Equity Research Please see end of this report for important disclosures September 23, 2010 Rating: SPECULATIVE BUY Lithium Americas Corp. Target Price: $2.50 (LAC-TSX) All figures in C$, unless otherwise noted. Charging Up Initiating Coverage: Lithium Americas Corp. (LAC) has recently begun a pilot plant operation at its signature property, Salar de Cauchari (Cauchari), after raising $45 million through an initial public offering (IPO) in May 2010. The capital will be used to bring the project closer to commercial production. Strategic Partners: LAC has signed Magna International Inc. and Mitsubishi Corporation as strategic investors. Magna and Mitsubishi hold 13.3% and 4.1%, respectively, of LAC. Both companies also entered into off-take options, which could provide LAC with interest free debt for up to 37.5% of capital costs. The off-take is for up to 37.5% of LAC’s lithium production. There is no equity dilution inherent to these agreements. Large Quality Resource: Cauchari’s inferred resource estimate of 4.9 million tonnes of lithium carbonate (LCE) and 7.7 million tonnes of potassium would make Cauchari larger than Rockwood’s Salar de Atacama and FMC’s Salar de Hombre Muerto. Lithium concentrations are attractive, averaging around 600 milligrams per litre (mg/L) with good brine chemistry and a low magnesium to lithium (Mg:Li) ratio, making the brine amenable to economic recovery, in our estimation. Drill results released on August 26 indicate the potential to increase both resource size and lithium concentrations beyond the May 2010 NI 43-101 estimates. We are initiating coverage of LAC with a SPECULATIVE BUY recommendation and $2.50 target price, based on a DCF model. Recent Price: $1.70 52 Week Range: $1.04 – 2.30 Shares O/S: basic 73.5 million f.d. 75.8 million Market Cap (f.d.): $128.9 million Average Daily Vol. (3 mo.) 100,000 shares Fiscal Year End: Feb 28 Cash (May 31/10): $44.5 million Company Description: Lithium Americas Corp is a Canadian based company listed on the TSX focused on the development of a low cost lithium and potassium brine project in the Puna region of Argentina. The company has evidence of attractive lithium grade, relatively low levels of magnesium and recently began a pilot study. Jon Hykawy, Ph.D., MBA Clean Technologies & Materials 647.426.1656 [email protected]Jonathan Lee, MBA Associate 647.426.1674 [email protected]Gabriela Casasnovas Associate 647.426.0287 [email protected]Source: www.bigcharts.com
Transcript
Equity Research
Please see end of this report for important disclosures
September 23, 2010
Rating: SPECULATIVE BUY Lithium Americas Corp. Target Price: $2.50 (LAC-TSX) All figures in C$, unless otherwise noted. Charging Up
Initiating Coverage: Lithium Americas Corp. (LAC) has recently begun a pilot plant
operation at its signature property, Salar de Cauchari (Cauchari), after raising $45 million through an initial public offering (IPO) in May 2010. The capital will be used to bring the project closer to commercial production.
Strategic Partners: LAC has signed Magna International Inc. and Mitsubishi Corporation as strategic investors. Magna and Mitsubishi hold 13.3% and 4.1%, respectively, of LAC. Both companies also entered into off-take options, which could provide LAC with interest free debt for up to 37.5% of capital costs. The off-take is for up to 37.5% of LAC’s lithium production. There is no equity dilution inherent to these agreements.
Large Quality Resource: Cauchari’s inferred resource estimate of 4.9 million tonnes of
lithium carbonate (LCE) and 7.7 million tonnes of potassium would make Cauchari larger than Rockwood’s Salar de Atacama and FMC’s Salar de Hombre Muerto.
Lithium concentrations are attractive, averaging around 600 milligrams per litre (mg/L) with good brine chemistry and a low magnesium to lithium (Mg:Li) ratio, making the brine amenable to economic recovery, in our estimation.
Drill results released on August 26 indicate the potential to increase both resource size and lithium concentrations beyond the May 2010 NI 43-101 estimates. We are initiating coverage of LAC with a SPECULATIVE BUY recommendation and $2.50 target price, based on a DCF model.
