Power Play

Australia is currently the biggest beneficiary of what some are calling a “land rush” to acquire lithium-producing mines of the hard-rock variety. This is not shocking; the country enjoys an incumbent position as the world's primary supplier. Greenbushes, mentioned above, is being built out to double its capacity -- a project set up in the wake of a joint venture between one of the Western majors in the lithium space, Albemarle (via its subsidiary Rockwood) and China’s Tianqui. Greenbushes alone currently produces about 30 percent of the world’s lithium. Similar expansions and deals for future output are underway at other major lithium sites in Australia and elsewhere. The big driver here as noted is battery capacity demand, and the big driver for that is -- where else? -- China. “China has basically taken over lithium,” says Manternach. “China has a strategic approach to industrial policy and an ability to implement industrial policy and to think very long-term. So now they're cornering the lithium market -- because they see it coming. There is roughly 160 GwH of battery manufacturing capacity under construction or announced. You need approximately 700 tonnes per annum of lithium for each GwH of capacity. So that's a demand increase of 112,000 tonnes versus today's total market size of 200,000 tonnes.”

Investors looking for a way to play the lithium surge need look no farther, in our opinion, than Manternach’s own Lithium Americas. The company has a disciplined and experienced board and a strategic development plan with a unique jurisdictional focus: Argentina, the only country in the Lithium Triangle with an improving outlook on political risk under the business-friendly administration of Mauricio Macri. The company’s flagship project -- Cauchari-Olaroz -- is a brine project with opex putting its per-tonne costs squarely in the low end of the curve at just under $2,500. It has a projected mine life of 40 years with an annual output some 25,000 tonnes of LCE (the reserves are estimated at 1.5 million tonnes with a sky-high concentration of 698 milligrams per liter) and favorable offtake agreements with its two major shareholders, China’s Ganfeng Lithium and Thailand’s Bangchak Petroleum. Analysts see significant upside to this one. Even on very conservative assumptions -- a 10 percent discount rate and long-term lithium prices at $8,000 per tonne, below where they are today to account for easing supply constrictions -- the per-share NAV of Lithium Americas is according to Cormark $2.07. The company’s current share price of $1.74 stands at almost a 20 percent discount to that. Using that same model, with even a modestly higher long-term price of $9,000 the per-share NAV jumps to $2.42. Current share prices stand at a discount of almost 40 percent to that number. At that same 10 percent rate and lithium long-term at $11,000 per tonne, Lithium Americas’ per-share NAV hits $3.12 in Cormark’s model -- marking out potential gains of 80 percent. And for the blue-sky gazers, at $11,000 per tonne (remember, that's below current prices) and a friendlier discount rate of 7.5%, the per-share NAV rises to $3.60, making this a solid double.

Make no mistake: lithium is the commodity of the future. The metal and its miners have already gone up somewhat over the past 24 months, but 2019 will mark a watershed. Yet the boom years will not go on forever. Once lithium prices hit $20,000, recycling will become economical and demand for new lithium will plummet. So the time to act is sooner rather than later.