You don’t have to go far down the latest ad from Dr. Stephen Leeb’s Real World Investing (being pitched at $795/yr) to see why Gumshoe readers are asking us questions…
“Thanks to Executive Order 13817, the United States is set to become one of the world’s largest producers of a coveted resource called ‘AN3.’
“Here’s how to get in on the ground floor and lock in your shot at life-changing gains…”
A mysterious government document, a code name, and a promise of the “ground floor?” The only thing we’re missing there is an Indiana Jones “slashing your way through the underbrush to find the city of gold” story.
And actually, it’s not a new Executive Order, this is apparently an opportunity that comes out of one of Trump’s earlier E.O.’s… here’s a little more of the story:
“After issuing Executive Order 13817, Trump spent years fighting environmentalists in the Bureau of Land Management to see it through.
“Then, in the final days of his presidency, the badgering paid off…
“And the Bureau of Land Management finally relented…
“Giving ONE company the green light to mine its massive reserve of a vital resource I call AN3…
This powdery metal is so valuable, many people call it ‘white gold.'”
And some details about the actual company… or as we put it around here, “clues” …
“Now, with 12 billion pounds of AN3 under its thumb…
“The largest reserve of its kind in the United States, and the second largest in the entire world…
“This little-known company — with a share price hovering around only $15 — finds itself sitting on a colossal $54 billion fortune….
“And I also wouldn’t be surprised to see its share price soar north of $90 in the near future… making select investors very rich.”
So what’s this “AN3” business? Well, you can probably already guess that it’s lithium. And Leeb notes that demand is rising, and prices are going up — 88% higher already in the first quarter of 2021, apparently.
And the booming lithium demand story, which Leeb says is hitting supply constraints and forcing prices higher, is fueled mostly by electric vehicles. That’s still a fairly small market, and lithium ion batteries for other purposes (smart phones, laptops, etc.) are big demand sources for lithium too, as are other industrial end markets for the lightest metal, but but it has been widely prophesied that the big boom in electric vehicles will shake up the lithium market dramatically.
The International Energy Agency, for example, notes that as of last year EVs and clean energy applications, mostly battery installations for backup storage, were responsible for about a third of lithium demand… but by 2030 they expect that to be more than 2/3, with the non-EV demand not really growing at all but EV/storage demand going from about 22kt last year to 160+ in 2030. Batteries for big things like electric cars, naturally, use dramatically more lithium than batteries for iPhones — and if EV sales ramp up fast, as investors are betting when they bid up the shares of early EV leaders Tesla (TSLA) and Nio (NIO) and established players like GM (GM) and Ford (F), to say nothing of the hopeful pre-production startups like Lordstown, Rivian, Fisker and dozens of others.
Of course, this is also what caused the first few real spikes in lithium prices (and shares of lithium-producing companies), and you can see that in the stock chart of any of the established lithium producers, all of whom saw surges in 2007-2008, 2011, and 2016-17 when the EV surge was previously prophesied. That prediction of EV demand drove all of those spikes… and it also drove increases in production, which kept pricing under control (lithium production roughly tripled in the last decade). Electric vehicles have been a long time coming, and they’ve certainly gotten dramatically better, and enjoy a much stronger charging infrastructure than they did a decade ago, so maybe it really will happen this time — but lithium speculators can be forgiven for feeling a little bruised about past promises.
This excerpt from an IEEE Spectrum article last month, “EVs Will Drive A Lithium Supply Crunch” sums up the demand/supply dance pretty nicely…
“A world in which EV assembly lines gather dust while battery manufacturers scrabble for scraps of lithium is wholly avoidable. But for producers, the solution isn’t as simple as mining more hard rock—called spodumene—or tapping more underground brine deposits to extract lithium. That’s because most of the better, easier-to-exploit reserves are already spoken for in Australia (for hard rock) and in Chile and Argentina (for brine). To drastically scale capacity, producers will also need to exploit the world’s “marginal” resources, which are costlier and more energy-intensive to develop than conventional counterparts.
“‘It’s not that it’s a resource issue. There is no fear that there is not enough lithium to meet demand by 2030 or longer,’ Sophie Lu, the head of metals and mining for BloombergNEF (BNEF), said by phone from Sydney. The larger question, she said, is whether the industry can continue producing lithium at similar costs as today, while also diversifying supply chains away from today’s dominant geographies and doing so without causing environmental damage.”
You’ll see lots and lots of different calculations about how the lithium market will balance, with predictions of a gap between demand and supply hitting as soon as 2025 if no big new projects are built. We shouldn’t bet too much on any specific market dynamic, since higher prices drive more production and the world of battery chemistries can certainly change to use less lithium a decade from now, but yes, everything I see indicates that the industry believes we’ll see continuing demand increases and a supply crunch (and therefore higher prices) at some point, probably within this decade.
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So that’s the back story — what’s Leeb’s tease about? A company with a US-based lithium project of some kind…
“… one tiny $15 company now has the go-ahead to develop America’s largest lithium reserve.
“All 12 billion pounds of it.
“That’s enough lithium to catapult our current production by 1,250%!
“And feed much of the world’s demand for 46 years!”
And then he throws in a little flag waving to get you to pull out your credit card…
“In other words, the moment the first ounce comes out of the ground, America will become one of the world’s top producers of lithium.
“Make no mistake, this is a powerful one-two punch for patriotic investors who are passionate about making America great again.”