Recent Price: $1.70
52 Week Range: $1.04 – 2.30
Shares O/S: basic 73.5 million
f.d. 75.8 million
Market Cap (f.d.): $128.9 million
Average Daily Vol. (3 mo.) 100,000 shares
Fiscal Year End: Feb 28
Cash (May 31/10): $44.5 million
Company Description: Lithium Americas Corp is a Canadian based company listed on the TSX focused on the development of a low cost lithium and potassium brine project in the Puna region of Argentina. The company has evidence of attractive lithium grade, relatively low levels of magnesium and recently began a pilot study.
Jon Hykawy, Ph.D., MBA Clean Technologies & Materials 647.426.1656 [email protected]
We are initiating coverage on Lithium Americas Corp, due to continued positive developments at its most promising and developed property, Salar de Cauchari in Jujuy Province, Argentina. With its continued and accelerating progress at Cauchari, our initial price target is $2.50. The target was derived using the company’s production timeline, information on Cauchari provided by the company, our own estimates regarding the cost of lithium production using solar evaporation from the chemistry of this brine, the NI 43-101 compliant technical report, and other publicly available data.
LAC holds claims to approximately 43,623 hectares (HA) at Cauchari and Salar de Olaroz (Olaroz) in northwest Argentina, near a national highway and available electricity. The company has issued a NI 43-101 compliant technical report that estimated resources on the northern portion of Cauchari. Within this confined resource area, the inferred in situ resource of lithium metal is 926,000 tonnes and 7.7 million tonnes for potassium. The brine chemistry is encouraging with a low Mg:Li ratio of 2.84 and average concentrations for lithium and potassium of 584 mg/L and 4,820 mg/L, respectively. Recently released 2010 drill results have exceeded these values, with average concentrations of 709 mg/L and 6,400 mg/L for lithium and potassium. The size of the Cauchari inferred resource is, at present, larger than FMC’s Salar de Hombre Muerte and over three times the size of Orocobre Limited’s (Orocobre) Salar de Olaroz just to the north, according to the most recent publicly available data. This resource, with its attractive brine chemistry, could make LAC one of the largest and least expensive producers in the lithium carbonate market. The company is continuing rapid progress toward production. It is currently performing additional investigations to refine its understanding of the distribution of lithium and potassium and to evaluate aquifer hydraulics. In parallel, LAC is studying metallurgy and processing as part of its pilot tests.
To firm up its capital position, LAC has reached agreement with two strategic partners, Magna International Inc. (NYSE:MGA) and Mitsubishi Corporation (TYO:8058). Magna has a 13.3% equity stake through its subsidiary, Symatec Corporation, and Mitsubishi owns a 4.1% equity position. The two firms have also entered into off-takes for lithium, and will fund a portion of the capital costs, relative to the amount of lithium each is expected to purchase.
LAC has significant claims on a large salar near good infrastructure, with plenty of lithium in good concentration, a good Mg:Li ratio and acceptable sulphate levels. Additionally, LAC has signed two strategic partners with equity stakes and off-take options, significantly de-risking this project. We believe that Lithium Americas has the potential to become a major player in the lithium industry. We are initiating coverage with a SPECULATIVE BUY recommendation and a target price of $2.50.
Lithium is a critical ingredient in the manufacturing of rechargeable lithium-based batteries. While certainly not a major factor in the final cost of the cell, without lithium there can be no lithium battery. Other elements can be used to make other rechargeable batteries, but to date, none of these alternatives has been shown to have the same performance and costs as lithium batteries.
While the lithium market was roughly 118,000 tonnes of Li2CO3, or LCE, in 2008, and a heavily recession-impacted 85,000 tonnes in 2009, it is important to note that about 23,600 tonnes of this demand is from rechargeable batteries alone. Of course, this is up from essentially zero demand from batteries in 1999, so battery demand growth has been, and continues to be, robust. Our previous report, Lithium: The Next Strategic Material (Sept. 4, 2009), outlined our projections for supply and demand, and we believe that battery demand alone will grow to 56,400 tonnes of LCE by 2014, driven both by increasing penetration and use of small-format batteries in consumer electronics and by large-format batteries in vehicular use.
According to TRU Group, approximately 72% of the lithium produced in the world today comes from brine-based suppliers. This amounted to some 85,000 tonnes LCE in 2008. Brine-based supply is the least expensive source of chemically-available lithium (roughly $2,300 per tonne of LCE, all-in cost, versus as much as $6,500 per tonne of LCE from underground-mined spodumene), but supplying lithium from brines demands that the producer respect the capacity of its aquifer and ensure that excess pumping does not result in permanent impairment of the resource through depletion or dilution.
