Lake Resources provides investors “incredibly cheap” direct lithium extraction exposure: Orior Capital Limited

Lake Resources N.L. (ASX:LKE) (OTCMKTS:LLKKF) (FRA:LK1) has welcomed a research report by Orior Capital Limited analyst Simon Francis which highlights the potential upside for the company’s Kachi Lithium Project in Argentina. Notably, the report flagged that Lake is “incredibly cheap” and assigned the company a valuation of A$1.89 per share - seven times the current share price. Francis said: “Assuming that Lake’s four other projects are being valued at say US$50 million, the market is valuing Kachi at just 10% of its post-tax NPV8 of US$1.6 billion (A$2 billion). “This is incredibly cheap. “Lake’s most obvious peer, Standard Lithium Ltd (OTCMKTS:STLHF) (CVE:SLL) (FRA:S5L), another direct lithium extraction (DLE) based company is currently trading at 107% of its adjusted attributable post-tax NPV8. “On this basis, the market is valuing Lake at a 90% discount to Standard Lithium. “Valuing Kachi at 100% of NPV and other projects at US$100 million, suggests a valuation of A$1.89/share. “This is 7x the current share price.” Kachi advances towards development Over the next year, Lake is expected to complete a number of tests and developments that will significantly advance the Kachi project. This includes expanding and upgrading the resource; completing a definitive feasibility study (DFS) (expected Q1 22); completing an Environmental and Social Impact Assessment (Q2 22); undertaking brine extraction and reinjection tests; further discussions with Export Credit Agencies; further discussions regarding offtake agreements; results from further battery tests at Novonix; a decision on expanding the project to an assumed capacity of 51,200 tonnes per annum (probably later this year); and a potential listing in the US (targeted for Q4 21). The report said: “Once these tests are completed, and given Kachi’s compelling environmental, social, and corporate governance (ESG) credentials and financial robustness, it seems reasonable to expect Lake to trade at a similar valuation as Standard Lithium.” Production in 2H 2024 The Kachi project is expected to commence production in 2H 2024, and to generate annual EBITDA of US$261 million. The analyst said: “Assuming financing of 70% debt and 30% new equity issued at A$1.50/share, and an EV/EBITDA multiple range of 15x to 25x, Lake could be valued at A$3.63/share to A$6.24/share. “This represents 13x to 23x the current share price. “If this is achieved by mid-2025, it would represent an annual return of 91% to 119% over the next four years. “While these valuations may seem high in the context of Lake’s current (undervalued) share price, the multiples on which they are based are low compared to current lithium sector multiples. “Livent is trading at ~65x 2021 EV/EBITDA. Albemarle is trading at ~26x, and the market seems to be valuing its lithium business at ~37x.” Increasing production capacity The report also noted that the company is examining the potential to double capacity at Kachi. “The large scale of the resource, the robust outlook for demand, the strong ESG credentials of the project, and the fact that battery makers will require large volumes of consistently high-purity product over a period of decades, would all seem to justify expansion. “Assuming ‘Phase 2’ comes on stream in 2028, lifting total capacity to 51,200 tonnes per annum lithium carbonate equivalent (LCE), and based on standardized cost estimates, and selling prices of US$15,500/tonne LCE, an expanded Kachi could boast a post-tax NPV8 of US$3.8 billion and an IRR of 53%. “In full production, the project could generate annual EBITDA of US$571 million. “Assuming a similar 70:30 debt-to-equity financing (even though Phase 2 could probably be financed out of cash flows from Phase 1) with equity issued at A$3.00/share, and an EV/EBITDA multiple of 15x, Lake could be valued at A$7.83/share.” Summary of potential Lake Resources valuations. Robust outlook for demand The analyst highlighted that lithium demand is expected to rise tenfold over the next decade to more than 3 million tonnes per annum LCE by 2030. “This incredible outlook is underpinned by government policies aimed at encouraging the adoption of electric vehicles, an acceleration in production commitments from global automakers, pledges from private-sector vehicle fleet users and falling battery costs. “US president Joe Biden’s American Jobs Plan includes US$174 billion in spending aimed at building domestic supply chains for electric vehicles. “Albemarle Corporation (NYSE:ALB) is now forecasting demand of 1.14 million tonnes LCE by 2025. “Over the past two and a half years, Albemarle has raised its forecast for demand in 2025 by the equivalent of about one lithium project per quarter.” According to the International Energy Agency (IEA), global EV sales reached 3.2 million units in 2020, representing 4.6% of total vehicle sales and under the Sustainable Development Scenario, this is expected to rise to more than 46 million units in 2030, representing 35% of total sales, and growth of 31% per annum over the next decade. The report noted that the supply-side will struggle to keep pace, and that to meet this demand some 2.6 million tonnes per annum in new capacity will be required over the next decade. “This equates to 37x Sociedad Quimica y Minera de Chile’s (NYSE:SQM) production of lithium products in 2020, or 52 expanded Kachi projects.” Direct lithium extraction the future Francis forecasts that, realistically, the only viable way to meet demand this is by the rapid deployment of DLE type projects. He said: “The only realistic option to achieve both the growth in supply required, and sustainability, is to use direct lithium extraction. “DLE is expected to become the primary method of lithium extraction over the next few years. “At some stage, lithium producers currently using evaporation ponds are likely to come under pressure to upgrade facilities and use some form of DLE." Lake provides DLE exposure Today, lithium is mainly produced either via inefficient evaporation ponds in South America or from Australian hard rock sources that are processed in China. Francis said: “Neither is ideal from the perspective of a western world automaker. “Developing DLE projects in South America, as well as in the US and Europe, will create more diversified supply chains.” As project financing becomes increasingly tied to ESG credentials, DLE offers substantial benefits in terms of environmental footprint, water use and carbon emissions. Francis said: "Lake Resources provides investors with one of the very few ways to gain exposure to direct extraction, the technology that represents the future for lithium. “There is huge upside potential as Kachi and other projects get developed. “The company looks incredibly cheap. “That presents an opportunity."