Lithium South Could Be An Eventual Takeover Play (LISMF)

Lithium abstract concept

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Lithium South Development Corp. (OTCQB:LISMF) is a tiny exploration stage company consisting of a few small Argentinian properties and a miniscule ~$35 million market cap. It’s a company that can be easily overlooked by lithium investors as they focus more on giants such as Livent Corporation (LTHM), Allkem Limited (OTCPK:OROCF), and POSCO Holdings Inc. (PKX). After all, big players such as these have strong revenue growth, positive free cash flow, and CapEx budgets that climb into the billions.

Meanwhile, Lithium South has no lithium to sell, it had under $8 million of cash and short-term investments on its balance sheet at the end of last quarter, and is plowing all of its meager resources into drilling a few holes out in the desert. At first glance, the Company is indistinguishable from most other lithium junior miners operating in the Lithium Triangle. But upon closer inspection, one key asset quickly becomes apparent: its location.

Company Backgrounder

I first wrote about Lithium South this past April, so for a more detailed description of its operations, please refer to that article. But over the intervening months there has been some noteworthy exploration work done at its properties.

The Company has been working towards completing a drilling program on the Alba Sabrina claim, which is part of its Hombre Muerto North Lithium Project in Salta Province, Argentina. The Alba Sabrina is the largest of Lithium South’s claims within the salar and comprises 2,089 hectares of its 3,287-hectare claim package, so just over 60%. Lithium South wants to complete the drilling campaign by year-end and is hoping results will allow it to expand the project’s resource estimate.

And so far, the data has been very encouraging. While drilling is ongoing, the Company has reported several samples that are in the 750 mg/L range, which is quite close to the 797 mg/L average Lithium South found on its nearby Tramo claim. The magnesium count has also been quite low, with the company reporting a ratio that was less than 4:1.

In 2019, the company completed its initial resource calculation of 571kt LCE (M&I) based solely on exploration work done on the Tramo claim, an area that makes up only 14% of the project. If drill results similar those of Tramo are found on Alba Sabrina, which is more than 4 times larger and makes up 63% of the project, we may see a significant upgrade to the total resource. The difference in size between the two claims can be seen on the map below.

Lithium South Claims and Resource Size

Lithium South Claims and Resource Size (Investor Presentation)

However, even if the resource is substantially expanded, shareholders will still have to wait for the mine to be built. Even if everything goes according to schedule, a rarity in the mining world, commercial production may not begin until the end of this decade. So, investors may be stuck waiting many long years in order to fully realize their investment.

Or, maybe not.

Let’s Make a Deal?

All of Lithium South’s press releases include the following paragraph:

“The HMN Li Project is adjacent to a US$840 million lithium mine under development by the Korean multinational corporation POSCO, which acquired their holdings from Galaxy Resources Ltd. for US$280 million. Livent Corporation is producing lithium to the south of the Hombre Muerto North Lithium Project and has operated there for over twenty-five years.”

The Company even included the following map in prior investor presentations in order to hammer home the point.

Lithium South, Livent and POSCO Properties

Lithium South, Livent and POSCO Properties (Investor Presentation)

To the best of my knowledge, neither of these two companies has ever presented Lithium South with any type of proposal. But if they were to do so, it would come as no surprise. That’s because both Livent Corporation and POSCO Holdings Inc. will eventually need large amounts of lithium to feed the refining capacity that both companies are currently building out.

POSCO is a South Korean steelmaker that is quickly moving into the battery metals business. Earlier this year, it announced plans to invest $4 billion into its abovementioned property to build brine extraction facilities as well as a lithium hydroxide plant capable of producing 100ktpa of the chemical. It expects to begin some commercial production by the end of 2023.

The Company aims to produce 300ktpa of lithium by 2030 and in press releases has listed one of its goals as, “increasing cathode material business competitiveness by securing a large amount of lithium.” It goes onto state that, “POSCO Group plans to become one of the top three global lithium production companies by 2030.” And the map above shows how Lithium South’s Tramo claim cuts right across POSCO’s property; a property that will eventually have $4 billion of assets on it.

Also, directly adjacent to some of Lithium South’s claims is Livent, a company of which I have previously written about here and here. As I discussed in those articles, Livent is planning to add a substantial amount of lithium refining capacity to its operations in the years to come. General Motors Company (GM) paid it almost $200 million upfront to secure hydroxide offtake that is scheduled to begin deliveries in 2025. It recently completed a 5ktpa expansion to its Bessemer City, NC facility, and plans to add 80ktpa of carbonate conversion capacity at its Argentinian operations over the coming years.

Livent's Argentinian Expansion Plans

Livent’s Argentinian Expansion Plans (Livent Investor Presentation)

Given both of these companies’ ambitious growth strategies, focused on adding midstream capacity, one can easily picture a scenario whereby Lithium South was purchased in order to boost either company’s reserves.

Downside Risk

The risk to this strategy, however, is that no deal is ever consummated. In that case, shareholders would have to wait until Lithium South began production, and the stock price would eventually suffer as it became clear that no buyers were interested.

Takeaway

In my opinion, Lithium South is pursuing a strategy very similar to that of Alpha Lithium, another junior lithium miner with claims in the Hombre Muerto Salar of which I have previously written about. And similar to Alpha, Lithium South’s value comes from its location and drill results. If management can demonstrate that these properties contain economical amounts of lithium, which is exactly what they are in the process of doing, I believe that there is a high probability at least one of its giant neighbors will be interested in acquiring the Company. And such a scenario could prove very beneficial to shareholders.

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