Lake Resources NL “should trade at a premium relative to its peers due to low environmental impact development plans”: Roth Capital Partners

The company’s goal is to complete the DFS and ESIA in 2021 and to be able to fund and develop Kachi by the end of the year.

Lake Resources NL (ASX: LKE) (OTCMKTS: LLKKF) (FRA: LK1) has been reported by Joe Reagor of Roth Capital Partner as on the verge of developing his Kachi project in Argentina, with the broker giving the company a rating of PURCHASE and a Target price rating of $ 0.60 A.

Today the shares have traded as high as A $ 0.425 and the market cap of the company is approximately A $ 359.2 million.

Reagor said: “Since we believe the LKE process has a low environmental impact, we believe it should sell for a higher price than conventional brine projects.

“Ultimately, we believe that the majority of the company’s current market value is attributed to the Kachi project and that there is significant potential to generate shareholder value through exploration of its other projects. “

In addition to its flagship Kachi project, the company also has three brine projects (Cauchari, Olaroz and Paso) in the heart of the lithium triangle and a pegmatite project in the province of Catamarca in Argentina.

Cleaner lithium production

The broker said, “We believe that as the demand for electric vehicles increases, it is likely that consumers will focus on the entire supply chain of the car they are buying.

“We believe electric vehicle manufacturers see this demographic shift on the horizon and have started looking to invest in producing lithium from sources with the lowest environmental impact.

“This will lead to significantly higher valuations for lithium companies that either have a low impact production process or are located in first world countries that demand higher environmental standards.

“We also believe that the process Lake Resources plans to use at Kachi has one of the lowest possible environmental impacts based on the technologies currently available.”

Direct extraction process

While most of the lithium assets developed in the Lithium Triangle produce using solar evaporation ponds, LKE intends to use a proprietary direct extraction process in partnership with Lilac Solutions.

The direct extraction process works by pumping lithium brine to the surface, then extracting the lithium before returning the majority of the brine to the ground.

This process has a much lower environmental impact with other benefits including a smaller surface footprint, a cleaner and purer produced form of lithium, and a scalable process.

The broker said: “Given the significant advantages of direct mining over traditional evaporation, we believe it is likely that direct mining will become the dominant process for producing lithium from brine resources. in the future.

“In our opinion, companies like LKE just need to demonstrate a proof of concept on a commercial scale before the industry looks to move in this direction.

“Lake Resources is at the forefront of commercializing this process and the company has, in our opinion, a leading advantage in the lithium triangle. “

Project location map

Other projects offer upside potential

The company’s projects in Cauchari, Olaroz and Paso in Argentina adjoin the existing evaporative production operations of Orocobre Limited (ASX: ORE) (OTCMKTS: OROCF) (TSE: ORL) (FRA: 3O1) and the developing company Lithium Americas Corp (NYSE: LAC) (TSE: LAC) (FRA: WUC1) and Ganfeng JV.

Reagor said: “Since these projects are adjacent to existing brine resources, we believe it is likely that they could also contain significant lithium deposits.

“In order to unlock this potential, the company intends to spend A $ 1.0 million exploring the projects in 2021.

“Based on the results of this work, we anticipate an increase in future exploration budgets. “

Notably, the Catamarca project is a pegmatite-style deposit while the region has a history of small-scale lithium spodumene production.

The broker said, “Ultimately, we think this project is the last in the line for the company because it would not lend itself to brine extraction technologies.

“For the combination of these assets and the future option they offer, we assign a value of AU $ 50 million.”

Kachi development decision

In 2020, the company released a PFS that showed an after-tax NPV of US $ 748 million and an after-tax IRR of 22%.

The PFS also predicted an initial capital budget of US $ 544 million, an operating cost of $ 4,178 per tonne of LCE and an initial mine life of 25 years, which consumes only the indicated portion. the estimate of the company’s resources.

Reagor said, “Our initial assessment of the company is based on the PFS of the company.

“Normally at the PFS stage, we would assign a valuation of 30-50% of the after-tax NPV, but in the case of LKE, we chose to assign a valuation of 60% due to our anticipation of a market premium. . “

The company is now working on a DFS with an estimated cost of US $ 10 million.

As part of the DFS, the company operates a pilot plant in California and an on-site demonstration plant to produce five tonnes of lithium carbonate.

The company’s goal is to complete the DFS and ESIA in 2021 and to be able to fund and develop Kachi by the end of the year.

Direct extraction process from the lake

Lithium Price Outlook

Given the continued growth in demand for electric vehicles in the future, lithium prices are likely to come under upward pressure. However, the broker maintains a bullish outlook for the price of lithium as demand for lithium is expected to outpace supply growth over the next decade. .

“Over the longer term, we expect the lithium carbonate price to average $ 12,000 per tonne, while we estimate a price of $ 14,000 per tonne for lithium hydroxide.

“We note that this is significantly higher than the current reported prices of approximately $ 6,000 and $ 7,000, respectively.

“However, we note that the growth in sales of electric vehicles was moderate in 2020 due to the pandemic.”

The term “declared” is used because lithium prices are not readily available and the quality of lithium products is not constant, which means that there are usually large variations in declared prices.

Reagor said, “Although we use these prices as a basis for evaluating lithium projects, we note that it is likely that lithium development companies will seek to sign off-take agreements with battery manufacturers, which would then stabilize the prices they receive.

“However, if our view that the demand for electric vehicles will significantly outpace the growth in lithium production over the next 10 years materializes, it is likely that there will be periods when spot lithium prices rise sharply. above our medium and long term forecasts.

“We believe this provides an additional advantage for lithium stocks compared to our estimates and valuations.”

Prospects for risks related to lake resources

Reagor noted the following risk outlook for the company

  • Political risk – Although most mining jurisdictions have known laws, there is the potential for these laws to change, and LKE has similar political risk to other companies in the lithium triangle in Argentina;
  • Commodity price risk – This risk is not only related to finished products, but can also relate to the costs of inputs and substitute products. LKE’s most significant commodity price risk is lithium, but the company is also likely to have other commodity price risks such as energy price;
  • Operational and Technical Risk – Despite the completion of resource estimates, deposits may still vary significantly from expectations and unpredictable problems may arise with mining and exploration activities. LKE has operational and technical risks similar to those of other direct mining technology companies;
  • Pre-Income Risk – There can be no assurance that LKE will ever produce income or achieve positive cash flow, as such it is likely that the business will need to raise additional capital; and
  • Market Risk – Although most natural resource companies are more closely tied to the performance of commodity prices, business cycle forces or economic crises can have a significant impact on a company’s valuation. LKE has a market risk similar to that of other lithium development companies.