Standard Lithium: Question Marks On Project Financials (NYSE:SLI)

Dust storm in desolate, barren desert landscape showing the environmental damage from lithium mine operations at Silver Peak Albemarle Mine in Nevada, USA

Jim Ekstrand

The Coming Lithium Boom

The revolutionary change to global mobility matched with greater sensitivity to sustainability has created an EV boom. Enriching its cheerleaders such as Elon Musk, profound changes in manufacturing and materials are creating seismic shifts in the automotive industry. Lithium plays a central role to EV adoption with the mineral destined for widespread battery production.

Standard Lithium (NYSE:SLI), the Canadian junior with development interests in the Mid-West and plans on engineering a profitable downstream transformation business, offers perhaps a compelling investment alternative. However, some project economics, valuations and financials have left me scratching my head. My current outlook is negative on the firm.

Investor Presentation

Standard Lithium

The current EV boom is pushing lithium demand sharply to the upside. Significant asset development will be required.

Latin America boasts the most prevalent lithium reserves. Argentina, AKA lithium elephant country, has extensive developments with 2 accounting for 40% of national production. For the nascent US EV industry – that poses challenges; Argentinian lithium imports come heaped with cost and risk.

Argentina itself has a track record of inflationary busts, leverage, and even state capture of private assets when paired with a political narrative. Such a trading partner hardly fits into the build back better, made in America US jobs narrative that President Biden has been trumpeting.

Investor Presentation

Standard Lithium

Present US lithium supply is negligible with Chile, Australia & Argentina dominating extraction. China continues to dominate lucrative downstream transformation.

In simple terms Lithium is derived from brine and hard rock deposits. Hard rock deposits generally require greater capital equipment and mining efforts. They follow conventional mining processes with mined ore being crushed and then subjected to a series of transformation steps to produce a Spodumene concentrate.

This is the lower end of the lithium value chain often with smaller margins and comparably bigger costs – your typical drill & blast, load & haul, crush & transform kind of mining operation. The good news is that is not the business that Standard Lithium is principally pursuing.

Lithium Prices

Trading Economics

Lithium Carbonate prices per ton have skyrocketed over the past couple of years with current rates at $82,000/t.

Like other battery minerals juniors, Standard Lithium is looking to develop lithium brine assets. The extraction process requires less in terms of capital equipment but is resource intensive, particularly in terms of water.

Environmental concerns have already played a role in delaying other US lithium projects, with US Fish & Wildlife Service voicing concerns of environmental impacts. In any case, Standard Lithium is pitching the higher end of the battery mineral playbook reputed for higher margins, particularly for the downstream extraction process.

Company Introduction

Standard Lithium is a Canadian lithium mining junior with speculative but perhaps rewarding US lithium developments. The company has significantly pitched the Smackover formation, one of the World’s largest brine aquifers, without providing much info on mining lease rights, extraction, or distribution.

The Smackover formation is indeed a massive ore body, extending from Florida to Texas. The expanse, measuring 600 miles long by 60 miles wide hosts huge volumes of mineral rich brine. According to the firm, brine from this area has shown lithium concentrations ranging from 150mg – 500mg/liter. To put this into perspective, Galan Lithium’s (OTCPK:GLNLF) Hombre Muerto West posts concentrations North of 800mg/liter.

Investor Presentation

Standard Lithium

The DLE Processing, purification, and conversion facility is in pilot phase. Big parts of the technical process appear reliant on outside partnerships such as the one built with Lanxess AG.

The fledgling lithium venture is also hedging its bets on downstream transformation processes. Its standard lithium facility is presently undergoing pre-runs and pilot phases but promises to capture the lucrative high-margin downstream transformation activity widely dominated by the Chinese.

How this is achieved in meaningful volumes does remain to be seen. A concern here is the firm does not appear to be bringing anything proprietary to the table, instead opting to form a partnership with German chemicals specialist Lanxess AG.

Technical reliance on a partner is a notable risk for any equity investor paying full price for a stake in Standard Lithium. The Canadian lithium miner is headquartered in Vancouver, British Columbia and was founded in 1998.

It is not all bad news being dependent on technical partners. If anything, it provides the company with the added prospect of strategic divestments or a complete sale of its business to the partner if the price is right.

