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.
Rodinia Lithium (TSX: V.RM, Stock Forum; 20 cents)
www.rodinialithium.com
Shares outstanding: 94 million
Market cap: $18 million/Little debt with approx. $3 million cash *
Lithium/potash/boric acid in Argentina
Strategic investment by one of China's largest lithium battery materials supplier
Dundee Capital 12-month price target: $1.05 (Nov 8th)
* Note: A concern is financing and what impact it may have on shareholder dilution. This is something we want to monitor closely in Q1 and Q2 as any excess dilution would be a red flag when the stock is trading near a 52-week low. If the share structure is managed carefully, we will continue to follow them. If it is not then I have to re-assess longer-term coverage. I have heard nothing negative on a financing but it is something I always watch for with small companies.
Two months ago we published a report on Rodinia Lithium following release of its first Preliminary Economic Assessment (PEA). The economics of the PEA were exceptional but unfortunately the market was in the midst of a correction that only worsened over the next six weeks as tax loss selling increased. This had a significant impact on all the micro-cap stocks and Rodinia was no different. The November 11th report was released with RM at 27 cents and now we are sitting on a 30 percent loss. A link to the original report is below.
https://stockhouse.com/Columnists/2011/Nov/11/Lithium-junior-most-promising-in-relation-to-share
Fundamentally there is nothing to justify the drop in price but I am reviewing RM this week as this appears a very attractive price level – in particular as oil continues to test $100 and energy alternatives become very important again.
Energy analysts have said that oil (at least short term following start of any confrontation with Iran) could approach $200 per barrel. Should this ever happen, the demand for alternative energy stocks would increase dramatically. Lithium in particular would take on significant importance as the electric vehicle market could change dramatically.
Iran: Idle threats?
“TEHRAN, Iran, Jan 8,: An Iranian newspaper quotes a senior commander in Iran’s Revolutionary Guard as saying that Tehran’s leadership has decided to order the closure of the strategic Strait of Hormuz at the mouth of the Arabian Gulf if the country’s oil exports are blocked.”
“January 13: Obama administration officials have warned Iran that shutting down the Strait of Hormuz — a vital waterway that carries one-sixth of the world's oil supply — would cross a "red line." The chairman of the Joint Chiefs of Staff, Gen. Martin E. Dempsey, said recently that if Iran made good on its closure threats, the U.S. would "take action and reopen the strait," which could be accomplished only by military means, including minesweepers, warship escorts and potentially airstrikes, the Times reports.”
The European Union said this week that an oil embargo against Iran would be six months away. However, as we have seen with Iran (and the Middle East in general) a lot can change within six months.
If an oil embargo is put in place, Iran feels that if “their” oil cannot get through, no oil will get through. Threatening to close transportation through the Strait is one of the only points of leverage they have. Several countries including the United States and Britain would be prepared to support military action but China and Russia would not.
Iran also has the military capability. Their land-based weapons and hundreds of fast moving (missile equipped) patrol boats would be similar to releasing hornets in your home. They have the capability to cause significant harm but more than anything they become a significant threat to normal life and a major deterrent to entering the area. For a tanker hauling huge amounts of crude oil, will they want to take that chance? The risk of that alone would be enough to have a huge impact on the price of oil.
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U.S. Navy Commander Rodney Mills examined the military implications of an Iranian move to shut the strait in a 2008 study at the Naval War College. His bottom line: There is consensus among the analysts that the U.S. military would ultimately prevail over Iranian forces if Iran sought to close the strait. The various scenarios and assumptions used in the analyses produce a range of potential timelines for this action, from the optimistic assessment that the straits would be open in a few days to the more pessimistic assessment that it would take five weeks to three months to restore the full flow of maritime traffic.
But fighting an Iranian effort to close the strait may not be easy. Iran in recent years has acquired “thousands of sea mines, wake homing torpedoes, hundreds of advanced cruise missiles and possibly more than one thousand small Fast Attack Craft and Fast Inshore Attack Craft,” [https://battleland.blogs.time.com]
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During the last oil crisis (July 2008) when crude hit $145 per barrel, we saw a significant flow of capital to alternative energy stocks. Within one year lithium stocks had a huge rally. Lithium One, for example, on the TSX gained 1200% within the first six months of 2009. Imagine the impact if oil went beyond $150 per barrel.
Why Rodinia Lithium (RM)?
The environment for small stocks is still weak because the aversion to market risk continues to run high. While we would hope that improves in Q1 and Q2, there is no guarantee. Therefore it is important to focus on the highest quality juniors in the sector and those without debt. Even if cash is running tight, the company also needs the capability to raise capital. The senior management behind RM have clearly demonstrated that ability in the past.
While I am cautious of the country risk (Argentina) I am hopeful the extremely strong economics of their deposit offset a good portion of that risk “should” we see any big rally in oil this year.
Here is an important excerpt from my Ticker Trax report in November.
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.
With the small stocks we want to try and identify best-in-class. RM is definitely one of the best lithium projects around. It is just a question of whether they can finance the project without excessive shareholder dilution, and whether the government of Argentina will not tax them to death in the process. This risk of course is also why we can get the stock this cheap.
Industry outlook – Price dependent
The electric vehicle push is on again at the North American International Auto Show. However, as in previous years the concern is vehicle pricing. Previous consumer studies have shown that 40 percent of drivers would be extremely interested in an electric vehicle but only if retail prices came down. It appears drivers are prepared to pay 10 to 20 percent higher than a gas vehicle, but little more.
Statistics show that over the past 11 years 18 million vehicles have been purchased in Canada. Of that, less than 60,000 were hybrids. The bulk of those purchases likely occurred in the past couple years but the uptake is definitely slow.
Drivers are prepared to stomach high fuel prices before they will commit to an electric vehicle but the long-term outlook is definitely improving. This aspect of the lithium market is the primary driver for price and interest in underlying equities of lithium producers and junior exploration companies. While that is the long-term perspective, the short term (2012) will be influenced by oil price shocks – the most likely of which could be Iran.
Disclosure: Danny Deadlock owns 60,000 shares of Rodinia Lithium (TSX: V.RM)