What else do we learn about this project? One more hint…
“… already one of the most advanced lithium projects currently under development with $100 million invested and permitted for construction”
The U.S. has pretty abundant lithium resources, but not much production — partly because the salt brines of the Andes and the spodumene projects in Australia have been cheaper and easier to permit and build. So which one is this?
Thinkolator sez Leeb is hinting at the Thacker Pass project in northern Nevada, which is owned by Lithium Americas (LAC). That is indeed a project they’ve spent about $100 million exploring and planning over the past decade, it did just receive a permit in January from the Feds (though some more permitting will come later this year), and LAC does claim a resource of six million tonnes of lithium carbonate at Thacker, which would be in the neighborhood of 12 billion pounds.
Lithium Americas is perhaps a little more focused on their large project in Argentina at the moment, that’s a joint venture (with Ganfeng Lithium) to develop the Cauchari-Olaroz lihtium brine project — Cauchari is already partly built and should begin commercial production in the middle of next year, with a further expansion to that project already planned, so they should see revenue in 2023 or 2024 (this is a salt brine evaporation project, like the huge SQM and Albemarle salt ponds in Chile’s Atacama desert, so once the ponds are flooded with brine and the infrastructure is ready, it will probably take 18 months or so to extract their first lithium for sale).
But that’s a joint venture, and the startup and construction is largely paid for (partly with debt), the next big catalyst will be trying to get construction started at Thacker Pass, which LAC owns by itself, and that could happen fairly soon. They have raised about $500 million in equity, they have at least a “record of decision” permit from the Feds and water rights secured for their first phase, and the project is not terribly remote (there’s a highway and electricity nearby), and they expect it to be fairly low cost, with operating costs of about $4,000/tonne, so it’s likely they could get debt financing as well (lithium carbonate pricing depends a lot on where it’s being shipped and often trades on long term contracts, but the spot price in China has ranged from about $7,000-15,000/tonne over the past couple years). There seems to be some local concern about the project, which requires open-pit mining of lithium-rich clays and an acid leach extraction process, in addition to always controversial water usage, but it’s also an economically depressed area, so the 40+ year project is probably also appealing for job creation and economic activity.
There had been some early hope that President Biden would try to incentivize US mining of “green” minerals, like lithium, cobalt, rare earths or even copper that are needed for batteries and electric vehicles and other clean energy infrastructure, but some of that enthusiasm died down a few weeks ago when the infrastructure plan focused more on EVs and processing than on expanding mining… but that doesn’t necessarily mean mining is dead in Nevada, or that the permits will be rescinded, it could just be that the Feds might not be firehosing extra money at them as some had dreamed.
The current plan, according to their latest Investor Presentation, is to begin construction at Thacker Pass next year, which if all goes well would probably mean production could begin in 2024 sometime. They forecast an annual production capacity of 60,000 tonnes of battery-grade lithium carbonate, and a mine life of 46 years, which gives them a net present value calculation of $2.6 billion (at $12,000/tonne lithium prices). The company carries an enterprise value of about $1.5 billion now, so it’s arguably not a huge discount to that far-future project to compensate for the risk… but there is, of course, meaningful upside if lithium prices end up going much higher, or if a large US project is able to claim a higher price for strategic reasons.
And while Argentina is a fairly risky country to operate in, at least economically, they do have their junior share of the Cauchari-Olaroz project and future expansion there, which will be of similar size and production cost, and have a similar life span to Thacker Pass — so that does de-risk things a bit, since the project is already under construction and should be generating cash flow in a couple years. Analysts expect about $150 million in revenue to LAC in 2023, which would presumably be entirely from Cauchari, and they think that’s going to generate about 55 cents/share in earnings — so even if Thacker Pass is slower to develop, more expensive, or hits other snags along the way, as mining projects always seem to do, there’s some valuation “floor” from that operation for Lithium Americas, assuming it produces as expected.
Sound like your kind of investment? It’s not crazy, it’s not entirely early stage or discovery-based, and there are some real economics behind both lithium price expectations and the likely output of their two projects, particularly if you give them credit for their 40+ year production expectations (or more)… but, of course, with that risk reduction and the progress toward construction in Argentina and the financing and permitting in Nevada, and with the rising lithium price, you also pay a higher stock price in exchange for the rising probability of success — so today, at roughly $15 a share, you’re paying $1.8 billion for projects that probably have a fair net present value, using a 8-10% discount rate and current lithium prices, of about 2-3X that (using very rough numbers). The projects seem to make economic sense, and there’s still meaningful upside potential if Thacker Pass goes forward, largely because lithium prices could rise considerably, but my guess is that you’d probably need a dramatic lithium price spike (or an investor mania) to get to Leeb’s teased $90 over the next few years.
If I were to buy this one, it would be with a hope that Thacker Pass finishes permitting and begins construction next year, with no big cost overrun surprises on the project, and that lithium goes up another 50% and the shares have potential to roughly double in two or three years. That’s just my rough initial thinking on this one, and it’s probably worth remembering that investors don’t tend to find mining construction projects as exciting as “discovery” announcements, so our collective impatience could easily lead to dips in the future even if all goes reasonably well. I can’t claim to have dug in very deep this morning, but it strikes me as a reasonable “large junior” lithium company — partly de-risked at this point, strategically interesting because there aren’t many large US lithium projects that make sense (it’s a Canadian company, incidentally), but not super cheap.
That’s just my thinking, though, and when it comes to your money it’s your call that matters — so what say you? Ready to chase another booming lithium market? Feeling burned from the last one? Have any other insights for us on Lithium Americas, or experience with the stock? Let us know with a comment below. Thanks for reading!