This True Vine Letter is an excerpt from a post I wrote a couple of months ago for subscribers of my Industrial Minefinder™ service. I am now doing almost all my mining focused writing through Industrial Minefinder™, but from time to time I will occasionally share investment focused content like this with my valued True Vine Letter subscribers.
What to Look For in a Lithium Company
The number one thing to look for in a lithium company is management expertise. Lithium production is more of a chemical business than a mining business. The production process is generally more complex than your typical mining operation. In a recent Bloomberg article, Lithium Americas' president, John Kanellitsas noted:
“It’s an arms race for engineers,” said John Kanellitsas, ... comparing the talent squeeze to the shortage of specialist programmers in Silicon Valley. The problem, according to Kanellitsas, is that generic mining experience is insufficient. “This is not copper or gold,” he said. “Every lithium project is a bespoke chemical plant.”
Lithium production has historically been controlled by mainly 3 producers—Chemical & Mining Co. of Chile (SQM), Albemarle (ALB), and FMC Corporation (FMC). Consequently, industry know-how was also concentrated amongst these main players. Now that the lithium boom is on, adding experienced personnel is very difficult. Juniors with highly experienced management are more likely to get a project successfully into production and also worthy of premium valuations.
The second thing to look for in a lithium company is a quality Resource. Not just a large and high-grade Resource, but one that has the right chemical composition and is suitable for a proven extraction method (e.g., evaporation). Brines containing high concentrations of impurities like magnesium ("Mg") or sulfate ("SO4") can be too costly for economic production.
With these 2 items in mind, let's move forward and take a look at NEO Lithium (Symbol: NLC on Canadian Venture Exchange; NTTHF on U.S. OTC) in detail, a lithium junior that checks these boxes and many more.
A good way to get acquainted with NEO Lithium and the expertise of management is to watch/listen to this compelling presentation from CEO Waldo Perez. In his career, Mr. Perez has discovered 5 mines, 3 of which are in production and 2 that are in development. He founded Lithium Americas where his team discovered Cauchari, the 3rd largest brine project in the world, brought it to the feasibility stage in 3 years, and sold half the project to SQM. The same management team that Mr. Perez had at Lithium Americas is now at NEO Lithium. Furthermore, the company has a deep bench of lithium brine/salar experts on their advisory and technical teams. These include several civil and chemical engineers that previously worked on SQM's Atacama salar brine in Chile, the largest lithium project in the world.
Tres Quebradas (3Q) Lithium Project
NEO Lithium's 3Q Project is located in the Catamarca Province of Northwestern Argentina, in the southern tip of the heralded "lithium triangle" that spans Chile, Argentina, and Bolivia. NEO owns 100% of 3Q and it is fully permitted.
Catamarca is ranked 4th for Investment Attractiveness by the Fraser Institute out of the 9 Argentinian provinces. The following chart shows that it is in the middle of the pack when it comes to Latin America.
Catamarca is not the best jurisdiction in Argentina but far from the likes of Chubut, Jujuy, and Neuquen that are ranked alongside Venezuela (note: Jujuy is located in the northeastern section of the lithium triangle bordering Bolivia which could spell trouble for some other lithium operators). Catamarca is also preferable to Chile because lithium is currently treated as a strategic metal in Chile, unlike copper, which presents difficulties for a lithium junior trying to develop a new project in Chile.
3Q has a large footprint. The project is 35,000 hectares (135 square miles) containing a salt flat/lake system. The following presentation slide includes a satellite image of the deposit:
The northern section of the property hosts a high-grade lake of brine (black section in the satellite image.) Geothermal springs containing lithium actively feed into the lakes and salars on the property, as can be seen here:
With a 520 mg/L Lithium cut-off grade, the northern section of the property covering the lake and salar contains an estimated 2,053,788 tonnes of lithium carbonate at an average grade of 714 mg/L (714,242 tonnes of Measured & Indicated and 1,339,546 tonnes Inferred Resource.) By including an additional section of the property south of this and using a lower 400mg/L cut-off, the Resource contains 3,562,108 tonnes of lithium carbonate at an average grade of 567 mg/L. The 714 mg/L Resource is one of the highest grade lithium projects in the world, as shown here:
Also, using the 400 mg/L cut-off, the 3Q Resource is the 8th largest lithium project in the world. At this point though, the size of the Resource is less material than the grade because 2+ million tonnes alone is enough to satisfy the company's current production plan of 35,000 tonnes per year for over 50 years.
The company is currently conducting definition drilling to convert the Resource into Reserves (Reserves are economic Resources) which may also lead to an expansion of the Resource estimate. A new Resource estimate is expected during the 2nd quarter of 2018. Based on what the company reported in a recent press release, this seems extremely likely. Here the company mentioned that 90% of their initial maiden resource estimate was comprised of a depth of less than 100 meters. However, the company drilled a 320 meter hole 2 km south of the current Resource grading 642 mg/L lithium with low impurities. (It is interesting to note that this press release did not "headline advertise" this strong result, which speaks to the quality of the management and the fact that they do not have to be promotional to obtain financing.)
