We are initiating coverage of Frontier Lithium with a Buy rating on the shares. FL is an emerging
lithium minerals and salts company focused on the development of its 100% owned PAK Lithium
Project in Ontario. The PAK Project hosts North America's highest grade hardrock lithium
resource, with significant resource expansion potential. The North American battery market is
expected to be significantly under supplied by continental lithium sources.
Valuation. We base our valuation loosely off the 2021 PEA with approximately 40% cost
escalation alongside scaling our throughput rate 20% by year five based off our assumption
of processing approximately 75% of the current resource. We arrive at an asset NAV10% of C
$1,564MM or C$4.54/sh fully funded and diluted. Accounting for corporate adjustments, our
corporate NAV is C$2,031MM or C$5.88/sh. Via a 0.80x NAV multiple used to reflect the PEA
stage of the project, our target price is C$4.80/sh.
Frontier’s PAK is the highest grade resource in North America and Top Five globally. Frontier’s PAK Project
showcases impressive grades not only when screened against North American projects, but also on a global basis.
The consolidated PAK Project resource is the highest grade lithium hardrock project in North America. When viewed globally, the project is within the top five highest grade resources. The consolidated PAK Project is made up of two deposits – PAK and Spark. PAK’s global resource of 9.3MMt @ 2.02% Li2O is the highest grade consolidated NI 43 101/JORC compliant resource globally. Spark’s global resource of 32.5MMt @ 1.38% Li2O ranks top five in North America.
We base our valuation largely off the 2021 PEA with some key costing differences and optimization value drivers. As noted, LCT pegmatites occur in clusters – like fingers pushing through a crack – and they occur in areas of favourable structure (FL’s majority staked Bear Head Lake Fault Zone) with favourable peraluminous granitic source rocks (nine exist documented on FL ground). LCT pegmatites are the fractionated end members of these sources.
Consequently, we envision an operation that is able to capitalize off of this clustered geology and scale into the future. We model a minable base of 30MMt at grade versus the 42MMt in global resources and 22MMt on the 2021 PEA – noting the resource of Spark has since grown from 18.9MMt @ 1.36% Li2O to 32.5MMt @ 1.4% Li2O, a roughly 74% increase in contained LCE. At the mine site, we model production of both technical 7.2% concentrate and 6.0% concentrate. We model lithium hydroxide production via a hydrometallurgical plant consistent with the 2021 PEA of
23.2ktpa beginning in year four.
Our increased tonnage estimate equates to increased chemical grade production, keeping technical grade production consistent with the 2021 PEA. We scale our modeled operation from the 2.9ktpd processing rate detailed on the 2021 PEA to 3.5ktpd by year four, a conservative increase based on resource potential. Should FL continue to discover additional tonnage along the +65km of fertile ground and justify a larger expansion to pull tonnage forward, this would be incremental to our NAV. We calculate ramping mill throughput to include the full currently defined 42MMt resource base at 5ktpd to keep the 25 year LOM constant – i.e., no additional tonnage via exploration – would increase our NAV to approximately $6.22/sh, a roughly 26% increase.
We model average LOM production of 22.8ktpa SC7.2% technical concentrate beginning in year one, and average LOM production of 23.2ktpa lithium hydroxide beginning in year four, both consistent with the 2021 PEA. As stated, our increase in throughput drives estimated SC6.0% chemical concentrate of 215ktpa average LOM above the 160ktpa from the PEA. With 65% of this concentrate filling the 23.2ktpa lithium hydroxide hydrometallurgical plant at capacity consistent with the PEA, we envision the balance sold on the spot market, for which a growing North American market is materializing, aided via aggressive funding packages from the U.S. Department of Energy.
We have increased our capex and opex cost estimates approximately 40% from the 2021 PEA to reflect sector inflationary pressures, with average LOM spodumene/hydroxide cash costs of US$454/US$6,136 per tonne, respectively (compared to AKE’s James Bay @ US$333/t via 2021 DFS, CRE’s Rose @ US$550/t via 2022 DFS). Deposit geometry (widths, continuity, and topography at Spark) and omnipresent surficial exposure have the potential to keep strip significantly lower than comparable projects and render our cost estimates conservative.
We use long-term commodity prices of US$20,000/t for battery grade lithium hydroxide, US$1,750/t for SC6.0% and US$2,500/t SC7.2%, a 20% premium from the pro-rated lithium content of SC6. We note PAK mineralogy has rare geochemical/mineralogical hallmarks that allow it to produce SC7.2% technical concentrate within the parameters of Albemarle’s Greenbushes, and could possibly be the only North American source of the specialty chemical, allowing it to command a significant premium. We arrive at an asset NAV10% of C$1,564MM or C$4.54/sh fully funded and
diluted. Accounting for corporate adjustments, our corporate NAV is C$2,031MM or C$5.88/sh. Via a 0.80x NAV multiple used to reflect the PEA stage of the project, our target price is C$4.80/sh.