Lithium Americas – Best of Breed?

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During Telsa’s Q2 2022 earnings call, Elon Musk told attendees that entrepreneurs should enter the lithium refining business. 

He compared it to the software business, stating the margins were similar and that it’s a license to print money. 

You see, lithium is essential for developing electric car batteries. Naturally, it makes sense to believe that lithium miners stand to gain as the world transitions from gas-guzzling cars to environmentally-safe electric vehicles. 

One of the most popular lithium mining companies among traders is Lithium Americas (LAC). 

And while traders love it, does it make sense as an investment?

After all the company sold…well nothing for the past few years.

Which makes us wonder why financial pros made this their number one search amongst metal and mineral stocks this month.

Do they know something about the company’s future the rest of us don’t?

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Lithium Americas Business

Lithium Americas (LAC) is a Canadian-based natural resources company focused on lithium projects in Argentina and the United States. The company explores lithium deposits. 

In Argentina, Cauchari-Olaroz is advancing towards its first production. It will be the largest new lithium brine operation in over 20 years.  

Meanwhile, in the U.S., the Thacker Pass project, located in Nevada, is advancing towards construction.  

Furthermore, LAC believes it has a strong growth pipeline with Pastos Grandes, Cauchari-Olaroz Stage 2, Thacker Pass Phase 2, and strategic investments in Arena Minerals and Green Technology Metals. 

Since the firm is gearing up for production and not producing yet, or earning revenues, liquidity is critical to its success. The firm has a strong balance sheet, with $510+ million in cash and cash equivalents as of March 2022. 

Financials

Its been years since LAC has generated revenues. 

And in terms of financials, there isn’t much to say. 

The firm experienced a higher net loss in 2022 compared to 2022 because it had a $50.3 million loss on change in the fair value of convertible notes. 

Until LAC gets production underway, it will bleed capital. Of course, with no revenues, most of its metrics will be negative (EBITDA, net income, return on assets, etc.).   

LAC has a total debt of $293 million, total cash of $492 million, and a market cap of $3.04 billion. 

The ability to raise capital is essential for the business’s success. 

Valuation

Since the company is light on current data, let’s look at its future state.

Of the company’s three sites, the Argentina one is closest to opening, slated for the back half of 2022.

Once fully ramped, the site should generate 40,000 tones per annum (tpa), of which LAC is entitled to half, for the next 40 years at a cost of around $3,600 per ton.

Considering the price of Lithium runs at more than $75,000 a ton, that’s a gross profit of $1.428 billion per year for LAC, or roughly $70 per share.

However, this is based on current lithium prices and does not include SG&A. Plus, the company is spending a lot of money to build and expand capacity at other facilities.

Opinion 8/10

This is definitely a speculative play and requires a multi-year outlook. Plus, we don’t know how well lithium prices will hold up nor what the final net margins will be.

That said, a managed risk position here could pay out big in the coming years in what’s sure to be a tightly supplied industry.