In brief, lithium is high-power simplicity.
On the periodic table, it sits right below helium, and above all other metals. Because its atoms are so light, its power-to-weight ratio is high, which is a simple measurement to compare the performance of power sources.
Lithium is also highly reactive, and the combination of mentioned factors make it ideal for storing energy. This is not just theory: you will find lithium-ion batteries in the majority of mobile devices. The use of lithium has also unlocked a sector of automobiles once believed to be true only in science fiction. This is, of course, electric vehicles and they will transform the lithium market.
Electric cars and other new energy vehicles will drive global demand for this metal. In a recent report, Macquarie Research projects that demand from this sector will continue growing over 30% year-over-year until 2021.
The industry is already feeling the impact of this surge in demand. In 2015, lithium price spiked and continued to climb this year.
This rally happened in part due to supply constraints. Just like OPEC deciding to protect their market share by maintaining output volumes despite low oil prices, lithium producers did not respond to the metal’s price increase with a matching spike in supply. This maneuvering is expected to continue into 2017, which will support the torrid increase in price.
As lithium prices continue to rise, supply and demand will self-balance. New entrants will flock to junior mining’s newest buzz. There will be losers of course, but the companies controlling large swaths of lithium rich land stand to see a continued benefit. This is because the lithium market will remain concentrated. Right now, just four producers control over 90% of the global supply.
This means that smaller players will have a higher chance of being bought out. Even if lithium price growth moderates, the majors will still be there, and they will want to keep their market share under control.
This is a great situation for a lithium junior that can stand out as an attractive takeover target. And in our opinion, there are two main features such a junior should have: its assets should have simple, predictable economics, and be located in a mining-friendly jurisdiction.
Technically, this means that companies with brine deposits will be a better bet than those with hard rock ones. Brine extraction is generally simpler, cheaper, and faster to start.
Equally, if not more important, is where the asset is located.
Two of the world’s top three producers are based in Argentina and Chile. When it comes to political and macro risk, these countries are not exactly bulletproof: Argentina is in the middle of high inflation and unemployment caused by a series of inept political decisions. A new regime is showing signs of friendly business practices; however, it is too early to predict how things will play out. Chile is in better shape, although a tough copper market and other factors have caused increasing unemployment and subdued growth expectations.
Argentina and Chile are both in poor fiscal shape; both need tax revenue. Even though the Argentine President has revoked the 5% mining export tax in March, it can return if the miners’ profits start improving. We have seen politicians reconsider decisions like this all the time.
The Fraser Institute provides ratings of mining jurisdictions. Its latest update states that Argentinian province of La Rioja is the least attractive place to invest—in the world. Even Venezuela is a better place to put money in. On average, Argentina’s provinces are ranked 93rd of the 109 jurisdictions covered.
Chile is a better place to invest, according to Fraser. It is ranked 11th in the same sample.
Lastly we would like to touch on Australia, the best place to be in terms of mining and the world’s the largest producer of lithium, but the lion’s share is derived from hard rock. Something far more expensive than lithium brine.
Thus, there is a better place to be for a lithium resource company than the three countries mentioned above. As Tesla Motors began building its Gigafactory in third ranked Nevada, all eyes turned toward domestic producers. And in the United States, there is only one, and they are located in Nevada.
More specifically, the single lithium-producing asset in the United States is located in Silver Peak. Albemarle’s Chemetall Foote Lithium Operation is a brine-type deposit that is just 3.5 hours’ drive away from Tesla’s Gigafactory.
Chemetall Foote is still operated by Rockwood Holdings, a company acquired by a chemical giant Albemarle in 2015. Before its own acquisition, Rockwood also had a history of take-overs. This came to a head in 2014, when it acquired 49% of a lithium producer located in Western Australia. Like other players in an oligopoly, Rockwood did not shy away from reaching out geographically and paying with cash on hand to maintain a leading position.
Back in Nevada, Rockwood’s Chemetall Foote operation has another neighbor and in contrast with the Gigafactory, it is only one hour’s drive away. It is a lithium junior that has accumulated a significant land position and cleared drill permits to begin de-risking. Across the hill from Silver Peak and Clayton Valley is Fish Lake Valley, an up-and-coming area that, in our opinion, is the next hot spot of lithium activity. Too bad no other junior will be able to get any acreage – one company owns all of the prime real estate.
Positive outlook for the lithium market, the advantages of brine deposit economics, neighboring producer known to be hungry for acquisitions, and the stability of one of the world’s best mining jurisdictions put this area on the map for any resource investor focused both on commodities and clean energy.
American Lithium Corp. (TSXV:LI) – In the Right Place Before The Right Time
Current Price: C$1.34
Shares Outstanding: 41.6 million
Market Capitalization: C$55.7 million
52-Week Range: C$0.05 – C$1.65
Cash: ~C$2.0 million
Total Liabilities: C$0.0 million
As lithium prices continue to rally, this segment of the commodity market attracts new entrants. Producing companies get re-evaluated based on new demand from the electric vehicle market while early-stage players, freshly funded, are amassing land claims and starting or re-launching exploration programs.
We believe that as the lithium market is poised to remain tight throughout this year and into 2017, the metal’s price may continue to provide support even for the earliest-stage juniors. This is the proverbial tide that could lift all lithium boats.
However, a positive price outlook is not enough for us. It is essential, but not sufficient. In addition to that, we need to see great potential on the company level. We want to see a team that has proven itself to be able to raise capital even in the toughest of price environments—and to do so on attractive terms for both the existing and new shareholders. To be able to do that the team needs to consistently deliver on the milestones it sets for itself: claim acquisition, obtaining permits, carrying out exploration, all the way to development and production.