Production of lithium from brines is least expensively accomplished using solar evaporation. Foote Minerals has previously disclosed, in US Patent Number 4,261,960, the general method of producing lithium carbonate from the brines of Clayton Valley, Nevada. Brine is pumped into a succession of holding ponds until its lithium concentration rises to 800 ppm. At this point, slaked lime is added as the brine is pumped to a new pond, and Mg in the brine reacts with the lime to create Mg(OH)2, which precipitates out of solution. Mg is separated out as Li concentration increases to perhaps 2,000 ppm. Acid and calcium chloride are then added to remove boron and sulfate from the brine; the brine is then pumped to a further succession of ponds until Li concentration rises and soda ash is added to precipitate out the lithium as Li2CO3, what amounts to lithium-based chalk.
Necessarily, this process requires time. The speed of production is defined by the rate of evaporation of water, locally. In Clayton Valley, from December to March the net evaporation rate is negative — more water falls as snow or rain than evaporates from ponds. As such, Chemetall does not even attempt to use its ponds during winter months. And even in the best environments on Earth, such as the Salar de Atacama in Chile, the time to produce lithium is measured in sizeable fractions of a year, not days or weeks. It is thus impossible, barring stockpiling, for a brine-based producer to respond to sudden spikes in price or demand for lithium. Note that it is during shortages when we would expect demand spikes to be most problematic, so any available stockpiles would likely have already been drawn down.
Northern Chile is one of the driest regions on Earth. Thus, the time to produce lithium from brine freshly drawn from underground is shortest. Since the grades of lithium
found in brines in the classical Chilean salars is very high, appropriate concentrations can be achieved much sooner than in a location such as Nevada. For example, according to SQM COO Patricio de Solminihac, speaking at the 2009 Lithium Supply & Markets Conference in Santiago, Chile, the current grade of Li being extracted from SQM’s Salar de Atacama is better than 2,700 ppm. This means that a producer could skip initial concentration of the brine and move directly to magnesium removal. Required evaporation ponds, and therefore infrastructure costs, are smaller and it is easier to produce relatively more lithium from a relatively small site.
The trade-off in Chile is usually that the important ratio of magnesium to lithium in the brine, a critical factor in the economics of a project, is higher than it is in neighbouring Argentina. Atacama is unusual in that the environment is so dry, magnesium can be crystallized out of the brine, reducing the effective Mg:Li ratio. But usually, one must use a process chemical, lime, to remove the magnesium. Thus, variable costs are generally higher where Mg:Li is higher, but this can be offset by the lower capital cost of the ponds on sites where Li concentrations are high, and by the lower working capital levels required by more rapid production of lithium; a company does not have working capital in the form of process chemicals tied up for as long a period of time.
In the case of Cauchari, the all important Mg:Li ratio is low and capital costs will be reduced with production scale. Additionally, Cauchari lies near the east side of Highway 70, providing easy access to transport, and is just north of the inter-Andes transmission line, providing plentiful energy.
We recently completed a visit to Cauchari, the main focus of Lithium America’s efforts, to date. Cauchari is in the Jujuy Province of northwest Argentina at approximately 3,950 metres above sea level. The property is located in an area with good infrastructure. Paved national highways, RA-51 and RA-52, run south and north of Cauchari, respectively. Access to the interior is possible through Highway 70, which runs along the west side of the salar. Additionally, the inter-Andes transmission line, linking Argentina’s power grid to Chile’s northern electric grid, lies just south of the property. Based on the published NI 43-101, there is an in situ resource of 4.9 million tonnes of LCE and 14.7 million tonnes of KCl. In addition to a large quantity of lithium, the brine chemistry is fairly attractive. The Mg:Li ratio is a low 2.84. This will reduce the amount of lime required to remove the magnesium per tonne of lithium produced, and thus minimize operating expenses. However, the SO4:Mg ratio is approximately 10.8:1 on mass basis, which is significantly higher than the required ratio of 4:1 on a mass basis to remove the calcium after lime is used to remove magnesium. During the liming process, lime is introduced to the brine to remove Mg as Mg(OH)2. Subsequently, the resulting calcium ions (originally in lime) are removed with sulphate from the system as CaSO4. Additional sulphate will saturate and crystallize as sodium sulphate and potassium sulphate. As metallurgy research is advanced, it may be necessary to add calcium chloride to remove the overabundance of sulphate. However, we do not believe that this will be a significant cost contributor, and that operating costs will be competitive with other low cost lithium producers. LAC is continuing to drill to meet its goal of establishing a measured resource by the end of 2010. LAC has completed a seismic survey encompassing 12 seismic tomography lines totalling 50 km in length, with confirmation through diamond drilling. The results show that from 50 metres to 400 metres, the aquifer is fairly continuous and has decent porosity for groundwater extraction. As of June, LAC had drilled an additional 15 holes in 2010 for a total of 4,000 metres of drilling. Prior results showed an average lithium grade of 584 mg/L. During our latest visit, we saw that the company has begun its pilot testing to optimize its extraction process. This included the installation of an onsite evaporation facility, as well as analytical equipment for rapid testing and continuous weather measurements. With the construction of this pilot plant, Lithium Americas hopes to produce small quantities of lithium carbonate by the end of 2010. This will be encouraging news and evidence of the speedy progress being made at Cauchari.