Low Levels of Impurities
As I mentioned earlier, it is very important that a brine or salar deposit has low level of impurities. Of all the major lithium brine or salar projects, 3Q has the second lowest level of magnesium ("Mg") and by far the lowest level of sulfate ("SO4"). A description of how the lithium will ultimately be extracted at 3Q is helpful to understanding why this is important:
3Q's production process will work by pumping the brine, with an initial concentration of only about .06% lithium, into evaporation ponds where the sodium, potassium, and calcium chloride will be removed resulting in a brine consisting of about 6% lithium. Higher levels of sulfates in the brine can lead to losses of lithium during this evaporation phase. This brine will then be transported in trucks to a Solvent Extraction Chemical Plant about 100 kilometers away in Fiambala, the closest town to the project. This plant will purify the lithium to produce the lithium carbonate. It is here where the purified brine is treated with a solution of slaked lime and soda ash to remove the magnesium and produce lithium carbonate. High levels of magnesium impurities in the brine require increased processing intensity and thus higher costs.
With lithium carbonate prices on the rise (~$14,000 per tonne) it is easy to ignore costs, however, the higher margins will ultimately lead to overproduction and prices will fall. No commodity is immune to this. It is only a matter of time for lithium because the major players in the lithium triangle hold huge Resources. Although it looks like this will be a very extended process due to the time it takes to get a brine project producing.
I like to invest in companies that are still profitable under difficult price scenarios. Company's that can thrive, not just survive, during a downturn can take advantage of the situation by repurchasing heavily discounted shares or acquiring properties at deep discounts.
I stress tested my financial model for NEO Lithium for lower prices. The 3Q Project, as outlined in the company's Preliminary Economic Assessment ("PEA"), can still generate 20% profit margins at $5,000 per tonne lithium carbonate.
The importance of lower impurities to the cost structure is highlighted on the following company slide:
The lowest cost producers in the lithium industry are the established majors, SQM and Albemarle. Their cash costs are in the $2,200 to $2,400 per tonne range. 3Q comes in just a tad higher at $2,791 per tonne. The only other junior on this slide with lower costs is Lithium Americas' Cauchari project at $2,495 per tonne (the project that NEO Lithium's management team discovered and brought to feasibility). Galaxy Resources' (GALXF) Sal de Vida project comes in higher at $3,369 per tonne.
NEO Lithium's detailed development timeline in their investor presentation is no surprise to me. This is a management team that has proven their ability to quickly move a brine project from discovery to feasibility.
Here is the timeline:
We can see here that the company's current agenda is further drilling for an updated Resource estimate (Q2 2018), the construction of a lithium carbonate pilot plant (Q1 to Q3 2018), and environmental reviews all culminating in a definitive feasibility study ("DFS") slated for Q4 2018. The company has approximately $65 million in cash which is enough to take the project to a completed DFS. 45% of NEO Lithium's shares are owned by institutions, including BlackRock, M&G (Prudential), JPMorgan, and Sprott. Management has stated that its shareholders are ready to finance the ultimate development of 3Q.
Looking out in 2018, I see three catalysts here that can drive the stock higher, other than regular lithium-interested flows to what I see as an undervalued and highly attractive investment opportunity. These are:
- Resource upgrade from additional drilling
- Resource to Reserves conversion and completion of the DFS
- Financing announcement, strategic investor, and/or acquisition announcement
2018 looks like it will be a pivotal year for NEO Lithium. As the project is further de-risked and the company moves to a completed DFS, I expect the shares to appreciate to a level that is closer to the project's after-tax Net Present Value of $933 million (10% discount rate; $11,834 per tonne long-term lithium carbonate price).
Because of the time required for evaporation (9 to 11 months), the 3Q project will take a couple of years to ramp up to full production. The PEA has production going from 7,000 tonnes per year in year 1, to 17,500 tonnes per year in year 2, before hitting full production of 35,000 tonnes in year 3. If all goes well in 2018, it looks like 2019 could be the year the company can break ground on the project with it eventually producing positive cash flow in 2022 and then full production in 2023.
NEO Lithium has everything I am looking for in a lithium junior, all at a highly undervalued share price. 2018 is shaping up to be a definitive year for the company. This company's prospects look very good given its proven management team, high quality asset, and strong institutional backing.
One additional thing I like about NEO Lithium is the long-term buy and hold potential. Given the high quality, long-life production potential of 3Q this is a company that an investor might be able to buy now and hold for a very long time.
I hope you enjoyed this investment focused Letter. I welcome your comments and questions below.
Joshua S. Hall, ChFC
Junior Industrial Miners Portfolio
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The True Vine Letter is a publication of True Vine Investments, the investment advisory business of Joshua S. Hall, ChFC, and a Registered Investment Advisor in the U.S.A. The information presented is for educational purposes only and should not be regarded as specific financial or investment advice nor a recommendation to buy or sell securities or other investments. It does not have regard to the investment objectives, financial situation, and the particular needs of any person who may read this Letter. True Vine Investments will not be held responsible for the independent financial or investment actions taken by readers. All data presented by the author is regarded as factual, however, its accuracy is not guaranteed. Investors are encouraged to conduct their own comprehensive evaluation of financial strategies or specific investments and consult a professional before making any decisions.
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