Finally, we’d like to see a company whose assets are located in a mining-friendly jurisdiction. We have seen government incompetency too often to prefer otherwise. Although a talented team with solid local connections can achieve enormous success in even the most frontier areas, an early-stage venture is risky enough in itself. We would like to limit our risk exposure to the uncertainties any junior company faces, like the inherent complexities of exploration economics. A jurisdiction that takes care of its mining companies alleviates political risk.
The company we want to talk about is located in Nevada. As we said earlier, it is one of the world’s best locations to invest in. It is extremely mining-friendly, too. Out of 109 jurisdictions included in Fraser Institute’s Policy Perceptions Index, Nevada sits in 6th place (the index measures how government influences exploration investment).
Lithium companies enjoy an extra edge when it comes to government support. When American Lithium’s neighbor, Chemetall Foote Operation, needed to expand, the Department of Energy pitched in with US$28.4 million, more than one-half of the total investment.
Management has assured us that the government in Nevada does not get in the way at all. Land acquisition goes smoothly and Nevada’s Bureau of Land Management issues permits predictably and promptly. Just as we would expect from a top-tier jurisdiction.
Of course, simply being in Nevada does not guarantee success. The management and the technical team have to do all the leg and deal-work to make it happen.
And we are confident that they have what it takes to accomplish that. We spoke to the management and were impressed by their openness, clarity of vision, and executional strength of the company’s team. So impressed in fact, that we made an investment in the company.
American Lithium’s CEO, Michael Kobler, has over 35 years of technical and business experience. At the helm of the company’s technical team is Alan Abrams who has as many years of experience in engineering and project management, both globally and in Nevada. The most recent addition to the company’s team is John Oldow, PhD, who will take charge of developing a geological model for American Lithium’s brine projects in Fish Lake Valley.
The company’s team is still growing but the results they achieved so far have made a very good impression. In May, American Lithium raised C$2 million; later that month the company struck an agreement that allows it to earn up to 80% of the Fish South property. In June, Nevada’s Bureau of Land Management issued a permit that it will use to drill 13 holes at Fish Lake.
American Lithium now holds options to acquire 18,552 acres in Fish Lake Valley, Esmeralda County, and the 2,240 acre San Emidio project in Washoe County. Source: Corporate Presentation
These holes will follow up on previous work at North Bowl Playa, one of Fish Lake’s targets. Earlier work included geochemical and geophysical studies, as well as shallow drilling that established several lithium-boron-potassium anomalies. The company is now going to focus on these.
Obviously, positive drill results from Phase 2 exploration should provide an imminent catalyst to the share price. Another upside comes from the company’s ongoing land acquisition. In our opinion, it can increase its 20,790 acre Nevada portfolio significantly. Expanding at the current clip, by the end of the year American Lithium may have as much as 55,000 acres of land. The company’s management told us that their plan is not only to accumulate land but also de-risk its assets through exploration. The current underground modeling work, exploration permits, and new land acquisitions tell us that the company delivers as promised.
When it comes to lithium, land accumulation is a crucial factor in valuation, especially this early on. The amount of lithium in brine can be directly correlated to amount of acreage a company owns, versus other commodities where the size of a land package does not necessarily imply a larger resource size. When looking at American Lithium using this metric, they are the cheapest relative to the best juniors in Nevada:
On the financial side, we were pleased to see American Lithium expand its reach to Europe. In June, it started trading on the Frankfurt exchange (symbol 5LA).
Dual-listing will provide the company with extra liquidity. For an early-stage venture liquidity is critically important to attract new shareholders and keep the existing ones happy. American Lithium’s team does the right thing here.
However, the listing was a precursor to something else. It provided the company with access to European capital, and now local investors can buy American Lithium’s shares on home turf. In fact, the management told us that the company is going to start meeting potential investors shortly.
We admire the speed at which the company’s team executes their multi-pronged strategy. One of the reasons we believe that they will continue to do so is the fact that they have a lot of “skin-in-the-game.” We learned that almost two-thirds of the company’s shares are the hands of insiders, associates, and partners. This will change as new investors join in, but it is enough to get us convinced that the management will do what it takes to push its goals forward.
Some of those goals will include shallow and deep-level drilling at Fish Lake. This is a multi-zone project, which gives the company diversification benefits and lowers risk. Expanding land holdings improves the odds of defining a resource in excess of at least 4 million tonnes. This is realistic, given the scope of the Fish Lake Valley lithium brine basin, which shares a lot of characteristics with Clayton Valley Basin where the Chemetall Foote lithium operation is located.
This brings us back to the original thesis: American Lithium has multiple reasons to succeed. It has an excellent management team that is experienced in technical aspects of mining and has the track record of utilizing an acreage accumulation strategy. Its properties are located close to a potential acquirer in a top-notch mining jurisdiction. The company is active at telling its story to potential investors on both sides of the Atlantic. These pieces of the puzzle fit together into a story that, we believe, has great investment potential.
Palisade Global Investments Limited holds shares of American Lithium. We receive either monetary or securities compensation for our services. We stand to benefit from any volume this write-up may generate. The information contained in such write-ups is not intended as individual investment advice and is not designed to meet your personal financial situation. Information contained in this report is obtained from sources we believe to be reliable, but its accuracy cannot be guaranteed. The opinions expressed in this report are those of Palisade Global Investments and are subject to change without notice. The information in this report may become outdated and there is no obligation to update any such information. Do your own due diligence.