Lithium Americas (Argentina): significant growth potential supported by quality assets

Lithium Americas (Argentina) Investment Overview.

With lithium prices falling, most stocks in the sector witnessed panic selling. Undoubtedly, lower lithium prices mean cash burn and project execution delays. These factors had to be updated in lithium stocks. However, the markets are trending to overreact and I see the same happening for lithium stocks.

For value investors, there are some good opportunities at undervalued levels. A company that deserves attention is Lithium Americas (Argentina) Corp. (NYSE:LAAC). I initiate LAAC stock coverage with a “Strong buy” rating and an investment horizon of 36 months.

It’s worth noting that LAAC stock is down 60% year-to-date. A current market valuation of $345 million looks attractive, and the downside appears to be capped. On the other hand, the potential for growth is significant. This thesis will detail the factors that support my optimistic view.

Lithium is ready for recovery

There is no doubt that Lithium Americas (Argentina)/Lithium Argentina has high quality assets. However, the basis for a rally in LAAC stocks from oversold levels is a reversal in lithium prices. So let’s start the discussion with the factors that point to a potential bottom for lithium.

I think a big catalyst for lithium is the reduction in production or the reduction in investment by some of the big lithium producers. There is already news about this. CATL, one of the world’s largest battery makers, plans to “make adjustments to lithium carbonate production in Yichun.” The company’s mine is one of the major reasons for China’s oversupply of lithium. This news sparked positive price action among all lithium mining stocks.

Linda Zhang, head of battery materials for Asia Pacific at CRU Group, believes project delays could peak next year. This “could tighten the market balance in the medium term”.

Therefore, the downside of lithium is likely to be limited. In the coming quarters, the supply-demand gap is likely to narrow on a relative basis. Therefore, I expect a gradual rise in lithium prices, and this will support a rally in LAAC stock from oversold levels.

In fact, LAAC shares recently hit 52-week lows of $2.07. The stock is already 20% higher and I expect the positive momentum to continue.

LAAC’s asset valuation indicates significant growth potential

It is worth noting that the company is still in the early stages of commercialization. At this point, individual asset valuation could be a good indicator of growth potential.

Lithium Argentina owns 44.8% of the shares in the Caucharí-Olaroz project, 46.7% owned by Ganfeng and 8.5% by JEMSE, a mining investment company.

The asset has a life of 40 years and an annual production capacity of 40,000 tonnes per year of battery-grade lithium carbonate. Although the asset has already been traded, let’s first focus on the net present value after tax.

Assuming an 8% discount rate and a base NPV, the asset value is $1.9 billion. With Lithium Argentina holding a 44.8% stake, the company’s share of NPV after tax comes to $876 million. In my opinion, this is a conservative estimate because the price of lithium carbonate is $12,000 per ton.

In the next five to six years, the world could return to a tight supply demand scenario or a supply shortage. Benchmark Mineral expects the lithium shortage to return at the end of the decade. If the high-case NPV is considered, the company’s share of the asset value is $1.1 billion. Clearly, Lithium Argentina appears undervalued at a current market valuation of $345 million.

Furthermore, Caucharí-Olaroz is not the only asset. The company’s Pastos Grandes asset was acquired from Millennial Lithium in early 2022. The project is in a feasibility stage, but there is a good valuation indicator.

In March 2024, Lithium Argentina signed an agreement with a subsidiary of Ganfeng Lithium to sell a 15% stake in Pastos Grandes. This transaction was completed in August 2024, whereby Ganfeng Lithium acquired $70 million in newly issued shares of Proyecto Pastos Grandes (the wholly owned Argentine subsidiary that owns the Pastos Grandes project).

Given the transaction, the Pastos Grandes asset is valued at approximately $470 million. I must point out here that the business is at a time when lithium prices have fallen. It would be fair to assume that asset valuation will be significantly higher in the coming years. Even if we consider the current valuation as a base case, the company’s share of the asset is valued at $400 million.

In addition, Lithium Argentina acquired Sal de la Puna in April 2023 in a full deal with Arena Minerals. The total value of the purchase was 227 million dollars. For the base estimates, we considered the same as the valuation of current assets.

