It was a question in an investment forum that prompted me to put up this post. I tend not to cover companies that do not generate revenue or earnings yet, since to me, its contentious on whether the company is undervalued or not. The thread this was raised in, was on a coal miner. The price of coal has skyrocketed and, these coal miners would be raking in huge profits in the coming few months. So, in lieu of the strong support from coal prices, should one be looking to buy into these coal companies? Just from a cash generation viewpoint, these companies would be raining cash. Won’t buying this be a sure bet?
My personal view was that no, I would not invest in said coal company. Having been investing for quite a while, I have come to establish that I want to buy what my principles allow. And having kids, I believe that climate change is not something I want to leave them with. It might sound hypocritical while I continue to be a beneficiary of modern polluters such as electricity, transport and just any form of consumption, I decided the least I could do is vote with my money. And personally, I see the current power crisis and spike in fossil fuels prices a good development. I believe the higher these prices go, the more economically viable renewable energy projects become. It would hasten the demise of generating energy via fossil fuels.
To this point, I chose to invest in a company deploying disruptive technology for lithium extraction.
One of the forum members asked whether I was invested in any of the companies he had listed. And yes! I happened to be invested in one of them. And that is Lake Resources (LKE AU). I had delayed writing this piece for a while, and the company has quite a significant run up. Readers, if interested, would have to deliberate on whether they would like to wait for a pull back before going in.
It would also be beneficial for readers to take note that LKE had prior announced an issuance of A$0.35 options for shareholders (which has already expired significantly in the money if not exercised by now), which on exercise will give the shareholders another A$0.75 option that expires in Jun 2022. Given the stock trades at A$0.89 as of last closing, there might be shareholders selling their share holdings to fund the exercise price of the option. At least that’s what I am considering in order to fund the additional 10% in options. Quality problem I would say.
Direct Lithium Extraction
The disruptive technology that I am investing in is DLE (Direct Lithium Extraction). The current methods of lithium extraction are either through hard rock mining (spodumene) or
evaporation (brine). Both methods of extraction have their pros and cons, but generally involve large scale use of land. In the evaporation method, there is exhaustive use of water in arid areas. In the hard rock mining method, there is a significantly higher carbon footprint due to the mining process.
So, what is Direct Lithium Extraction? It’s a technology developed by Lilac Solutions that is geared towards displacing the evaporation process. It directly extracts lithium from the brine resource via an ion exchange process, which lowers impurities significantly to achieve 99.97% purity in lithium carbonate that is higher than the 99.5% battery grade requirement.
Source: Lake Resources Presentation
Flagship Project – Kachi Project
The flagship lithium project that Lake Resources is working on is situated in the Lithium Triangle where the world’s five largest lithium producers all have operations in.
Source: Lake Resources Presentation
Currently, the Kachi project has an Indicated Resource of 1.0Mt and Total Resource of 4.4Mt. Pre-feasibility study shows a post-tax NPV of US$1.58bn, and Lake Resources is expected to have a 75% interest in the project after Lilac Solutions completes earn in of 25% of the project. This NPV is based on 25,500 tpa LCE production target, while the company is working on expansion plans to increase the production to 51,000 tpa. Price assumptions are off $15,500/t lithium carbonate price (CIF Asia). If you look around, the price of lithium carbonate has been rocketing and this price assumption would probably have to be reviewed. The company has projects in other regions as well that are in early stages and we won’t be delving into those (Cauchari, Olaroz, Paso and Catamarca).
Source: Lake Resources Presentation
Why Lithium?
If you have been following lithium prices, you would have seen the boom in 2017. During that period, there was an expectation of high demand for lithium due to increase in Electric Vehicles production promised by various car manufacturers in an attempt to catch up to Tesla. The demand did not come to head, and the supply brought online subsequently brought about a collapse in lithium prices which also brought down Alliance Minerals (later renamed Alita Resources) that was listed in Singapore. So, is this another repeat of the boom and bust?
I believe not. I believe there is a convergence in technologies and macro conditions that are going to accelerate the adoption of EV and renewable energy. And all these means very high demand for lithium. The following video is a very interesting take on disruption by renewable energy that I would highly recommend.
Why Lake Resources?
There are many choices out there to invest in a lithium boom. You could invest in a variety of companies. Established producers such as Orocobre (post merger with Galaxy), Ganfeng Lithium, Livent or Albemarle that are currently producing and seeing the uptick in cashflows just from the improving prices. Or you could invest in any of the up and coming producers like Piedmont and Sayona mining. Even in the DLE technology area, Lake Resources is not alone. Out of those involved in DLE, I decided Lake Resources seem to have the most relative upside compared to the others. I would expect that all the other names I have looked into would benefit from this boom as well, so one method is to diversify into a few of them, sit back and wait. Other names in DLE space includes Standard Lithium, Vulcan Energy Resources and E3 Metals that you can consider.
My preference for Lake Resources is top and foremost, how undervalued it is compared to its NPV and relative to how de-risked it is. A few announcements recently have made the investment really attractive.
Lake Resources has, in my opinion, made significant headway into funding the development. They have received expression of interest from both the UK Export Finance, Export Credit Agency for United Kingdoms and Export Development Canada, Export Credit Agency for Canada. Both agencies provide fundings at relatively lower rates compared to traditional debt financing. The issue of bonus options would also provide equity financing for furthering the project.
The most important announcement was with respect to locking in Lilac Solutions as a partner. Lilac Solutions would contribute technology, engineering teams and an onsite demonstration plant, earning up to a maximum of 25% interest in Lake Kachi project. This is a very important development in establishing how Lilac Solutions would benefit from sharing of the DLE technology and to me, the best way this could have turned out. Having a vested interest in the project shows Lilac’s confidence in their technology and aligns the objectives for both Lake Resources and Lilac Solutions. Lilac Solutions has very strong backers and after Lake Resources' announcement, immediately announced a series B $150m equity raising, which includes existing investors such as Breakthrough Energy Ventures, and at closing also shows up new investors such as BMW and SK Materials.
Lake Resources has completed a pilot plant module and through initial testing with Novonix, verified the quality of the produced lithium carbonate. Novonix is a company providing high precision battery testing equipment to tier 1 battery makers.
Future Catalysts
The next likely catalyst that would bring Lake Resources to catch up to the valuation metrics on Vulcan Energy Resources and Standard Lithium would be the announcement of an offtake agreement. That’s the major difference between Lake Resources and the two mentioned names which had either announced offtake agreements or is partnering up with a huge global name in chemical production that can easily handle the sale of the lithium products.
Other catalysts include Definitive Feasibility Studies and Expansion studies on Kachi, scoping studies on their Cauchari Project and how high lithium products pricing can go. The following is a production timeline as per presented by Lake Resources.
Source: Lake Resources Presentation
Conclusion
I am personally invested on what I think is a beneficial sector on converging technology and macro conditions that will propel EV and renewable energy adoption. It also aligns with my principles when choosing lithium over coal, not wanting to put my money in a business that I won’t want to be an owner of. Unlike the other names I have covered so far, this carries significantly higher uncertainty and anyone who intends to invest in this name should be wary especially after the recent run up. At the current price, the company is trading at a market cap of circa USD797m.
The less risky way is to invest in a lithium themed ETF, such as the Global X Lithium and Battery Tech ETF. That would allow a larger sizing and remove risks of non systematic failures. I am a stock picker at heart, and thus I picked one stock to be vested in and that is Lake Resources.
Disclaimer: All posts on The Squirrel's Drey are for informational and discussion purposes only. This is not a recommendation to buy or sell securities discussed. Please do your own due diligence before investing.
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