Given the compelling ESG credentials and the financial strength of the Kachi Project, the report pointed to a valuation of AUD 1.89 per share.
Lake Resources NL (ASX: LKE) (OTCMKTS: LLKKF) (FRA: LK1) hosted a research report from the analyst of Orior Capital Limited, Simon Francis, which highlights the growth potential of the Kachi Lithium project of the company in Argentina.
Notably, the report pointed out that Lake is “insanely cheap” and gave the company a valuation of A $ 1.89 per share, which is seven times the current share price.
Francis said: “Assuming Lake’s other four projects are valued at around US $ 50 million, the market values Kachi at just 10% of its after-tax NPV8 of US $ 1.6 billion (US $ 2 billion). Australian).
“It’s incredibly inexpensive.
Lake’s most obvious peer, Standard Lithium Ltd (OTCMKTS: STLHF) (CVE: SLL) (FRA: S5L), another company based on direct mining of lithium (DLE) is currently trading at 107% of its Adjusted after-tax NPV 8.
“On this basis, the market values Lake at a 90% discount compared to Standard Lithium.
“Valuing Kachi at 100% NPV and other projects at US $ 100 million, suggests a valuation of US $ 1.89 / share.
“That’s 7 times the current share price.”
Kachi advances towards development
Over the next year, Lake is expected to complete a number of tests and developments that will move the Kachi project forward significantly.
This includes expanding and upgrading the resource; completion of a definitive feasibility study (DFS) (expected in Q1 22); carrying out an environmental and social impact study (Q2 22); carrying out brine extraction and reinjection tests; further discussions with export credit agencies; further discussions regarding direct debit agreements; the results of other battery tests at Novonix; a decision to expand the project to an assumed capacity of 51,200 tonnes per year (likely later this year); and a potential listing in the US (targeted for Q4-21).
The report states, “Once these tests are completed, and given Kachi’s compelling environmental, social and corporate governance (ESG) credentials and financial strength, it seems reasonable to expect Lake to trade. to a rating similar to that of Standard Lithium.
Production at 2H 2024
The Kachi project is expected to go into production in the second half of 2024 and generate an annual EBITDA of US $ 261 million.
The analyst said: “Assuming funding of 70% debt and 30% new issued shares at A $ 1.50 / share, and an EV / EBITDA multiple range of 15x to 25x, Lake could be valued at 3 , A $ 63 / share to A $ 6.24 / share.
“This is 13 to 23 times the current share price.
“If that target is met by mid-2025, that would represent an annual return of 91% to 119% over the next four years.
“While these valuations may seem high in the context of the current (undervalued) Lake stock price, the multiples on which they are based are low compared to current multiples in the lithium industry.
“Livent is trading at ~ 65x 2021 EV / EBITDA. Albemarle is trading at ~ 26x, and the market appears to value its lithium business at ~ 37x. “
Increase in production capacity
The report also noted that the company is examining the potential to double capacity at Kachi.
“The large scale of the resource, the robust demand outlook, the strong ESG credentials of the project, and the fact that battery manufacturers will require large volumes of high purity products continuously over a period of decades, would all appear justify the expansion. .
“Assuming ‘Phase 2’ goes into production in 2028, bringing the total capacity to 51,200 tonnes per year of lithium carbonate equivalent (LCE), and based on standardized cost estimates and selling prices of US $ 15,500 / tonne LCE, an enlarged Kachi could boast an after-tax NPV8 of US $ 3.8 billion and an IRR of 53%.
“In full production, the project could generate an annual EBITDA of US $ 571 million.
“Assuming a similar 70:30 debt-to-equity funding (although Phase 2 could probably be funded from Phase 1 cash flow) with shares issued at AUD 3.00 / share and a multiple EV / EBITDA of 15x, Lake could be valued at AUD 7.83 / share. “
Summary of potential Lake Resources assessments.
Solid outlook for demand
The analyst pointed out that the demand for lithium is expected to increase tenfold over the next decade to reach over 3 million tonnes per year LCE by 2030.
“These incredible prospects are underpinned by government policies to encourage the adoption of electric vehicles, accelerated production commitments from global automakers, commitments from users of private sector vehicle fleets and lower battery costs.
“US President Joe Biden’s US Jobs Plan includes $ 174 billion in spending to create national supply chains for electric vehicles.
“Albemarle Corporation (NYSE: ALB) now forecasts a demand of 1.14 million tonnes of LCE by 2025.
“Over the past two and a half years, Albemarle has increased its demand forecast in 2025 by about the equivalent of one lithium project per quarter. “
According to the International Energy Agency (IEA), global sales of electric vehicles reached 3.2 million units in 2020, or 4.6% of total vehicle sales and, under the sustainable development scenario, they are expected to reach over 46 million units by 2030, representing 35% of total sales and growing 31% per year over the next decade.
The report notes that supply will struggle to keep pace and that to meet this demand some 2.6 million tonnes per year of new capacity will be needed over the next decade.
“This is equivalent to 37 times the production of lithium products at Chile’s Sociedad Quimica y Minera (NYSE: SQM) in 2020, or 52 extended Kachi projects.”
Direct lithium extraction the future
Francis realistically predicts that the only viable way to meet demand is to rapidly deploy DLE-type projects.
He said: “The only realistic option to achieve both the required supply growth and sustainability is to use direct lithium mining.
“DLE is expected to become the primary method of lithium extraction over the next few years.
“At some point, lithium producers who currently use evaporation ponds will likely be forced to modernize their facilities and use some form of DLE. “
The lake offers a DLE exhibition
Today, lithium is mainly produced either through inefficient evaporation ponds in South America or from Australian hard rock sources which are processed in China.
Francis said: “Neither is ideal from a Western automaker’s perspective.
“The development of DLE projects in South America, as well as in the United States and Europe, will create more diverse supply chains. “
As project finance becomes increasingly linked to ESG benchmarks, DLE offers substantial benefits in terms of environmental footprint, water consumption and carbon emissions.
Francis said, “Lake Resources offers investors one of the very few avenues to gain exposure to direct mining, the technology that represents the future of lithium.
“There is huge upside potential as Kachi and other projects develop.
“The business looks incredibly cheap.
“This represents an opportunity. “