Caucharí-Olaroz, Pastos Grandes and Sal de la Puna therefore have a combined valuation estimate of US$1.5 billion (base case). This underscores my view that LAAC stock is significantly undervalued.

Increasing production and cash flow from Caucharí-Olaroz

It is still a few years before Pastos Grandes and Sal de la Puna start contributing to increased production and revenue. However, for the next few years, Caucharí-Olaroz is likely to create value. This view assumes that lithium will grow gradually over the next 36 months.

To put things into perspective, Lithium Argentina reported Q2 2024 production from Caucharí-Olaroz Stage 1 at 5,400 tonnes. On a quarterly basis, production increased by 24%. The company targets production of 20,000 to 25,000 tonnes of lithium carbonate in 2024.

In the first stage, production can, however, be increased to 40,000 tons per year. Once Phase 2 production begins, it will add 20,000 tonnes per year of lithium carbonate production. The Caucharí-Olaroz asset therefore has a peak production capacity of 60,000 tpa. Given Lithium Argentina’s 44.8% stake, the company’s attributable production is likely at 26,880 tpa.

It is worth noting that Lithium Argentina has been running steady-state operations close to the rated capacity of 40,000 tpa until the end of 2024. This would imply strong year-on-year production growth in 2025. I believe that the progress of stage 2 would depends on the trend of lithium prices over the next 12 months.

Besides the visibility of production growth, the reason to be optimistic about Caucharí-Olaroz is the excellent economics of the project. As indicated above, the project has an IRR of 45% in a base case scenario. For Q2 2024, Lithium Argentina reported positive operating cash flows when adjusted for changes in working capital.

Digging deeper, the table below provides the total operating cost per ton of lithium carbonate.

At $3,579, the operating cost is attractive even considering the base scenario of lithium price at $12,000 per tonne. It’s worth noting that lithium carbonate (per ton) averaged $68,100 in 2022 and $46,000 in 2023. I don’t expect these euphoric prices even in the next 36 months.

However, even with lithium carbonate trading between $20,000 and $30,000 per tonne, there is visibility for robust cash flows. To put things into perspective, Lithium Argentina has guided for negative cash flows in its first two years of operations. In the third year, the cash flow is likely to be $52 million annually. Thereafter, annual cash flow is targeted at $212 million. This is based on the assumption that lithium carbonate is trading at $12,000 per tonne.

As a top case scenario, if lithium carbonate traded at $24,000 per tonne by 2026 or 2027, the annual cash flow would be $424 million. This would involve cash flows attributable to Lithium Argentina at US$190 million. That’s the potential of an asset that has a 40-year life and further underscores my view that Lithium Argentina is undervalued at a current market valuation of $345 million.

Final views

Based on asset potential and cash flow visibility, I think LAAC stock is significantly undervalued. Therefore, the deep correction presents a good buying opportunity. However, I would look at an investment horizon of at least 36 months for substantial gains. It would be unrealistic to expect a “V-shaped” recovery in lithium prices. However, I expect a gradual upward trend as miners scale back their production and investment plans.

Amidst these positive aspects, the major risk factors are the execution and financing of the development of major projects. A key risk mitigation factor is the association with Ganfeng Lithium (OTCPK:GNENF) (OTCPK:GNENY). The latter is one of the world’s largest lithium miners and will enhance Lithium Argentina’s execution capabilities.

At the same time, there is financial support and I expect Lithium Argentina to raise funds through the additional stake sale. Of course, with projects at the feasibility stage, there is a case for potential equity dilution. I don’t see this as a concern if lithium is in a renewed uptrend.

The company also indicated that it is working with Ganfeng to “pursue additional long-term financing options to obtain improved credit conditions in Argentina.” This includes the possibility of a local bond offering. Currently, the focus of Lithium Argentina and Ganfeng is to expand the debt maturity profile. In the long term, there is ample cash flow visibility to reduce leverage.

For now, Lithium Argentina reported a cash reserve of USD 96 million as of Q2, 2024. If unused credit facilities are included, the total liquidity reserve increases to USD 171 million. With the completion of the Pastos Grandes transaction, there is an additional cash infusion of $70 million. The current liquidity buffer is therefore healthy to support growth plans for the coming quarters. Overall, Lithium Argentina stock is worth considering in the medium to long term. I expect significant value creation once lithium goes up.