Olaroz and Cauchari are both within the Olaroz-Cauchari hydrographic basin which is an elongated depression approximately 150 km in length (north to south) and 10 to 40 km in width (east to west). Olaroz lies to the north and Cauchari to the south. Unconsolidated and semi-consolidated sediments lie in the basin. It is within these sediments that the groundwater flows. The two salars are separated by a large alluvial fan created by the Rio Ola, creating a groundwater divide (fresh water). Additionally, groundwater inflow from the Rio Ola is toward the central axis of each salar and provides a surface water hydraulic gradient away from the alluvial fan toward the salar. However, the salars are most likely hydraulically connected. The exact composition of the alluvial fan is currently unknown, but we do know that it is made of sediments that will have some porosity, enabling a hydraulic connection between the two salars. We have, in the past, cautioned investors about this scenario, and the benefits of having a single claimant and developer on any one salar. Although it is unknown if pumping brine from Cauchari will have a long term impact on Olaroz, or vice versa, the risk appears minimal to us, given the size of the respective salars, the 16 km distance between them, the surface water hydraulics, and the alluvial fan separation. To date, LAC has focused most of its efforts on investigating Cauchari, and Orocobre has been focused on its work at Olaroz. However, Cauchari is not entirely owned by LAC, nor is Olaroz completely owned by Orocobre. The bulk of the claims on Cauchari are held by LAC, but certain claims within the salar are owned by Orocobre. The opposite holds true at Olaroz, where Orocobre owns the majority of mining claims with some claims held by LAC. In Exhibit 3, below, LAC claims are shown in purple and Orocobre claims are shown in yellow. By looking at the claims map, it is easy to see there are Orocobre claims embedded in and adjacent to LAC’s Cauchari claims. Some of the most promising sampling results were produced in close proximity to the LAC-Orocobre borders. While we do not claim to have full knowledge of Argentinean law, pumping groundwater from locations in close proximity to the claims border may lead to potential lawsuits based on water rights. This is a risk that both firms face. To date, there have been no such problems regarding lithium-bearing brines anywhere in Argentina. The two firms are deeply focused on bringing production online, and neither
has the time nor the capital for litigation, in our estimation. Given that neither firm is generating revenue, to date, there is even less incentive to engage in costly litigation. Therefore, we believe that the litigation risk at this time is muted, and that it would be in the best interests of the firms to remove this risk from the table. The simplest option would be to swap claims, so that Orocobre would hold exclusive rights to Olaroz while LAC gains exclusivity at Cauchari.
Exhibit 3 – Claims Map
Source: Lithium Americas Corp.
MUTUALLY BENEFICIAL, AND TWICE AS NICE
Two strategic partners have joined forces with LAC - Magna International, Inc. (through its Symatec subsidiary), and Mitsubishi Corporation both of which are billion dollar firms (by market capitalization). As of June 2010, Symatec held 13.3% of common shares in LAC, and Mitsubishi held 4.1%. The firms also signed similar off-take option agreements. The off-take options give each company the right to purchase lithium carbonate at a 5% discount to market price, and in exchange for the discount, Magna and Mitsubishi will contribute interest-free debt for capital costs, in direct proportion to the percentage of production that each firm may purchase. Magna can purchase up to 25% of production while Mitsubishi can purchase up to 12.5%. Between the two partners, LAC will receive 37.5% of its capital costs in the form of this interest-free debt. The ability to attract two
large and stable strategic investors is a significant victory for LAC. The Interest free loans will minimize dilution of existing shareholders when funds are raised for construction of the project, and will significantly drive down the company’s weighted average cost of capital. Given that Magna and Mitsubishi are invested in LAC, it is highly unlikely that the two firms will purchase lithium from another firm and forego their price discount relative to the market. We believe these two off-take options with Magna and Mitsubishi are extremely advantageous to LAC, and represent the best value-added deals that the company has made to date.