Often larger players find refuge in smaller more fledgling firms, looking for them to take pioneering risk with the opportunity to acquire them should they succeed.

The company, formerly known as Patriot Petroleum Corp, is led by Robert Mintak, who was the founder of Pure Energy Minerals. This prior firm had struck an agreement with Tesla (TSLA) for the “potential” supply of lithium hydroxide.

Mr. Mintak’s transition from founder of Pure Energy to Executive Chairman to now CEO of Standard Lithium does raise eyebrows, particularly given Pure Energy’s value destruction (-82.24% returns since inception) and absolutely nothing to be shown in terms of revenues, even during Mr. Mintak’s tenure. I guess that supply deal never worked out.

Investor Presentation

Standard Lithium

Standard Lithium posts a compelling economic narrative without really going into too much detail as to how long-term asset monetization will be achieved.

Financial Position

Standard Lithium posts a current market cap of $691M. 2022 has been a difficult year, as it has for most with risk assets, with shares giving up -58% over the past year. The company remains very much in the junior mining space with only 4 ETFs holding shares, amounting to ~$32M.

The company has not recorded any revenues since 2012. Emphasis here needs to be on speculation as funds go into ramp-up of some of the corporate projects. Yet given Mr. Mintak’s Pure Energy track record, it is not looking great.

Natural increases in project ramp-up expenditure (Cost of revenues FY2021 $5.5M v FY2022 $13.3M) are buffeted by roughly $145M cash on hand. Most of the venture’s current assets are highly liquid making navigating capex expenditure easier. The other good news is the company has had little or no recourse to credit markets, meaning choking interest expenses are not a factor on the income statement.

Stock based compensation (FY 2021 = $5.2M v FY 2022 = $4.8M) seems somewhat without justification given where the company presently is in its project development (For information, design feasibility study and front-end engineering & design on plant won’t be completed until mid-2023)

With cost of debt perhaps not an option in a restrictive monetary environment, the firm has consistently relied on equity raises as a source of funding. From 2017 onwards, the firm raised between $11M and $148M, significantly diluting investors.

That is concerning for me, given high interest rates means recourse to debt is unlikely to be an alternative option. I would expect more share issuances in 2023.

Project Economics

The sticker price for Lanxess Project, assuming 100% project ownership (i.e., No continued partnership with the German Chemicals firm) is $437M for plant, property & equipment. This assumes almost 21kt of annual production of lithium carbonate equivalent with an average selling price of $13,550/t.

It’s positive that Standard Lithium has been extremely conservative with future lithium selling prices to de-risk the project. Yet when comparing the project to the Galan Lithium development these project economics have me scratching my head.

Comparative analysis

Spreadsheet developed by author – inputs Standard Lithium & Galan Lithium Investor Presentations

Comparative analysis of Galan Lithium’s Hombre Muerto West Project v Standard Lithium’s Lanxess Project.

The company has been conservative when penning together its financials. With almost equivalent sticker prices, Galan Lithium’s Hombre Muerto West prospect commands a premium in terms on NPV perhaps expressed by more aggressive price assumptions.

What it does not explain is why the Australian Lithium junior has a market capitalization of less than 50% Standard Lithium. Country risk premium perhaps, but to that extent? Additional research will be required – in any case, valuations appear immensely disparate.

Valuation & Risk

Project financing is the main risk for Standard Lithium. With a project yet to get off the ground (decisions to be made mid next year) my concerns are plenty.

Share issuances appear to have been the sole pathway to cash and while it is presently on hand ($145M in the bank) we are a world away from Lanxess Project’s sticker price.

While Standard Lithium is not exposed to the same country risk that lithium juniors with Argentinian or Chilean interests are, there remains sizable environmental, permitting, and legislative risk. Lithium brine deposits are extremely water intensive posing possible operating challenges.

Key Takeaways

I am skeptical on Standard Lithium’s prospects. While it has some compelling future projects, little has been done in the investment presentations or financial statements to clearly describe monetization.

Stock compensation appears misaligned with investor interests. This paired with the track record of leadership has alarm bells ringing. (For the record, Pure Energy Minerals sales in 2022 were solely $600K!)

Dilutive share issuances appear the only means to a funding end. Pockets will need to be deep with decisions on project sanctioning a way off and significant unknowns on actual front-end production.

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