ioneer: One Step Closer To Construction

seekingalpha05-02

ioneer Ltd. owns the low-cost Rhyolite Ridge Lithium-Boron Project in Nevada, which is expected to have industry-leading economics.ioneer recently achieved a major permitting milestone with the BLM ...

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Olemedia A few months ago, I reviewed ioneer Ltd (NASDAQ:IONR), an ASX-listed lithium developer with the Rhyolite Ridge Lithium-Boron Project in Nevada. I assessed that IONR is a high-risk / high-reward opportunity with potential 'multi-bagger' returns, as the company is essentially a call option on the price of lithium. Since my article, IONR has performed nicely, returning over 35% on a combination of company catalysts and improving lithium prices (Figure 1).   Figure 1 - IONR has performed nicely (Seeking Alpha) With a few months gone by, let us review the company's latest news and catalysts to see how much more upside is possible. Brief Company Overview ioneer is a development-stage lithium mining company set to become a globally significant producer of lithium and boron. The company owns the Rhyolite Ridge Lithium-Boron Project (\"Rhyolite Ridge\") in Nevada. Rhyolite Ridge is a lithium project that is envisioned to produce over 20k tons per annum (\"ktpa\") of lithium carbonate and 174 ktpa of boric acid with multiple organic expansion opportunities (Figure 2). Figure 2 - Rhyolite Ridge overview (IONR investor presentation) Due to the dual production nature of Rhyolite Ridge, the project is expected to have industry-leading economics of ~$2,500 / t Lithium Carbonate Equivalent (\"LCE\") production costs at an initial capex of $785 million (Figure 3).   Figure 3 - Rhyolite Ridge is expected to have industry-leading economics (IONR investor presentation) Unlike other junior mining companies, ioneer has an all-star list of institutional backers including Sibanye-Stillwater (SBSW), a leading South African mining company that has agreed to invest $490 million for a 50% stake in Rhyolite Ridge, offtake agreements with Ford (F) for its eventual lithium production, and up to $700 million in loans from the U.S. Department of Energy as part of President Biden's Advanced Technology Vehicles Manufacturing (\"ATVM\") program (Figure 4).   Figure 4 - ioneer has an all-star list of institutional partners (IONR investment presentation) Lithium Prices Finally Stabilizing After plunging for more than a year, from close to CNY600,000 / ton (>US$80,000) at the end of 2022 to a recent low of CNY 72,000 / ton, lithium prices appear to have finally stabilized, with a price of CNY 110,000 / ton in the last few weeks (US$15,000) (Figure 5). Figure 5 - Lithium carbonate prices starting to stabilize (tradingeconomics.com) Commodities like lithium are boom/bust industries where the cure for low prices is low prices, as low spot prices make many development projects in the pipeline uneconomic. For example, in recent months, we have seen many lithium producers and developers like Liontown and Albemarle delay expansion projects or curtail current production. As supply is curtailed and demand continues to grow, we are now laying the groundwork for the next bull cycle, when some positive catalyst (perhaps a Chinese EV cash-for-clunkers scheme?) causes demand to outstrip supply and lithium prices to squeeze higher. BLM Finally Issues Draft Environmental Impact Statement On the project side, ioneer also saw some positive catalysts in the last few months, with the Bureau of Land Management recently releasing a long-awaited Draft Environmental Impact Statement (\"EIS\") on the Rhyolite Ridge project for public comments (Figure 6). Figure 6 - Rhyolite Ridge permitting timeline (IONR investor presentation) As a reminder, a Final EIS is the critical permit that ioneer must obtain before it can begin construction on the mine. As a fellow SA analyst noted in the comments to my prior article, the Buckwheat endangered species is a key issue for the Rhyolite Ridge project that needs to be addressed. While it is still early days, the fact that the BLM issued a Draft EIS is a strong vote of support for the project and suggests the government does not see major environmental concerns. Referring to the permitting timeline above, ioneer's permitting plans are about nine months delayed (as the Draft EIS was received in Q2/24 instead of Q3/23), so first production is now expected in 2027. Raises Equity To Fund Development ioneer also recently raised a small sliver of equity (~$25 million) that should carry the company until the final investment decision expected at the end of 2024. It is interesting to note that ioneer was able to raise equity at the same price as the stock's last close on April 26th, without any discounts or concessions. This fact suggests there remains strong institutional demand for ioneer's stock. Valuation Remains Attractive Even with the recent stock appreciation and equity issuance, I believe ioneer is still attractively valued, with an enterprise value of ~$240 million (Figure 7). Figure 7 - IONR enterprise value (Seeking Alpha) Assuming a realistic initial capex of $1 billion (compared to the 2020 Definitive Feasibility Study figure of $785 million) and Sibanye funding $490 million of the figure, ioneer will likely have to finance the $510 million difference. Assuming IONR raises ~$120 million in equity (50% equity dilution) at current prices and raises $400 million in debt, the company's enterprise value should increase to ~$800 million for the construction. However, from the DFS report, we know that the Rhyolite Ridge project has an NPV of $1.27 billion at $11,740 per ton lithium carbonate. Using the company's sensitivity of +18.4% in NPV for +10% in lithium price, I estimate 100% of Rhyolite Ridge will have an NPV of $2.9 billion at $20,000 / ton lithium carbonate (~70% higher pricing) (Figure 8). Figure 8 - Rhyolite Ridge NPV sensitivity (IONR technical report) On the other hand, I also expect higher capex, so the NPV should be adjusted lower to $2.7 billion to account for higher capex by ~$200 million. Therefore, ioneer's half of the project should be worth $1.35 billion. Subtracting $400 million in expected debt, the resulting equity may be worth $950 million when Rhyolite Ridge is built, compared to ~$411 million currently (current market cap of $266 million plus recent $25 million equity raise plus the additional ~$120 million construction equity raise). Therefore, I think IONR's stock still has ~130% upside. Furthermore, as we all know, when commodity prices start to rally, investors tend to substitute spot prices instead of conservative long-term prices in their models. Therefore, if lithium carbonate spot price returns to $30,000 / ton or above, we could see IONR's stock price substantially higher than my modeled upside. Risks To ioneer While I am bullish on ioneer's stock, I believe there is still quite a bit of risk with the story. For example, if environmentalists protest and delay the permitting of the project, then production may be further pushed out or the project canceled altogether. Furthermore, the Rhyolite Ridge technical report was completed in 2020, and the cost estimates may no longer be reliable given the high inflation we have seen in the subsequent years. Finally, as a real call option on the price of lithium carbonate, we can expect IONR's stock price to have a high beta to lithium carbonate prices, both positive and negative. Conclusion  Recently, the shares of ioneer have benefited from the double tailwinds of stabilizing lithium carbonate prices and permitting developments. As the project continues to derisk, I expect ioneer's stock price will continue to grind higher. Ultimately, I see more than 100% upside with the stock. 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