MANAGEMENT
Waldo Perez – President, Chief Executive Officer and Director With 24 years of academic and industry experience in mineral exploration in South America, Mr. Perez directed project generation for Barrick Gold Corp. and IAMGOLD Inc., throughout South America, including Colombia, Peru, Chile, Paraguay and Argentina. Mr. Perez also worked as senior consultant for Apex Geoscience in Edmonton, Alberta and as Country Manager for junior explorer Opawica Exploration Inc. Mr. Perez is currently Interim President and Chief Executive Officer, and a director, of Latin American, a resource exploration company listed on the TSXV. In addition, he has been Acting President and Chief Executive Officer of Latin American since August 2009, Vice- President (Exploration) of Latin American from September 2006 until August 2009, Exploration Manager of Opawica Exploration Inc. in Argentina, a junior exploration company listed on the Exchange, from June 2006 until August 2006, Senior Geologist for IAMGOLD Inc. in Argentina, a mid-tier gold mining company listed on the Exchange, from September 2005 to April 2006, and Senior Geologist for Barrick Gold Corp. in Argentina, a senior mining company listed on the Exchange, from May 2000 to August 2005. Mr. Perez received his Ph.D at Universidad Nacional de Tucuman (Argentina), conducted graduate studies at University of Sao Paulo (Brazil) and at the University of New Brunswick and completed his post-doctoral studies at the University of Alberta. Basil Botha – Director and Non-Executive Chairman Mr. Botha joined Otavi Mining AG in 1974 as a project manager establishing mines on three continents. In 1980, Mr. Botha formed Reef Coal Mining Ltd. in Johannesburg, South Africa supplying Sasol with over 3,000,000 tonnes of coal per annum. In addition, he has extensive knowledge of the minerals and metals markets in Japan, Taiwan and South Korea where he supplied lithium to the ceramics and glass industry from Bikita Minerals, Zimbabwe. Currently, Mr. Botha is President and Chief Executive Officer of G4G Resources Ltd. (“G4G”), a resource company listed on the TSXV. Mr. Botha holds an MBA from the University of the Witwatersrand, South Africa. In addition, he is the President and Chief Executive Officer of G4G since July 2008; President, Chief Executive Officer and Vice-President, Business Development of Cash Minerals Ltd., a junior uranium exploration company listed on the TSXV from May 2005 to December 2009, and Principal of Ram Associates, a private consulting firm from December 2002 to March 2005.
David D’Onofrio – Director Mr. D’Onofrio is the Chief Financial Officer of PowerOne, a merchant bank headquartered in Toronto, Ontario. PowerOne acted as agent in connection with the Corporation’s private placements which closed on July 14, 2009, September 9, 2009 and December 23, 2009 and has been retained to provide advisory services in connection with the Offering. Mr. D’Onofrio is a chartered accountant who has acted in both audit and international taxation advisory roles with two Toronto based public accounting firms where he worked extensively with small/medium sized public companies, with a specific focus on junior resource companies, both foreign and domestic. Mr. D’Onofrio is also a member of the Institute of Corporate Directors and has acted as a corporate director to several publicly listed companies in the past. In addition, he has been the Chief Financial Officer of PowerOne since October 2009, Tax Manager at CollinsBarrow LLP, a Canadian accountancy firm from July 2009 to October 2009, and Tax Manager at Deloitte & Touche LLP, a prominent international accountancy firm from January 2000 to June 2009. W. Thomas Hodgson – Director Mr. Hodgson is a consultant and advisor to the Chairman of Magna, one of the world’s largest automotive companies, having a particular specialization in sourcing venture investment opportunities for the company. Mr. Hodgson also currently serves on the board of Helix BioPharma Corp., a biopharmaceutical company listed on the Toronto Stock Exchange specializing in the field of cancer therapy. Mr. Hodgson holds a M.B.A. from Queen’s University and has over 20 years experience in capital markets research, corporate advisory matters and consulting. He has been a consultant to Magna and Magna Entertainment Corp. since 2006. From March 2005 to March 2006 he served as President and Chief Executive Officer of Magna Entertainment Corp. In addition, he served as a director of MI Developments Inc from September 2004 to March 2005 and President of Strategic Analysis Corporation, a capital markets research firm from November 2002 to March 2005. Douglas Reeson – Director Douglas Reeson, M.B.A., is an independent financial consultant and business executive with experience as an officer and director of a number of junior public companies. Prior to 1991, he held a number of positions in the investment industry including the Executive Director of Listings for the Toronto Stock Exchange, Vice-President and Director of Davidson Partners, Midland Doherty Financial Corp. and