Lithium Americas (NYSE:LAC) has announced two important developments that massively enhance revenue visibility for the next year and also reveal longer-term strategic vision. First off, the company entered into a definitive agreement with Ganfeng Lithium – its joint venture (JV) partner in Argentina – to give control of the JV to the latter. In another important development late last month, the company announced receiving the Notice of Intent (NOI) from the Bureau of Land Management (BLM) for the Thacker Pass lithium project in northwestern Nevada. These two updates indicate that start of production at the projects will be aligned with the expected recovery in lithium prices. As such, investors can start accumulating the stock over the next six months for long-term gains.
For starters, the company is a focused play on lithium production with interests in two projects – the Cauchari-Olaroz project in Argentina’s far north and the Thacker Pass project in Nevada. The first of the two is in advanced stages of construction, with production expected to start in early 2021. On the other hand, the Thacker Pass project, fully owned by Lithium Americas, is currently in the process of securing the necessary permits, and construction is likely to start early next year.
Ganfeng Lithium now has 51% interest in Cauchari-Olaroz project
The agreement with Ganfeng Lithium is actually a minor adjustment in numbers. As part of the deal, Ganfeng Lithium will pay USD16 million for boosting its interest by 1% in the Caucharí-Olaroz project with the cash going towards construction and development of the project. In addition, Lithium Americas gets USD40 million cash in the form of non-interest-bearing loans.
Even though the numbers involved aren’t substantially big, the development is quite important from the perspective of understanding the strategic thinking at Lithium Americas’ management. Lithium Americas roped in Ganfeng Lithium as 50% partner in the 40,000 tpa project last year. At the time, Lithium Americas’ management had categorically denied the possibility of selling more than 50% stake in the project.
However, the latest change in the equity structure of Argentina project indicates that Lithium Americas’ management team is flexible towards such pragmatic changes. In fact, the CEO mentioned that selling its entire interest in the project to its Chinese partner is very much a possibility now. Make no mistake, this decision isn’t a sign of distress as the company is rather well-funded.
Lithium Americas’ CEO Jon Evans surely knows what he is doing. Apart from correctly sensing a potential trouble in Argentina, Evans understands the Thacker Pass project is a much better strategic choice for the company. Evans is no stranger to the global lithium business. He has spent over four years with FMC Corporation (NYSE:FMC), directly looking into the company’s lithium business, which has been now spun off as Livent Corporation (NYSE:LTHM).
In a nutshell, Lithium Americas is still going to benefit from the project, while reducing exposure to Latin America and getting some cash to deploy in the bigger project back home. The transaction is actually win-win for both parties as Ganfeng Lithium gets the operational control (key decision will still be made jointly) and can consolidate the project in its balance sheet, thus enhancing its access to capital. The Argentina project remains on track to start production next year.
Source: Lithium Americas
Focus on Thacker Pass Project now
With Ganfeng Lithium in the driver’s seat for Argentina project, Lithium Americas’ focus will be on the Thacker Pass project now. From Lithium Americas’ perspective, a reduction in exposure to Argentina and extra cash for a domestic project is a much better arrangement. More so when Argentina is engulfed in political unrest and collapsing economy.
Meanwhile, the Thacker Pass mining project offers some unique advantages on its own. While the clay-extracted lithium project is fundamentally different from conventional brine projects, operating costs at the project are pegged at just USD2,570/t with an expected life of the mine at 46 years on the basis of Preliminary Feasibility Study (PFS) conducted in August 2018.
In light of the unrest in Argentina and other lithium-producing Latin American countries, the project simply represents conflict-free lithium. Without a doubt, most automakers and battery manufacturers will prefer dependable sources further down their supply chains. Just in case the world was forgetting supply chain complexities, the situation in China and the resulting suspension in vehicle production at the biggest car production plant offered a grim reminder.
Even though lithium is a raw material for batteries, it pretty much occupies the space reserved for critical components like engines and transmissions which are mostly produced in-house. As such, it is not entirely out of the question that at least some automakers will contemplate establishing direct JVs, if not outright acquisition, with lithium suppliers. Tesla (NASDAQ:TSLA) could be one for sure, Musk has indicated his desire to make the automaker as “vertically integrated” as possible, and the company is already testing waters producing its own battery cells.
GM (NYSE:GM) already has some in-house battery production and just announced to invest USD2.3 billion in a JV with LG Chem. Earlier this month, GM confirmed the widely-anticipated return of the Hummer nameplate under the GMC brand. The iconic model will be an electric vehicle with a massive battery that can propel the truck to 60mph from standstill in just 3 seconds. This is another reminder that much like mobile phones, the batteries of electric cars are going to be bigger and more powerful.
Project moves closer to approvals, on track
Meanwhile, the NOI for the project is yet another milestone towards start of production. Of course, there are several steps still left before final permitting, but getting the NOI indicates the project is on schedule. A Definitive Feasibility Study (DFS) is expected by mid-2020, and this will be followed by efforts to get a partner for the development of Phase 1.
Source: Lithium Americas
A recovering lithium market to help focused plays
Since none of its projects is operational as of now, there is little to talk in terms of revenues and valuations. Nevertheless, start of production is not far, and a recovery in lithium prices is widely anticipated either later this year or early next year. Considering this, the recent rally in lithium stocks appears premature and seems to have got tailwinds from the massive stock price movement in Tesla.
As such, retracements in stock prices aren’t ruled out, but let’s not forget that stock market is a forward-looking mechanism, and it will start factoring in a recovery in lithium prices much before the actual recovery takes place. The anticipated recovery in lithium prices, coupled with tangible updates on both projects later in the year, can make this focused player more appealing to investors.
On a cautionary note, we can certainly expect better entry prices in the coming months as quarterly results of lithium producers will be negatively impacted by the ongoing coronavirus situation in China. This time frame should be used to accumulate this focused play.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.