"speculative buy", and 95 cent price target
Tue 1:35 pm by Deborah Sterescu
Canada's Rodinia Lithium (CVE:RM) received a confident outlook yesterday from Salman Partners, with the equity research firm assigning the junior lithium explorer a "speculative buy" rating, and a price target of 95 cents per share.
Powered by growing demand for car batteries and portable electronic devices, world demand for lithium has been growing at 5.5% per year, with this rate expected to continue, noted Salman.
Vancouver, British Columbia-based Rodinia, which is currently trading at 28 cents per share, has properties in Nevada and Argentina, including its main Diablillos asset in Argentina.
In order to develop its projects, Rodinia has established a partnership with Shanshan Enterprise, a Hong Kong-listed conglomerate and China’s largest supplier of lithium-ion battery materials. Shanshan owns about 7% of Rodinia.
"This is an unusual and creditable move for a potential producer of a commodity that does not trade on terminal markets," said Salman in its report.
Indeed, Salman's analysis is based on two principles, namely the Goldie principle and supply mangement.
The first suggests that if a company proposes to produce something that does not trade on a terminal market like the London Metal Exchange, third party investors shouldn't invest until a potential consumer of that product has given some sort of financial endorsement, like an equity investment or offtake agreement.
Because of the Shanshan Enterprise partnership, Salman believes Rodinia has "gone a long way" towards satisfying this requirement.
The second principle considers the concentration of a business, and says that the more concentrated the industry, the more profitable the producers, as it is more likely they can engage in supply management, maintaining strong and stable prices by matching supply and demand. According to Rodinia, only four producers account for 85% of lithium production, meaning the industry is quite concentrated.
As such, Salman expects that Rodinia will be able to surf on the strong, stable pricing structure of lithium that has been established and maintained by existing producers.
The Canadian lithium explorer has interests in three salars, also known as ‘salt” or evaporite deposits, in Argentina. The key property is Diablillos, where the company holds 100% of the mining rights at
this lithium-potash-boron project in Salta province. Rodinia bought Diablillos from Rio Tinto.
Beginning in 2016, Rodinia could be producing about 2,000 tonnes of lithium per year from Argentina, or about 6% of the world's supply, with a by-product of potash, according to Salman's estimates.
Sales of these products would generate free cash flows of about US
.35 per Rodinia share per year, added Salman.
In mid-July, Rodinia announced that results of surface sampling at Diablillos were “a very pleasant surprise" as the results were considerably higher grade than its previous surface sampling program.
The company is currently drilling at Diablillos, and on August 4, reported that diamond drilling had “confirmed the favorable aquifer properties identified during reverse circulation drilling last year." Having completed the first pump test well, Rodinia is now well on its way to define the production capacity at the property. Two drill holes also encountered a potential aquifer not included in the previous resource estimate.
In addition to Diablillos, Rodinia also holds the Clayton Valley property in Nevada, which surrounds Rockwood Holdings' mine, which is believed to produce about 940 tonnes of lithium per year. The company is currently arranging for permitting to allow for more drilling on its property, and plans to issue a resource estimate around the end of this year.