Yorkton Securities and, earlier, as an Investment Analyst at BurnsFry. Mr. Reeson resides in Toronto and holds undergraduate and graduate degrees from York University. Mr. Reeson has been the Principal of Reeson and Associates since 1990, Principal of D.G. Imports since December 1999, director of Mega Uranium Ltd. since March 2002, Treasurer and Chief Financial Officer of Mengold Resources Inc. since June 2004, President and Chief Executive Officer of Gossan Resources Limited since September 2004, Director of Colossus Minerals Inc since January 2007, and Chief Financial Officer of Soltoro Limited since May 2008. Franco Mignacco – Director Mr. Mignacco received his MBA from San Andres University, Buenos Aires and his honours degree in Mining at Universidad Austral. Mr. Mignacco is currently the President of Grupo Minero Los Boros S.A., a company that extracts boron from salt lakes in Argentina. Mr. Mignacco is also the proxy (Argentinean legal representative) of
Magna Construcciones, a construction company that recently built the ADY lithium mine in Salar del Rincon, in the Salta Province of Argentina. Mr. Mignacco’s has been a director of the Corporation since July 2009, a proxy of Magna Construcciones since March 2005, and President and director of Grupo Minero Los Boros S.A. since July 2006. Constantine Karayannopoulos – Director Mr. Karayannopoulos, a Professional Engineer and resident of Canada, is President, Chief Executive Officer, and Director of Neo Material Technologies Inc. (“Neo Materials”), a TSX listed company and one of the world’s largest producers, processors, and developers of neodymium-iron-boron magnetic powders, rare earths and zirconium based materials and applications. He was previously Executive Vice President and Chief Operating Officer responsible for the three business units of AMR Technologies Inc. (predecessor company to Neo Materials). Prior to that, at AMR, he held the positions of Vice President, General Manager, Rare Earth Division since September 1998, and Vice-President Sales since May 1995. Mr. Karayannopoulos is a Director of the Canada China Business Council and a member of the Board of Advisors to the Department of Chemical Engineering and Applied Chemistry at the University of Toronto. He holds Bachelor and Master of Applied Science degrees in Chemical Engineering from the University of Toronto. George Pirie – Director Mr. Pirie is an accomplished mining executive with over 29 years of experience in exploration and production companies. He was previously the President and Chief Executive Officer of Breakwater Resources Ltd. and prior to that, he held a series of progressively more senior positions during a distinguished 20 year career at Placer Dome Inc., including Chief Financial Officer, and President and Chief Executive Officer of Placer Dome Canada, and Executive Vice President of Placer Dome Inc. Mr. Pirie also has extensive board of director experience having served on a number of boards, including the Mining Association of Canada. Among other roles, he is currently the Chief Executive Officer of Northern Star Mining Corporation. Raymond Mitchell – Chief Financial Officer Mr. Mitchell has more than 30 years of experience in the financial industry. He has 9 years experience in a variety of finance related roles in the trust/banking industry and 24 years with the Canadian Depository for Securities Limited (“CDS Ltd.”). With CDS Ltd. Mr. Mitchell was the Senior Vice-President of Finance from 1996 to 2005 and in charge of developing and implementing the “SEDAR” system in 1993 to 2001. Currently, Mr. Mitchell is the Chief Financial Officer of Latin American and Red Rock Capital Corp., and is a director of Dumont Nickel Inc. Mr. Mitchell has been the CFO of the corporation since July 2009, CFO of Red Rock Capital Corp., a capital pool company listed on the TSXV since May 2008, and CFO of Latin American since March 2007. Prior, he was the CFO of Carlisle Goldfields Limited, a junior exploration company listed on the Exchange from September 2007 to May 2008; and Senior Vice President of Finance of CDS from 1996 to 2005. Michael Cosic – Vice President, Corporate Development Mr. Cosic is a strategic executive with 17 years of experience in a variety of industries. In addition to a BA and an MBA, he obtained his CFA designation in 1999. Mr. Cosic has spent the last 10 years of his career in corporate development, working for publicly traded multinational organizations seeking growth opportunities via mergers and
acquisitions. He has experience in evaluating, structuring, managing, and executing global transactions. Prior to his corporate development roles, he worked in the venture capital industry. In addition, he has been the Vice President Corporate Development of the Corporation Since December 2009; he was Vice President, Business Development of ADP Canada Employer Services, a business outsourcing solutions company, from July 2006 until May 2009; and Director, Corporate Development of Celestica Inc., an electronic manufacturing services company from May 1999 until July 2006.
