Recommendations:
I recommend taking a long position with Lithium Americas (NYSE: LAC) over the next 2-3 years. Lithium Americas has a $555 million dollar market capitalization and is working on the extraction and processing of lithium. The company owns one project in northern Nevada’s McDermitt Caldera region. The current trading price of LAC at $2.93 per share puts the company significantly undervalued.
Bulls Say:
The company’s access to the Mcdermitt Caldera puts the company at a massive advantage
The price of lithium will remain above the cost of production for the foreseeable future
The net asset value of the company far exceeds the current stock price
Bears Say:
Electric vehicles are being adopted at a slower anticipated rate, combined with other lithium projects coming online faster, there is going to be an oversupply of lithium.
The clay based lithium at Thacker pass will likely cause the lithium produced to have a higher than anticipated cost
Delays with permitting and operation could cause the mine to be fully operational longer than expected
Recent News:
This past April, LAC announced that Orion Resources has fully funded Phase 1 of Thacker Pass. This is great news for the company, as it keeps LAC’s timeline for Phase 1 of the project on target for 2027. Around 60% of the engineering for Phase 1 is now complete; the company is making massive strides towards operating by 2027. Once open, LAC is predicted to produce 40,000 metric tons of lithium carbonate, enough for 800,000 electric vehicles. Using the current 4-year low of lithium prices at $11,026 per tonne, LAC can expect $441 million in revenue. Now I would like to make further calculations in regard to LAC, however the implications of lithium prices in my argument are not the spotlight.
Upside:
The main upside for Lithium Americas from its assets values. LAC has assets valued at $1.04 billion USD, and a small amount of liabilities only at $99 million. Solely based on an asset value the companies shares are each worth about $4.23. I think the fair value for the company should be based off of the assets value for Lithium Americas. Until Lithium Americas starts mining lithium and refining the lithium the fair value of the company is $4.23 per share.
Economic Moat: Narrow
While Lithium Americas is the first lithium producer to extract lithium from clay on such a scale, there are other factors that cause the company’s business strategy to lack a wide moat. Brine mining, most common in Chile and Argentina, is generally cheaper at producing lithium when compared to hard rock extraction. Potentially cheaper lithium from South America could undercut the lithium from the McDermitt Caldera.
Government Support or Risk?:
Currently in America, over 50% of the lithium used for manufacturing has been imported from other countries. With current tariff wars being thrown around, American companies like GM know the most reliable and cost-efficient sources of lithium will be American lithium. The Trump Defence Protection Act could pose a possible risk for Lithium Americas. The Defense Protection Act will make it easier for other mining companies to set up shop and start the mining process in America. With an easier permitting process and the federal government’s ability to speed up mining projects, the potential for another competitor to dig new ground is present. In addition, the Trump administration removed other lithium-reliant products like solar modules, heat pumps, and fuel cells. With less government involvement to produce more of these lithium-reliant items, the Trump administration will likely harm the demand for lithium.
Increased EV Demand:
Although EV demand has slumped in the past two years, the demand for EVs is being understated by the market. I am more bullish about the EV market in 2030 than currently; according to estimates, I believe the EVs will account for 40% of cars sold in the USA by 2030. This increase in EV demand will increase the demand for lithium and subsequently raise lithium prices. Assuming EV sales more than double by 2030, the price of lithium per metric ton should increase to around $20,000, which will bring in more revenue for lithium miners like LAC.
Bottom Line:
I believe the fair market value of Lithium Americas is best based on its asset value, and that fair value is $4.23 per share. Until the lithium is extracted from the clay on a large and efficient scale, the company should be valued on its assets. In summary there is a 40% potential upside to Lithium Americas.