, Kidman Resources and Critical Elements are marked down, Altura Mining and Pilbara Minerals fairly valued, while Nemaska Lithium seems to be overvalued.
Table 3. Levels of valuation of lithium developers relative to the predicted enterprise value. Source: the author's calculation.
Discussion and investor takeaways
A cautionary note on the use of EV/Li ratio
I have been of the opinion that investors should avoid relying on a single variable in stock picking. I have been actively advocating at The Natural Resources Hub (TNRH) that a value investor should establish a holistic understanding of the business behind a stock, estimate the intrinsic value based on that knowledge, and search for an adequate margin of safety. Such an apparently tiresome approach actually gives the investor the best risk management and consequently the highest rate of return. The practice of this methodology by Laurentian Research is exemplified by the in-depth surveys done on, e.g., Orocobre (see here and here), Lithium Power International (see here), Ardea (see here), and Clean TeQ (see here), among others.
Even though either the EV/Li ratio (Table 2) or the relative valuation based on linear regression (Table 3) should not be used as the endgame in stock valuation, it can be useful for building an initial understanding of an industry. One just has to explore beyond that point of departure, to leave behind the assumption of everything else being equal. The reality is almost invariably more nuanced, richer in complexity, and studded with all sorts of surprises, which a simple tool such as the EV/Li ratio cannot capture.
For example, at first blush, the EV/Li ratio at 355 appears to suggest the gross overvaluation of Advantage Lithium (Table 2). However, a slightly more extensive research would lead to the knowledge that the company is yet to appraise the northwestern flank of its tenements, that even in the southeastern flank only 0.47 Mt LCE of inferred resource in the shallow level have been booked, and that some 0.25 to 5.6 Mt LCE of upside potential exist in the exploration target. This is not surprising at all because sandwiched between the northwestern and southeastern flanks of the Advantage tenements is the Cauchari Project of Lithium Americas, which is reckoned to contain an M&I resource of 11.7 Mt LCE (Fig. 3).
Fig. 3. A map of the Cauchari Project of Advantage Lithium (left) and a schematic cross-section of the Caichari Basin. Source: here.
It is reasonable to expect that, as exploration goes on, Advantage will probably book an increasing amount of lithium resource, just as Lithium Power International has done in the Maricunga Project in Chile (Fig. 4).
Fig. 4. The upgrade of lithium resource in the Maricunga Project of Lithium Power International. Source: here.
Further research would shine a light on another edge Advantage stands to benefit from. It turns out the Olaroz plant of Orocobre, the 25% partner of Advantage, lies just 10km to the north of the Cauchari tenements. Advantage may be able to save millions of dollars in construction costs by choosing to pipe the Cauchari brine to that plant for processing. Additionally, partner Orocobre, itself an entrenched producer, is anticipated to willingly share its knowledge of local geology and hydrology, technical know-how as well as the Toyota-linked marketing channel with Advantage (see here). All of these meaningful benefits are not captured by the EV/Li ratio.
As a project progresses...
A lithium project has a life cycle, progressing from exploration, via appraisal and development, to production. As the project marches from exploration to appraisal, more mineralized zones are appraised, resulting in an expanding lithium resource. As uncertainty tapers off, exploration potential is realized. The risk in the project decreases as the project goes through PEA, DFS, IEA, as construction starts and completes. By the time the project is brought on stream, much of the risk of yester-years has been converted into an economic benefit. The market, therefore, accords increasingly richer valuation as the project progresses along its life cycle.
A look at either the brine or the hard rock lithium projects tells us this is clearly the case (Table 2). The EV of a pre-production company varies according to the net lithium resource it holds, except for some aberrations caused by geography and by how close the project is to the culminating event -- production. However, the first production places a company in a much-elevated level of valuation. Orocobre and SQM receive significantly richer valuation than those still struggling toward the first production. Likewise, Neometal and Galaxy Resources are awarded EV/Li ratios north of 400, while the pre-production brethren average 356, with the exception of Nemaska, the operator of a Quebec mine, which supposedly enjoys a geographical advantage. As a side note, proximity to Tesla Gigafactory can be just another red herring in the electric vehicle craze.
The following equation explains the double blessing enjoyed by a quickly maturing lithium developer:
[EV] = [EV/Li] X [Lithium resource]
Just as the EV/Li ratio expands along with the life cycle, its lithium resource is expanding. The EV/Li ratio can multiply four-fold as a junior developer graduates to the status of Orocobre or 6-fold to that of SQM (Table 2). The lithium resource can expand as many folds, e.g., the M&I lithium resource of Lithium Power International multiplied 3-fold from 2012 to 2017 (see here) and can multiply 7 times by the time the DFS is completed. This double blessing is precisely how a 10-bagger to 30-bagger comes into being.
In this regard, it is perhaps a great idea to focus on picking the pre-production developers with the greatest potential of lithium resource expansion. Advantage Lithium has six times exploration target of its inferred resource, Neo Lithium has 1.8 times as much inferred resource than M&I resource, and Lithium Power International has 1.3 times as much inferred resource than M&I resource, which are highlighted in this article for their prospect of value appreciation. On the other hand, although having booked a huge lithium resource, Lithium Americas may have a rather limited upside for resource expansion (Table 2).
One more thing...
The hard rock lithium developers selected for this study already receive a rich valuation (hence lack of headroom to multiply) and generally lack further resource expansion upside (Fig. 2). According to the above equation, going forward, they probably will not offer as much torque as one would like to have.
I think this probably is because the hard rock lithium developers near in the development stage may have passed the stage of rapid resource expansion.
If that is true, then investors perhaps should search in the cohort of less mature hard rock explorers for the best opportunity. That may lead the investors away from politically stable countries such as Australia and Canada to more volatile land, e.g., the Democratic Republic of Congo where AVZ Minerals Ltd. (OTC:AZZVF) has located pegmatite mines of enormous size (see here).
This trade-off between growth potential and political risk is just another undesirable aspect of hard rock lithium mining besides the relatively high operating costs as compared with the brine lithium developers (see here).
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