Since my last article on Lithium Americas (LAC), the world has been thrown into quite heavy turmoil. COVID-19 has disrupted supply chains across the world and lessened the demand for many goods as consumers took on reduced income or even lost it altogether. Lithium Americas hasn’t been immune to this, having been forced to suspend construction in Argentina for its Cauchari-Olaroz project back in March and, more recently, again on July 6th after two workers tested positive for COVID-19. Temporarily weakened electric vehicle (“EV”) sales are also among the fallout from the pandemic. Unrelated to the ongoing pandemic, however, Lithium Americas made a deal with Ganfeng Lithium (OTCPK:GNENY) to transfer a 1% stake in Minera Exar, the company that owns the Cauchari-Olaroz project, to provide Ganfeng with 51% ownership of the project. While at first glance this may seem far from ideal, I will discuss later on why investors shouldn’t worry about this. Now, in spite of everything that has happened, Lithium Americas still remains my favorite long-term investment choice.
While this is a bit less intense than a global pandemic, it is worth looking into the deal that has caused some concern among some onlookers. This concern, it appears, is caused more from confusion and general misinformation than the actual contents of the deal. A recent Reuters article describes the deal with Ganfeng as an “opportunistic” deal resulting from the pandemic as an “indebted” Lithium Americas was looking for cash. Reuters isn’t alone in displaying this kind of sentiment, but let’s take a second to look at the facts of the agreement. The deal, which was officially approved on June 23, was announced on February 7, just under 18 days after the first case of COVID-19 was found in the United States. At that time, the threat of COVID-19 was still dramatically underestimated, and even so, a deal like this was likely at least a couple of weeks in the making. This should eliminate any concern that this was a pandemic-influenced decision.
In addition, Lithium Americas transferred just 1% of the project control to Ganfeng, for which it was compensated $16 million. None of these numbers seem large enough to support the notion that this was a move in desperation. Now, it is true that this 1% shift in ownership brings the control from 50/50 to 49/51 in Ganfeng’s favor, but that doesn’t tell the full story. As per the agreement, Ganfeng still needs Lithium Americas’ approval to make material changes to “funding plans, construction program, project design and process, capital and corporate structure, production output level, and capital investment plan (including expansions).” So, realistically, Lithium Americas hasn’t lost any control in its project, even with this reduced ownership.
Okay, so the downside seems quite minimal, but the upside also seems to be relatively non-existent. Well, Lithium Americas was also provided with a $40 million non-interest-bearing loan that doesn’t have to be repaid until 2029. This loan will add a bit of relief to Lithium Americas’ financial stresses. The increased stake for Ganfeng also ensures the Chinese company’s commitment to developing a world-class mining project with Lithium Americas. So, what’s in it for Ganfeng? As Xiaoshen Wang, Vice-Chairman and Vice-President of Ganfeng Lithium, stated, “The Transaction provides increased financial flexibility and benefits to Ganfeng Lithium…” as their majority stake now makes securing loans from local Chinese banks much easier for the company. As Joe Lowry said on Twitter, this move is a “win-win” for both companies involved.
On March 20, the Argentinian government began a nationwide quarantine that forced Lithium Americas to suspend all activity at the Cauchari-Olaroz site. The order, initially expected to last until March 31, was extended, on March 29, until April 12 and, before expiring, was extended again to ultimately cease on May 10. However, work was able to gradually return after April 12th, when the quarantine loosened a bit, until two workers tested positive on July 3rd and construction had to be halted yet again.
While construction shouldn’t be held up for more than two weeks at a time, this alludes to a bit of a worrisome future. With over 1,000 workers on site, if production needs to be halted every time just one tests positive for COVID-19, odds are this will happen again and production will be further delayed. In its first-quarter report, Lithium Americas stated that the damage done to the developmental timeline isn’t fully realized yet and an updated timeline will be released in the company’s second-quarter report to be released in the coming months. However, based on the slowed construction process, even when not suspended, I would expect the new timeline to show production beginning in Q3 2021.
(Source: Lithium Americas)
Not everything is bleak, however. The company did state that, “Any increase in capital costs as a result of the COVID-19 impact on the construction schedule is expected to be minimal and within the existing contingency.” The minimization of financial burden is incredibly important for the company, as it has yet to generate any meaningful cash from operations and won’t do so until Cauchari-Olaroz comes on-line. While I initially hypothesized a sizable pop in value for the company at the beginning of next year, I would now expect this to come in the third quarter – in line with the new construction timeline. However, I wouldn’t expect this pop to be any less significant than it would have otherwise been.
