Lake’s Kachi Lithium project in Argentina is advanced, with construction expected to begin in mid-CY22 and first production scheduled for 2024 (25,000 tonnes per year).
Lake Resources NL (ASX:LKE, OTCQB:LLKKF) is moving towards developing the Kachi Lithium project in Argentina which will use a direct lithium mining (DLE) process to extract lithium through ion exchange.
Euroz Hartleys sees the potential for DLE to disrupt mid-term industry forecasts by bringing large volumes of low-cost, high-quality battery chemicals in a shorter time frame.
Western Australia’s largest stockbroker launched LKE as it is an advanced DLE developer.
LKE remains high risk as it heads into development, but without risk it has a strong valuation upside, according to Euroz Hartleys.
Here is an excerpt from the initiation report:
LKE’s Direct Lithium Extraction (DLE) process uses ion exchange to extract lithium. Ion exchange is a common technology, but it has never been used for lithium brines because
a. The purity of the lithium chemical was not required / demanded;
b. Supposed long-term lithium selling prices meant that the DLE process was not profitable;
Neither is true anymore. Product quality/purity specifications have increased significantly and long-term lithium price assumptions have also increased.
Consensus long-term price assumptions are often set to encourage significant conversion of spodumene/spodumene and conventional brines (with their long lead times and commissioning risks). Instead, we see the potential for DLE to disrupt mid-term industry forecasts by bringing large volumes of low-cost, high-quality battery chemicals over a shorter period of time. This should still mean that lithium prices need to be high, but perhaps not as high as the worst quartile brine and spodumene developers are demanding, and it may also mean that supply can be added to the market in faster turnaround times than built-in spodumene/converters or brines. Therefore, tracking DLE is very important for mid-term lithium supply/demand models.
We are initiating on LKE as it is an advanced DLE developer. It remains high risk as it moves towards development, but without risk it has a strong upside in valuation. Lithium investors are also expected to follow closely as the DLE industry leader.
LKE is developing the Kachi project (100% LKE, 75% sale) in Argentina alongside its partner Lilac (25% conditional). The project is very advanced, with construction expected to start mid-CY22. The first production is scheduled for 2024 (25ktpa). We assume an extension at 51ktpa. The estimated PFS capital expenditure is US$544 million and cash costs US$4.2k/t (we assume cash costs of US$6,000/t in our model).
Based on June 22 options (A$60 million outstanding principal), as long as the stock price is above the option strike price (75 cps), this means that, on a combination 70/30 debt/equity, LKE only needs about AUD 50-70 million. additional equity to finance the construction.
According to our estimates, LKE is trading on a maximum net debt and a fully funded EV/EBITDA of 8.5x FY25 and 5.4x @ 50ktpa on a base estimate and using spot prices of 3.7x FY25 and 1, 8x @ 50ktpa. These are attractive to a future lithium producer, particularly as an early adopter of new techniques that could enable substantial growth if applied to further brine acquisitions.
We start with a speculative buy recommendation. Our valuation is $0.76, assuming LC prices of US$13,000. Our spot price valuation is $2.92. We note that lithium shares are trading at a premium to our valuations, and therefore our price target is set at $1.28/sh.
- Demonstration plant – March Qtr 2022
- DFS – Quarter June 2022
- Abduction partners – June Qtr 2022
- Fid & financing – Jun Qtr 2022
- Construction site – 2H CY22
- First production – 2023