Lake Resources NL jumps to AU$2.20, Kachi lithium production forecast ‘very positive’: Red Cloud Securities

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“We view this increase in production very positively, as the PFS which used a scenario of 25,500 tonnes per year had already shown robust economics. We expect the DFS to demonstrate even more robust economics and are therefore increasing our target price” , says David Talbot, CEO of Red Cloud.

Lake Resources NL (ASX:LKE, OTCQB:LLKKF) had its Buy rating maintained by Red Cloud Securities and received a significant increase in target share price to A$2.20 per share from $1.25 Following forecasts that the Kachi Lithium project will double production to 50,000 tonnes per year.

Lake’s upcoming Definitive Feasibility Study (DFS) will use 50,000 tonnes as a base case, with increased production to be supported by an updated resource estimate.

Read: Lake Resources Increases Production Base Case for Kachi Lithium Brine Project on Favorable Market Forces

“We view this increase in production very positively, as the PFS, which used a scenario of 25,500 tonnes per year, had already shown robust economics,” said David Talbot, managing director and mining analyst at Red Cloud.

“We expect DFS to demonstrate even stronger economics and are therefore increasing our target price for Lake to A$2.20/sh (from A$1.25/sh).”

The following is an edited excerpt from Red Cloud Securities’ research coverage of Lake Resources.

“Very positive” production forecasts

Several factors led to a double production decision.

These pilots included:

1) Increase in demand for high purity lithium carbonate equivalent (LCE) from interested parties (sampling in progress);

2) Support from UK and Canadian Export Credit Agencies (ECAs) to cover 70% of project debt, with additional interest from various international banks;

3) Lowering of export taxes by the Argentine government; and

4) Confidence in its technology partner, Lilac Solutions, to develop the modular and cost-effective Direct Lithium Extraction (DLE) technology to be implemented at Kachi.

Expect a resource upgrade shortly

Only 25% of its 4.4 million tonnes of JORC LCE compliant brine resources are classified as measured and indicated resources.

In addition, only 20% of the resources were used to support the production scenario of 25,500 tonnes per year, so we believe that the existing resources can already support the increase in LCE production.

Expect recent drilling to help improve the resources to a level suitable for inclusion in the DFS.

Increased target price to $2.20 A/sh.

Although details were not provided, Red Cloud is updating its model to include the extended production scenario.

Red Cloud assumes that Kachi will start production in the fourth quarter of 2024 and increase to 50,000 tons per year by the second half of 2026.

Red Cloud also assumes that doubling production will increase capital expenditure (US$544 million in PFS 2021) by approximately 60%, resulting in total capex requirements of US$870 million.

Given the commitments received from the ECAs, Red Cloud assumes that 70% of the investments will be financed by project debt, with the remainder being covered by Lilac Solutions and future equity financing.

Focus remains on Kachi in 2022

An initial drilling program of four 1,200 meter wells is underway to expand the resources and, more importantly, to upgrade the measured resources from inferred to indicated.

As Kachi continues to be the focus, a 10-hole program is set to begin shortly at its 100% owned Olaroz, Cauchari and Paso brine projects.

Red Cloud Securities says…

“We maintain our BUY rating and increase our price target to A$2.20/share (from A$1.25/share).

“Our price target is derived from the discounted cash flow (DCF) method to which we apply a multiple of 0.7x.

“We believe the upcoming DFS, drill results as well as general progress at Kachi should continue to re-evaluate the stock.

“Upcoming Catalysts: 1) Demonstration Plant (Q1/22), 2) Brine Project Analyzes (2022), 2) Drawdown Discussions (ongoing), 3) Resource Update, DFS and ESIA ( Q2/22), 4) Construction Decision (S2/22) and 5) Production S2/24.”

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