VALUATION AND FINANCIALS
LAC is in possession of claims to one of the largest lithium resources in Argentina. Not only is Cauchari a potentially huge source of lithium, but it is also a lithium source with a low Mg:Li ratio of 2.84 and a good lithium concentration at 584 mg/L. We have taken our cash cost per tonne of LCE for this source to be a conservatively high $2,400. This cash cost takes into consideration an attractive Mg:Li ratio, a decent lithium concentration, and the potential use of calcium chloride to remove the excess sulphate. To be more conservative in our DCF model, we have taken into consideration inflation risk associated with Argentina, by increasing the cash cost by 6% starting in 2017, while keeping the revenue stream constant. Annual production is estimated to begin at 10,000 tonnes per year in 2014, ramping up to 20,000 tonnes per year by 2015. Given that we expect Cauchari to be larger than Orocobre’s Olaroz project, a capital cost of $125 million was used based on the $80 to $100 million capex estimate from Orocobre’s preliminary economic assessment (May 2009). Of the required $125 million, we assume that Mitsubishi will provide 12.5% ($15.6 million) and Magna will provide 25% ($31.3 million) of the capex via zero interest loans. In return for these low cost loans from LAC’s strategic investors, a 5% discount was applied on 37.5% of the revenue. We believe a 14% discount rate is appropriate given the stage of the project, the muted litigation risk, and the presence of two strategic investors. Using a 14% discount rate and applying the other assumptions and costs from above, we derive a target price for LAC of $2.50 (see Exhibit 4).
In Cauchari, Lithium Americas has a very large, high-quality brine deposit that will allow LAC to compete on scale with any other brine project in the region. While high sulphate levels may slightly increase operating expenses, the positive attributes of this brine project should make it cost competitive. LAC is well-positioned given its strategic investors, the size and quality of its brine, Cauchari’s good Mg:Li ratio and the rate of its progress to production.
The two major risks associated with the project are that Cauchari is not solely owned by LAC, and that the extent of its hydraulic connection to Olaroz is unknown. When Orocobre begins production and commences pumping brine from Olaroz, the long term hydraulic effects are unknown. Additionally, the legal ramifications associated with not being a sole claimant on the salar represents an unknown level of risk. However, as discussed previously, the risk is currently muted, as both LAC and Orocobre are entrenched within their respective salars.
The intermingled property claims of the two firms are currently of limited importance, in our estimation, and we believe that this will continue to be the case into the future given the priorities of each firm. Further, LAC is well positioned commercially, with one of the largest salars in Argentina, good infrastructure support, good brine chemistry and two large strategic investors. The progress LAC is making at Cauchari is extremely encouraging. Thus, we are initiating coverage on Lithium Americas with a SPECULATIVE BUY recommendation and a $2.50 target price.
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Investment Rating Criteria STRONG BUY BUY
The security represents extremely compelling value and is expected to appreciate significantly from the current price over the next 12-18 month time horizon. The security represents attractive value and is expected to appreciate significantly from the current price over the next 12-18 month time horizon.
SPECULATIVE BUY The security is considered a BUY but in the analyst’s opinion possesses certain operational and/or
financial risks that may be higher than average. HOLD The security represents fair value and no material appreciation is expected over the next 12-18 month
time horizon. SELL The security represents poor value and is expected to depreciate over the next 12-18 month time
horizon.
Other Disclosures
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