Stockhouse Ticker Trax is equity specific research (Canadian listed and market cap < $300 million) published every Monday to paid subscribers. Our free Friday column may feature companies previously featured to paid subscribers (with a minimum one month delay) or discuss topics of interest to the general investment community and relevant to overall portfolio management.
This week's discussion topics
I. Rodinia Lithium
Rodinia Lithium (TSX: V.RM, Stock Forum; 27 cents)
www.rodinialithium.com
- Shares outstanding: 94 million
- Market cap: $25 million/ Little debt with approx. $6 million cash
- Lithium/ potash / boric acid in Argentina
- Strategic investment by one of China's largest lithium battery materials supplier
- Very positive economic study released November 7th
- Dundee Capital 12-month price target: $1.05 (Nov 8th)
Several years ago the lithium sector was expected to be the next great energy play. With the exception of a couple strong blips since 2009, it has been grossly underwhelming. That may change as more hybrid and electric cars hit the market from 2015 to 2020. The growth rate, however, is still a wildcard. The high price of oil also tends to help rejuvenate the lithium sector as alternative energy takes on greater importance.
Junior exploration plays in the sector are not hard to find but we want to identify the most promising in relation to share price. My personal opinion is that RM in the 20 cent range satisfies that criteria. They have a fair amount of stock outstanding and when combined with this unstable market, this is hurting its share price. However, the underlying value of their lithium properties at 27 cents (once cash value is removed), is only $19 million. By industry standards (peer comparison) and based upon the November 7th economic study, this is extremely attractive.
Rodinia's main project is the Salar de Diablillos in Argentina. This property hosts one of the largest lithium-potash brine deposits in the world. The lithium grades are high and the economics are very strong. The project is located only 11 km from the world's second largest lithium brine producing mine (Salar de Hombre Muerto). Because of this the regional economics, geology, and chemistry are well understood.
November 7th Preliminary Economic Assesment (PEA)
This full report is available on the home page of the Rodinia website
What is particularly appealing about this project is the 20-year mine life, the low capital costs ($144 million) and the exceptionally strong projected cash flow of $86 million annually with a 1.6 year payback on the capital. Especially when we take into account the current value of the project is only $19 million (share price X 94 million shares out, less $6 million cash in bank).
It is also worth noting that with $220 million in capital (vs. $144M), they forecast annual cash flow of $150 million from much higher production of lithium, potash, and boric acid. Even if lithium remained indefinitely at current lower prices, the production of potash and boric acid from this project makes the overall long-term economics very strong.
Below are a few excerpts from the Dundee Capital Markets research report Nov 8.
Analysts: David A. Talbot / Mansur Khan - www.dundeesecurities.com
Conclusion: We reiterate our BUY for Rodinia Lithium with an increased target price of C$1.05 from our previous $0.75 based on our 10% DCF model. An impressive PEA was released yesterday for the flagship Diablillos Lithium Brine project in Argentina. In our view, the numbers speak for themselves (Table 1, Figure 1). Rodinia continues to trade at US$3/t LCE, a significant discount to its peers group average of US$11/t LCE. While RM is early stage, we believe the company's attractive asset (low impurities, no sharing of salar), experienced management team, and steady de-risking of the project should justifiably close this gap. Shareholder dilution for small companies with a large capital build is often a concern, but management plans to leverage its strategic partnership with Shanshan, one of the world's largest battery materials provider, into a source of capital while eliminating need for a large equity raise or partial interest sale.
2012 will be busy. A C$15-$20 MM feasibility study will now begin with drilling scheduled to define the resource, further explore and create the initial production wells. Pilot plant construction will also begin with a goal of completing a full production cycle over 12-months culminating with final products for LCE, potash and boric acid. Permitting has started and EIA needs to be submitted.
Rodinia wishes to avoid dilution – Off-take arrangements are being discussed with potential LCE buyers including Shanshan. The goal is to cover most of the capital requirements through an arrangement of pre-paid production or debt financing. Issuance of equity will likely be kept to a minimum and Rodinia wishes to retain full 100% interest in the project. This would likely provide the best valuation
Note: Argentina has been waiving red flags recently that signal their intent to partially nationalize the natural resource industry. In my opinion this is the primary reason RM's share price remains under selling pressure. Any investment in this company must take that country risk into consideration.
If, however, Rodinia is able to finance this mine and put it into production without interference from the government, the valuation upside over the next couple years could be dramatic. One must first and foremost understand the risks of doing business in Argentina.
Further due diligence: There is a corporate presentation available on the Rodinia website. https://www.rodinialithium.com/inSitePresent/
Disclosure: Danny Deadlock owns 40,000 shares of Rodinia Lithium