The second thing to consider with the impact of COVID-19 on Lithium Americas is how this pandemic has hurt the greater lithium market. This, again, isn’t something that should cause investors too much concern. As anyone following the lithium sector should know, EVs are the greatest driving force behind the rise in lithium demand in recent years and the foreseeable future. That’s why articles such as this one may cause some concern among investors. However, the worst has already passed us. When China shut down earlier in the year, lithium usage ground to a halt as the country with “over 80% of the global supply chain of rare earth elements, important minerals for electric vehicles and wind turbine components” shut down. However, as the country reopened and lithium was able to flow freely once again, the concern over lithium’s availability began to fall again. There’s also no need to worry about an oversupply of lithium, as production delays coincide quite well with the manufacturing blackout. To fully understand what I’m saying, take a look at the Global Lithium ETF (LIT) year-to-date chart seen below. It demonstrates a steep decline under China’s initial lockdown, with strong recovery ultimately leading to 30% growth on the year.
(Source: Seeking Alpha)
This section will contain some more speculative analysis, though there is some information that I believe is valuable for investors to consider. The biggest question mark to remain around Lithium Americas is exactly how it’s planning to finance Thacker Pass. As my previous article discussed, the company will not be able to finance the project on its own with its current financial trajectory, and adding another joint venture partner – just as it did with Cauchari-Olaroz – seems likely for Thacker Pass. As per Lithium Americas’ most recent update, “The Company is exploring financing options for Phase 1 construction, including the possibility of a joint venture partner at Thacker Pass.” If the company does decide to pursue this route, I have already discussed in length how I expect it to go about doing this. However, in an interview from back in February, Lithium Americas’ chief executive, Jon Evans, said that the company “‘[sees] Nevada as a better place to put our money.”’ This is likely due in part to the Energy Resource Governance Initiative, which will help ensure Thacker Pass’ success through government support. Evans went on to respond with “Sure” when asked if Ganfeng could someday control the Cauchari-Olaroz project in full. This implies another potential solution to Lithium Americas’ finance problem at Thacker Pass – selling Cauchari-Olaroz. I have always stated that I believe Thacker Pass to be the much more important of the two projects due to its sheer size and location, so a move like this wouldn’t necessarily be a bad thing. It would also free up a large amount of excess capital for the company, which it could use to further grow or pay off existing debt sooner than anticipated. While this second scenario remains less likely, in my eyes, I believe that it’s a possibility investors should be aware of. I would also expect the company to release its finance plan for the project relatively soon, as construction is expected to begin in the first quarter of 2021, so stay tuned for that.
Part of the reason this company was so appealing to me when I first discovered it was that it seemed like a hidden gem. No one was talking about it. While this remains true for the most part, analysts have taken a bit more notice of the small company. On May 11, for the first time in the five years of available data, Lithium Americas’ quant rating turned bullish. Currently, its quant rating resides at 4.30, just ahead of the average analyst rating of 4.28. Though, with no bearish analysts and only one neutral, the other six analysts are split evenly between Bullish and Very Bullish. The price target for Lithium Americas is also currently at $8.80, a 66.98% upside at the time of writing this article.
But what I think is more important than the ratings is how many analysts are actually covering Lithium Americas. March 2016 saw the addition of another analyst, bringing the total coverage to a mere two. By the end of 2017, this number had doubled, and in April 2018, another analyst started their coverage. Just five months later, in September, two more analysts joined, bringing us to the seven we have now. Now, in the nearly two years since then, no new analysts have joined the ranks, and all seven have been unchanged during that time as well. This tells an important story: even as the company begins to objectively improve its operations, as demonstrated by the rising quant rating, analysts are still not really taking note and the company remains a footnote in the lithium industry.
My investment thesis remains mostly unchanged. Lithium Americas remains my favorite long bet on the market due to its tremendous growth potential. The fact that it is still mostly unknown does nothing but bolster my confidence in its potential to pop upon reaching production. To outsiders, it will seem as if this company rose out of nowhere, but to those that have been following it, as I have, it will finally be the day when we can reap the rewards of our patience. As I’ve demonstrated throughout this article, Lithium Americas continues to strengthen its position for the future and becomes increasingly appealing to me by the day. I would recommend initiating a long position in Lithium Americas, though I would also recommend reading this article first if you are unfamiliar with the company.
Disclosure: I am/we are long LAC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Originally published on Seeking Alpha